Pvt. Ltd v. %Reserved On: 13[Th]October, 2022Date Of Decision: 02[Nd]November, 2022

$~ *IN THE HIGH COURT OF DELHI AT NEW DELHI +W.P.(C) 4093/2021 AMBARNUJ FINANCE AND INVESTMENT PVT. LTD..... PetitionerThrough :Ms.Suruchi Mittal, Advocate. versus %Reserved on: 13[th]October, 2022Date of Decision: 02[nd]November, 2022 CORAM: HON'BLE MR. JUSTICE MANMOHANHON'BLE MS. JUSTICE MANMEET PRITAM SINGH ARORA J U D G M E N T MANMEET PRITAM SINGH ARORA, J: 1.The present writ petition has been filed by the Petitioner, Assessee,seeking quashing of the rectification order dated 15[th]February, 2021, passedby the Respondent during the consideration of the Assessee’s application forsettlement of disputed tax under the Direct Tax Vivad Se Vishwas Act, 2020(‘Act of 2020’). 2.The Assessee is also seeking a direction to the Respondent No. 1 to reconsider its application for settlement of disputed tax under the Act of2020, for the Assessment Year (‘AY’) 2017-18. 3.The Assessee filed its Return of Income (‘ROI’) on 2[nd]November,2017, and thereafter, filed its revised return on 14[th]May, 2018, both timesdeclaring an income of NIL, as there was business loss in the AY 2017-18. 4.TheAssessingOfficer(‘AO’)initiatedscrutinyassessmentproceedings under Section 143(3) of the Income Tax Act, 1961 (‘the Act of1961’) for the said assessment year and passed assessment order dated 21[st]December, 2019. The AO disallowed the write off of the ‘bad debt’ andmade an addition to income of Rs.30,00,152/-. The AO computed and raiseda demand of Rs.5,53,839/-. 5.The Assessee filed an appeal against the aforesaid assessment orderdated 21[st]December, 2019, which is pending before the Commissioner ofIncome Tax (Appeals). 6.In the meantime, the Act of 2020 was notified, which provided forresolution of disputed tax. The applications eligible for settlement under theAct of 2020 were the proceedings which were pending and filed upto 31[st]January, 2020. The benefit of the Direct Tax Vivad Se Vishwas Scheme(‘DTVSV Scheme’) could be availed by Assessee upon payment of taxamount and the Assessee would be benefitted by the waiver of interest andpenalty. Further, the DTVSV Scheme offered the Assessee immunity fromfurther proceeding qua the relevant disputed tax and was intended to put aquietus to the said disputes. 7.The Petitioner herein opted for the said scheme and on 28[th]December2020 filed relevant forms and declarations stipulated under Section 4 of theAct of 2020. Thereafter, on 4[th]January, 2021, the Assessee received an e- mail from the Respondent No. 1 stating that upon verification of Form-1 andForm-2, filed under the DTVSV Scheme, it was noticed that there was acomputation mistake and therefore, the addition of Rs.30,00,152/- onaccount of ‘bad debt written off’, has been inadvertently taken as incomechargeable to tax at special rates in lieu of business income and due to thealleged mistake, there was a short fall of Rs. 4,09,386/- approximately. Itwas further stated in the e-mail that the application of the Assessee under theDTVSV Scheme could not be entertained in the absence of correct taxliability. 8.The Assessee replied to the aforesaid email on 6[th]January, 2021,raising its objection that the enhanced demand now sought to be raised in thee-mail is not a mistake apparent on the record, but is a debatable issue andany rectification on the basis of a debatable issue is impermissible as itwould amount to a case of change of opinion by the AO. It was also stated that it is Assessee’s right to set-off loss inter-headwithout any particular sequence since no guidelines have been given in theAct of 1961, for sequence of set-off of losses. It was stated that the AO’sstance of changing sequence of set-off of business loss from one head toanother head is nothing but change of opinion. 9.The Respondent No. 1, sent an email to the Assessee on 9[th]January,2021, rejecting the objections raised by the Assessee and reiterated theearlier position communicated vide email dated 4[th]January, 2021. It was also stated that it is Assessee’s right to set-off loss inter-headwithout any particular sequence since no guidelines have been given in theAct of 1961, for sequence of set-off of losses. It was stated that the AO’sstance of changing sequence of set-off of business loss from one head toanother head is nothing but change of opinion. 9.The Respondent No. 1, sent an email to the Assessee on 9[th]January,2021, rejecting the objections raised by the Assessee and reiterated theearlier position communicated vide email dated 4[th]January, 2021. 10.The AO consequently passed the impugned rectification order dated15[th]February, 2021, purportedly in exercise of his jurisdiction under Section154 of the Act of 1961, modifying the original assessment demand dated 21[st]December, 2019, and raising a fresh enhanced demand of Rs. 9,27,047/- along with the interest. 11.The Assessee aggrieved by the aforesaid order, filed an applicationunder Section 154 of the Act of 1961 on 11[th]March, 2021, for rectificationof order dated 15[th]February, 2021, raising its objection to the modifiedcomputation and stated that there was error apparent in the AO’s treatmentof disallowed bad debt by himself. The Assessee, therefore, requested AO toconsider the application and rectify the mistake apparent from record sincebusiness income needs to be adjusted against business loss first and balancebusiness loss is to be set-off against other heads of income. 12.Learned counsel for the Petitioner states that the present petition hasbeen filed against the arbitrary action of the Respondent in modifying itsoriginal assessment order dated 21[st]December, 2019, which was pending inappeal, while considering the Assessee’s application for resolution of the taxdispute of AY 2017-18 under the DTVSV Scheme. She states that the actionof the AO is in excess of his jurisdiction under the Act of 2020, as it iscontrary to the intent of the DTVSV Scheme and also violative of the rightsof the Assessee to have the tax dispute settled under the Scheme. She statesthat the exercise of modification of tax demand undertaken by the AO, whileconsidering the application filed by the Assessee under the DTVSV Schemeof 2020 is impermissible, in addition to being contrary of the object of theDTVSV Scheme. She submits that the Assessee has till date, not receivedany formal intimation rejecting its application under the DTVSV Scheme.However, on a random login on ‘My Account’ of the Assessee on the e-Filing portal, the Assessee learnt that the status of the application under theDTVSV Scheme was marked as ‘rejected’ and no separate order, in thisregard, has been communicated to the Petitioner. 13.In the alternative, on merits, the learned counsel for the Petitionerstates that the modification dated 15[th]February 2021 of the assessment orderby the AO with respect to the accounting treatment of the bad debtdisallowed was incorrect since the Act of 1961, does not prohibit theaccounting treatment in the manner undertaken originally by the AO in theassessment order dated 21[st]December 2019. Notice was issued in thispetition and a counter-affidavit has been filed and brought on record by theRespondent No. 1. 14.In the counter-affidavit, it is stated that the rectification on 15[th]February, 2021, has been carried-out in pursuance to an audit objectionraised by the ITO-IAP (Central)-3, Delhi (‘the Audit Party’) wherein, it wasstated that the tax liability in this case should have been Rs. 9,00,046/- +statutory interest, instead of the demand raised in the original assessmentorder dated 21[st]December, 2019. Consequently, the Audit Party made anintra-head adjustment of business loss of current year towards the incomefrom capital gain first and income from other sources second. The AuditParty then calculated the tax at 30% of the balance income. 14.In the counter-affidavit, it is stated that the rectification on 15[th]February, 2021, has been carried-out in pursuance to an audit objectionraised by the ITO-IAP (Central)-3, Delhi (‘the Audit Party’) wherein, it wasstated that the tax liability in this case should have been Rs. 9,00,046/- +statutory interest, instead of the demand raised in the original assessmentorder dated 21[st]December, 2019. Consequently, the Audit Party made anintra-head adjustment of business loss of current year towards the incomefrom capital gain first and income from other sources second. The AuditParty then calculated the tax at 30% of the balance income. 15.The Respondent states that the AO has only followed the auditobjection raised by the Audit Party and consequently, he amended theoriginal assessment order dated 21[st]December, 2019. It is further stated thatthe rejection of the application filed by the Assessee under the DTVSVScheme was a consequence of the rectification order dated 15[th]February2021. 16.We have considered the submissions of the parties. 17.The computation of the returned income made by the AO in theAssessment order dated 21[st]December, 2019, and as modified vide Signature Not Verified rectification order dated 15[th]February, 2021, following the Audit objectionare as under[1]: - Computation as per the Assessment order dated 21[st]December, 2019 ‘TABLE A’ Computation modified as per rectification order dated 15[th]February, 2021 ‘TABLE B’ S. No.ParticularsAmount (in Rs.)1.Return Income declared by the Assessee asNILunder:Business Loss – (Rs. 71,38,088)Add:Capitalgainasdeclared– 1Annexure P-11, Rectification Application dated 11th March 2021 Signature Not Verified 18.It is not disputed by the Respondent in its Counter Affidavit and bythe learned senior standing counsel for Revenue during the arguments thatboth the computations are equally permissible under the Act of 1961 andthat the AO has modified the computation dated 21[st]December 2019 in hisrectification order dated 15[th]February, 2021, solely on the basis of auditobjection raised by the Audit Party. Further, from a perusal of the aforesaidcomputations, it can be seen that consequent to the modification, thereturned income has remained the same but there is an increase in total taxpayable, on account of change in rate at which payable tax is calculated.19.Learned counsel for the Petitioner has drawn our attention to aCircular bearing No. 26 (LXXVI-3) dated 7[th]July, 1955, issued under theerstwhile Income Tax Act, 1922, which reads as under: “There is nothing in Section 24(1) to indicate that a particular-mode of setoff shall be followed. [In the absence of any suchindication, the general rule to be followed in all fiscalenactments is that where words used are neutral in import, aconstruction most beneficial to the assessee should be adopted].The words “he shall be entitled to have the amount of loss set- off” occurring in Section 24(1), would seem to be consistent withthe conferment of a benefit on the assessee which he can claim asof right.” 20.Section 24 (1) of the erstwhile Income Tax Act, 1922 corresponds toSection 71 (2) of the Act of 1961 and the audit objection has been raisedunder the said Section. She states that the audit objection raised by the AuditParty is in ignorance of the aforesaid Circular, which allows the Assessee toselect a sequence of set-off, which is more beneficial to it. 21.No legal error in the method of computation made in the originalassessment order dated 21[st]December, 2019 has been brought to ourattention during the course of arguments. The amount of disallowed baddebt has been added as income and consequently the business loss of theAssessee stood reduced to Rs. 41,37,936/-. The said business loss has thenbeen set-off first against ‘income from other sources’ and balance from‘short term capital gain’. The remaining short term gain of Rs. 30,00,152/-has been taxed at 15%. The said method of computation (TABLE A) ofincome is also permissible on a plain reading of section 71(2) of the Act of1961. 21.No legal error in the method of computation made in the originalassessment order dated 21[st]December, 2019 has been brought to ourattention during the course of arguments. The amount of disallowed baddebt has been added as income and consequently the business loss of theAssessee stood reduced to Rs. 41,37,936/-. The said business loss has thenbeen set-off first against ‘income from other sources’ and balance from‘short term capital gain’. The remaining short term gain of Rs. 30,00,152/-has been taxed at 15%. The said method of computation (TABLE A) ofincome is also permissible on a plain reading of section 71(2) of the Act of1961. 22.In contrast, as per the computation in TABLE B, the AO acting uponthe Audit Party’s objection has set-off the business loss as claimed by theAssessee in its original return, first against the other heads of income andthen taxed the amount of disallowed bad debt as a stand-alone addition toreturned income. This is contrary to facts as the amount for the saiddisallowed bad debt has to be added to the business income of the assesseeto arrive at the net income/net loss. It is not chargeable to tax as a separatehead of income as is sought to be done in TABLE B. 23.Further, the objection raised by the Audit Party in this case was not toa mistake apparent from the record, which can be corrected under Section154 of the Act of 1961, but it is an opinion in law on the manner in whichset-off of business losses is to be permitted. It is also evident from the recordthat the legal opinion of the Audit Party is at variance with the opinion of theAO, who determined that it was permissible to add as income, the amountarising from disallowed bad debt resulting in reduction of the business loss,while passing the original assessment order. Therefore, there were twodifferent legal opinions available on record with respect to the sequence ofset-off giving rise to a debatable issue. 24.In this regard, it would be relevant to mention here that the SupremeCourt in the case of T.S. Balaram, Income Tax Officer, Company CircleIV, Bombay v. M/s Volkart Brothers, Bombay, 1971 (2) SCC 526, has heldthat for the purpose of Section 154 of the Act of 1961, a mistake apparent onthe record must be obvious and not something which can be established by along-drawn process of reasoning on points on which there may conceivablybe two opinions. 25.We therefore find in the facts of this case that there was no mistakeapparent in the computation of income in the assessment order dated 21[st]December, 2019, within the meaning of Section 154 of the Act, which couldhave been a subject matter of rectification. 26.We also find merit in the submission of the learned counsel for thePetitioner that the rectification order dated 15[th]February, 2021, effectivelyresulted in re-assessment of income and not rectification. She states that inthe facts of this case, even a reassessment on the basis of the audit objectionwas not permissible. Signature Not Verified 27.Upon a perusal of the counter-affidavit, it is borne out that theobjection raised by the Audit Party on the sequence of set-off of losses is anopinion on law and that the AO had passed the rectification order only onthe basis of the direction of the Audit Officer. The AO himself was not ofthe independent opinion that the original assessment order passed by him on21[st]December, 2019, was erroneous in law. 28.In this regard, it would be instructive to refer to the decision of theSupreme Court in M/s Indian & Eastern Newspaper Society, New Delhi v.Commissioner of Income Tax, New Delhi, (1979) 119 ITR 996 (SC),wherein, the Court held that an audit opinion by itself with respect toapplication or interpretation of law cannot be treated by the Income TaxOfficer as ‘information’ for reopening the assessment. The relevant portionof the said judgment is reproduced hereinunder: “… 28.In this regard, it would be instructive to refer to the decision of theSupreme Court in M/s Indian & Eastern Newspaper Society, New Delhi v.Commissioner of Income Tax, New Delhi, (1979) 119 ITR 996 (SC),wherein, the Court held that an audit opinion by itself with respect toapplication or interpretation of law cannot be treated by the Income TaxOfficer as ‘information’ for reopening the assessment. The relevant portionof the said judgment is reproduced hereinunder: “… 13. … In every case, the Income Tax Officer must determine forhimself what is the effect and consequence of the law mentioned inthe audit note and whether in consequence of the law which has nowcome to his notice he can reasonably believe that income hasescaped assessment. The basis of his belief must be the law of whichhe has now become aware. The opinion rendered by the audit partyin regard to the law cannot, for the purpose of such belief, add to orcolour the significance of such law. In short, the true evaluation ofthe law in its bearing on the assessment must be made directly andsolely by the Income Tax Officer. xxx xxx xxx 20. Therefore, whether considered on the basis that the nature andscope of the functions of the internal audit organisation of theIncome Tax Department are co-extensive with that of Receipt Auditor on the basis of the provisions specifically detailing its functions inthe Internal Audit Manual, we hold that the opinion of an internalaudit party of the Income Tax Department on a point of law cannot be regarded as "information" within the meaning of Section 147(b)of the Income Tax Act, 1961.(Emphasis Supplied) 29.Thus, since the objection of the Audit Party in this case was on a pointof law, no reassessment proceedings could also have been permissible,inasmuch as the Supreme Court in M/s Indian & Eastern NewspaperSociety (Supra) has clearly held that the opinion of an internal Audit Party ofthe Income Tax Department on a point of law cannot be regarded as‘information’ and gives no cause to the AO to initiate reassessmentproceedings. The Supreme Court while deciding the aforesaid issue, inreference to the provisions of Section 34(1)(b) of the erstwhile Income TaxAct, 1922, corresponding to S. 147 of the Act, has also held that discoveryof an error by the Income Tax Officer, upon reconsideration of the samematerial, does not give him any power to reopen the assessment. 30.In the facts of the present case, there was no new or fresh materialbefore the AO except the opinion of the Audit Party. Since, it is settled lawthat mere change of opinion cannot form the basis for initiating reassessmentproceedings as per the decision of the Supreme Court in CIT Vs. Kelvinatorof India Ltd., (2010) 2 SCC 723, no reassessment could also have beenpermissible in the facts of the present case. It is also not apparent fromrecord if the AO agreed with the objection of the Audit Party. Infact, thecontents of the counter affidavit evidences that the AO was satisfied with theinitial computation and has acted only upon the direction of the Audit Partywhile passing the impugned order. 31.We are, therefore, of the considered view that since the objectionraised by the Audit Party was in regard to the law, which objection in the facts of the present case was debatable in light of the Circular bearing No.26 (LXXVI-3) dated 7[th]July, 1955, and thus, it could not have formed thebasis for passing a rectification order under Section 154 of the Act. We,therefore, set aside the impugned rectification order dated 15[th]January,2015. 31.We are, therefore, of the considered view that since the objectionraised by the Audit Party was in regard to the law, which objection in the facts of the present case was debatable in light of the Circular bearing No.26 (LXXVI-3) dated 7[th]July, 1955, and thus, it could not have formed thebasis for passing a rectification order under Section 154 of the Act. We,therefore, set aside the impugned rectification order dated 15[th]January,2015. 32.Lastly, as regards the objection of the counsel for the Petitioner thatthe impugned rectification order is barred under Section 5 of the Act of2020, we find that the bar of the said provision is not attracted in the facts ofhis case. She contends that the provisions of the Act of 2020, have an over-riding effect on the provisions of the Act of 1961, insofar as thedetermination of the tax arrears under Section 5 of the Act of 2020, is to bemade on the basis of the facts, as they existed on the date of the filing of theapplicationandtheRevenue wasprecludedfromundertakinganyrectification after receipt of the Forms 1 and 2. 33.The right of the Revenue to initiate any further proceedings withrespect to the calculation of the disputed tax arrears are foreclosed afterForm 3 has been issued by the Designated Authority under Section 5(1) ofthe Act of 2020, determining the full and final settlement of tax arrears. TheForm 3 has admittedly not been issued in the present matter and therefore,the rigour of Section 5(3) of the Act of 2020 is not attracted in the facts ofthis case. 34.Further, in the facts of this case, as per record the rectificationproceeding was initiated consequent to an audit objection dated 31[st]August,2020, even though, the rectification order finally came to be passed on 15[th]February, 2021 and therefore, we are unable to agree with the contention ofthe Petitioner that the rectification proceedings were initiated only upon Signature Not Verified receipt of the application of the assessee on 28[th]December, 2020 under theAct of 2020. 35.However, the aforesaid issue need not detain us, since we have heldthat the rectification order itself was incorrect and as held above, we haveset aside the impugned rectification order dated 15[th]February, 2021. Wealso set aside the consequential order of the Respondent rejecting thePetitioner’s application for settlement under the DTVSV Scheme, on theground that the tax liability was not ascertained, and restore the applicationto the file of the AO as on 28[th]December, 2020. We direct the Respondentto determine the amount payable by the assessee in accordance with theprovisions of the Act of 2020 and grant a Certificate to the assesseecontaining particulars of tax arrears and amount payable, in accordance withlaw, within a period of two weeks. 36.The writ petition stands disposed of with the above directions. MANMEET PRITAM SINGH ARORA, J MANMOHAN, J NOVEMBER 02, 2022 j