Sca/18355/2018 Of Shreeji Associates v. The Deputy Commissioner Of Income Tax Circle- 1(2), Vadodara

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/SPECIAL CIVIL APPLICATION NO. 18355 of 2018 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE J.B.PARDIWALASd/-andHONOURABLE MR. JUSTICE BHARGAV D. KARIASd/-================================================================1Whether Reporters of Local Papers may be allowedNoto see the judgment ?2To be referred to the Reporter or not ?No3Whether their Lordships wish to see the fair copyNoof the judgment ?4Whether this case involves a substantial questionNoof law as to the interpretation of the Constitutionof India or any order made thereunder ? ==========================================================SHREEJI ASSOCIATES VersusTHE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE- 1(2),VADODARA ========================================================== Appearance:MR B S SOPARKAR(6851) for the Petitioner(s) No. 1MR.VARUN K.PATEL(3802) for the Respondent(s) No. 1 ========================================================== CORAM: HONOURABLE MR.JUSTICE J.B.PARDIWALA andHONOURABLE MR. JUSTICE BHARGAV D. KARIA Date : 16/03/2020 ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE J.B.PARDIWALA) 1.Rule returnable forthwith. Mr. Varun K. Patel, the learnedsenior standing counsel, waives service of notice of rule for and on behalf of the Revenue 2.By this writ application under Article 226 of theConstitution of India, the writ applicant has prayed for thefollowing reliefs; “(a)Quash and set aside the impugned notice atAnnexure-A to this Petition; (b)Pending the admission, hearing and final disposal ofthis petition,to stay implementation and operation of thenotice at Annexure-A to this petition and stay furtherproceedings for assessment for A.Y.2011-12. (c )Any other and further relief deemed just and properbe granted in the interest of justice.” 3.The subject matter of challenge in the present litigation isthe impugned notice issued by the Revenue under Section 148of the Act dated 28[th] March, 2018 for the purpose of reopeningof the assessment for the A.Y.2011-12. 4.The facts, giving rise to this litigation, may besummarized as under; 4.1The writ applicant is a partnership firm registeredunder the provisions of the Indian Partnership Act. The writapplicant filed its return of income for the A.Y.2011-12 on 28[th]September, 2011, declaring its total income at Rs.15,23,720/-The assessment was framed under Section 143(3) of the Act atRs.20,86,090/- vide assessment order dated 11[th] February,2014. Later, the impugned notice under Section 148 of the Actdated 28[th] March, 2018 came to be issued. The reasons for thepurpose of reopening are as under; “Brief details of the Assessee The assessee firm engaged in the business ofconstruction and development of housing project hadfiled the return of income for the asst. year 2011-12 on28.09.2011 declaring totla income at Rs.15,23,720/-.Assessment U/s 143(3) of the Act was completed on11.02.2014 and the total income of the assessee wasassessed at Rs.20,86,090/- 2.Brief facts of information collected/received by theAO: During the year under consideration, the assessee hadrecognized income based on percentage completionmethod and the value of the closing stock in profit andloss account was shown at Rs.6,22,13,507/-. However,from the certificate of the site supervisor, it is seen thatthe closing stock of M/s. Shreeji Associates wasbifurcated in the following manner Value of land (after apportioned)Rs.6,00,000 Value of closing material stockRs.22,13,507 Total value of closing stockRs.6,22,13,507 2.Brief facts of information collected/received by theAO: During the year under consideration, the assessee hadrecognized income based on percentage completionmethod and the value of the closing stock in profit andloss account was shown at Rs.6,22,13,507/-. However,from the certificate of the site supervisor, it is seen thatthe closing stock of M/s. Shreeji Associates wasbifurcated in the following manner Value of land (after apportioned)Rs.6,00,000 Value of closing material stockRs.22,13,507 Total value of closing stockRs.6,22,13,507 From the copy of the document in respect of sale of flatNo.702 it is noticed that the assessee is executing twodeeds (I) one related to sale of proportionate share ofland at Rs. 10 Lakhs and the other related to constructioncost of Rs.32 Lakhs. Assessee has sold share of land to15 purchasers of flat Rs.10 Lakhs at Rs.1,50,00,000/- wassold. The total cost of land was Rs.9,11,00,000/- out ofwhich the land valued at Rs.1,50,00,000/- was sold,therefore, the closing value of land was required to beRs.7,61,00,000/- (91100000-15000000) against whichthe assessee had shown the value of closing stock atRs.6,00,000/- on the basis of valuation of its sitesupervisor. 3.Analysis of information collected/received From the balance sheet, Form No.3CD, profit and lossaccount and submission of assessee in respect ofvaluation of closing stock revealed that the assessee hadclaimed an expenditure of Rs.9,11,00,000/- on accountof purchase of land. The assessee had shown income of Rs.6,50,09,501/- as sales. The sales income has beenbifurcated in two parts viz. (I) sales (1) termed as salesales of flats 15 flats @ 10,00,000 each totaling toRs.1,50,00,000/- (I) sales (ii) termed as constructionincome of Rs.5,00,09,501/- in respect of 36 flats. In thenotes forming part to the 3CD report, it has beenmentioned by that revenue from the construction isrecognized when the construction has been completedwith the passing of title. Further, the assesse hadfollowed mercantile method of accounting during theyear. Therefore, during the year whatever amountreceived against sale of residential units by executingsale deed are considered as sales consideration andrecorded in profit and loss account. Further amountreceived for construction of residential unit based onAS-9, revenue recognition to the extent of workcompleted and risk and reward transferred to prospectivebuyer recognized as income by transferring to profit andloss account. Assessee has not shown anything under thehead 'work-in-progress'. It was further noticed that theassessee has shown closing stock of Rs.6,22,13,506/- ason 31.03.2011. In clause 28 of 3CD report, it has beenreported by accountatn that value of closing stock wasshown on the basis of valuation done by site supervisor.The bifurcation of the closing stock as worked out by thesite supervisor has been discussed in para 2. 4.Enquiries made by the AO as sequel to informationcollected/received. As per para no.2 5. Findings of the AO From the sample copy of document submitted by theassessee during the course of assessment proceedingsu/s.143(3) of the At in respect of sale of flat no.702 toShri Rajesh Pachoury it was noticed that the assessee isexecuting two deeds, one related to sale of proportionateshare of land at Rs.10,00,000/- and the other related toconstruction cost at Rs.10,00,000/-. The assessee hadsold share of land to 15 purchasers of flat @ Rs.10 Lakhsat Rs.1,50,00,000/-. As the total cost of land wasRs.9,11,00,000/- out of which land valuing atRs.1,50,00,000/- was sold, the closing value of land wasrequired to be taken at Rs.7,61,00,000/-1,50,00,000/-. As per para no.2 5. Findings of the AO From the sample copy of document submitted by theassessee during the course of assessment proceedingsu/s.143(3) of the At in respect of sale of flat no.702 toShri Rajesh Pachoury it was noticed that the assessee isexecuting two deeds, one related to sale of proportionateshare of land at Rs.10,00,000/- and the other related toconstruction cost at Rs.10,00,000/-. The assessee hadsold share of land to 15 purchasers of flat @ Rs.10 Lakhsat Rs.1,50,00,000/-. As the total cost of land wasRs.9,11,00,000/- out of which land valuing atRs.1,50,00,000/- was sold, the closing value of land wasrequired to be taken at Rs.7,61,00,000/-1,50,00,000/-. Against this the assessee has shown his closing stock atRs.6,00,00,000/- on the basis of the valuation by tis sitesupervisor. This has resulted into under assessment ofincome by Rs.1,61,00,000/- (7,61,00,000-6,00,00,000). 6.Basis of forming reason to believe and details ofescapement of income. During the year under consideration, the assessee hasshown sales of Rs.6,50,09,501/- and the sale wasbifurcated into two parts (I) sales of flats -15 flats @Rs.10,00,000 each totaling to Rs.1,50,00,000/- in respectof 36 flats. The assessee has shown the closing stock atRs.6,22,13,206/- as on 31.03.2011. But , however, theassessee has not mentioned anything under the head'work-in-progress' The value of closing stock wascalculated based on the certificate of the sitesupervisor. On the basis of the document with respect tosale of flat no.702, it is seen that the assessee isexecuting two deeds (I) one related to sale ofproportionate share of land at Rs.10 Lakh and the otheris related to construction cost at Rs.32 lakh. So,accordingly, the assessee had sold share of land to 15purchasers of flat @ 10 lakhs valuing forRs.1,50,00,000/-. Further the assessee had claimed anexpenditure of Rs.9,11,00,000/- being the cost purchaseof the land. Therefore, after taking into consideration theassessee's working of sale of deeds i.e. one related tosale of proportionate share of land, the closing stock ofthe land was required to be Rs.7,61,00,000/-(9,11,00,000-1,50,00,000). Against this, the assessee hasshown the closing stock at Rs.6,00,00,000/- as per thevaluation given by the site supervisor. By this, theassessee has undervalued the closing stock byRs.1,61,00,000/- (7,61,00,000-6,00,00,000) 7.Seventh paragraph will include escapement ofincome chargeable to tax in relation to any assets(including fnancial interest in any entity) located outsideIndia. Not applicable. 8.Findings of the AO on true and full disclosure of thematerial facts necessary for assessment under Proviso tosection 47. As per the notes forming part of form no.3CD, revenuefrom construction is recognized when the constructionhas been completed with the passing of title. Theassessee is following mercantile system of accounting.During the year, whatever amount is received againstsale of residential units by executing sale deed areconsidered as sales consideration and the same is to berecorded in the profit and loss account. Further amountreceived for construction of residential unit, based onAS-9, revenue recognition of the extent work completedand risk and reward transferred to prospective buyerrecognized as income by transferring to profit and lossaccount. Assessee has shown anything under the headwork-in-progress. Based on the certificate of the site supervisor, theassessee has shown closing stock at Rs.6,22,13,507/-after bifurcating value of land at Rs.6,00,00,000/- andvalue of closing material stock at Rs.22,13,507/-. Based on the certificate of the site supervisor, theassessee has shown closing stock at Rs.6,22,13,507/-after bifurcating value of land at Rs.6,00,00,000/- andvalue of closing material stock at Rs.22,13,507/-. On the basis of the document with respect to sale of flatno.702, it is seen that the assessee is executing twodeeds (I) one related to sale of proportionate share ofland at Rs. 10 Lakh and the other is related toconstruction cost at Rs.32 Lakh. So, accordingly, theassessee had sold share of land to 15 purchasers of flat@ 10 lakhs valuing for Rs.1,50,00,000/-. Further, theassessee had claimed an expenditure of Rs.9,11,00,000/-being the cost purchase of the land. Therefore, aftertaking into consideration, the assessee's working of saleof deeds i.e., one related to sale of proportionate shareof land, the closing stock of the land was required to beRs.7,61,00,000/- (9,11,00,000-1,50,00,000). Against this,the assessee has shown the closing stock atRs.6,00,00,000/- as per the valuation given by the salesupervisor. By this, the assessee has undervalued theclosingstockbyRs.1,61,00,000/-(7,61,00,000-6,00,00,000) which has resulted into underassessment of Rs.1,61,00,000/-. 9.Applicability of provision of section 147 /151 to thefacts of the case. In this case, return of income was filed for the year underconsideration and regular assessment u/s.143(3) wasmade on 11.02.2014. Since 4 years from the end of the relevant year has expired in this case, the requirementsto initiate proceeding u/s.147 are reason to believe thatincome for the year under consideration has escapedassessment because of failure on the part of theassessee to disclose fully and truly all material factsnecessary for the assessment for the assessment yearunder consideration. It is pertinent to mention here thatreasons to believe that income has escaped assessmentfor the year under consideration have been recordedabove (refer paragraph 2 to 6). I have carefullyconsidered the assessment records containing thesubmission made by the assessee in response to variousnotices issued during the assessment /re-assessmentproceedings and have noted that the assessee has notfully and truly disclosed the material facts necessary forhis assessment for the year under consideration. It is evident from the above facts that the assessee hadnot truly and fully disclosed material facts necessary forthe assessment for the year under consideration therebynecessitating reopening u/s.147 of the Act. It is true that the assessee has filed a copy of the annualreport and audited P&L A/c and balance sheet along withthe return of income where various information/materialwere disclosed. However, the requisite full and truedisclosure of all material facts necessary for assessmenthas not been made as noted above. It is pertinent tomention here that even though the assessee hasproduced books of accounts, annual report, audited P&LA/c and balance sheet or other evidences as mentionedabove, the requisite material facts as noted above in thereasons for reopening were embedded in such a mannerthat material evidence could not be discovered by the AOand could have been disclosed with due diligence,accordingly, attracting provisions of explanation 1 ofsection 147 of the Act.“ 4.2The writ applicant filed its objections with regard to thereopening of the assessment dated 14[th] August, 2018. 4.3The objections raised by the writ applicant, ultimately,came to be overruled vide order dated 5[th] October, 2018. Theorder, overruling the objections, reads thus; 4.2The writ applicant filed its objections with regard to thereopening of the assessment dated 14[th] August, 2018. 4.3The objections raised by the writ applicant, ultimately,came to be overruled vide order dated 5[th] October, 2018. Theorder, overruling the objections, reads thus; “First and foremost, the case has been re-opened by theissuance of notice u/s.148 of the Act dated 28.03.2018after duly recording the requisite reasons and takingprior approval from the Principal Commissioner ofIncome-tax-1, Vadodara and duly serving upon theassessee. Furthermore, it is well within 6 years from theend of the relevant assessment year. Therefore, thereopening of the instant case is technically and legallyvalid. Secondly, given the facts narrated herein above, theRevenue had a 'reason to believe” that in the case of theassessee, an income to the extent of Rs.1,61,00,000/-which was chargeable to tax had escaped assessment.Therefore, it was held that the case of the assessee forthe A.Y. .2011-12 was a fit case for re-opening ofassessment after due application of mind by the AO. 9.In view of the above facts, it can be considered thatthe case is correctly re-opened as per the reasonsrecorded. Under the circumstances, the reassessmentproceedings initiated are legal and valid and, therefore,the objections to the reassessment proceedings/submissions of the assessee made against there-assessment proceedings do not hold good &accordingly, the same are rejected and filed.” 4.4Being dissatisfied with the action on the part of theAssessing OfÏcer in reopening the assessment, the writapplicant is here before this Court with the present writapplication. 4.5Mr. B.S. Soparkar, the learned counsel appearing forthe writ applicant submitted that the impugned notice underSection 148 of the Act dated 28[th] March, 2018 is beyond theperiod of four years from the end of the relevant assessmentyear. According to Mr. Soparkar, all the necessary informationhad been furnished before the Assessing OfÏcer for thepurpose of scrutiny assessment and there was no failure on the part of his client to disclose fully and truly all the materialfacts relevant for the purpose of assessment. Mr. Soparkarwould submit that the assumption of jurisdiction on the part ofthe Assessing OfÏcer under Section 147 of the Act could betermed as one without any authority of law. Mr. Soparkar alsopointed out that the assessment is sought to be reopened onthe basis of the audit objection and not on the basis of theformation of any belief on the part of the Assessing OfÏcer thatany income chargeable to tax had escaped assessment. In thelast, Mr. Soparkar submitted that even otherwise no incomecould be said to have escaped assessment as the writapplicant recorded the closing stock on the basis of theaccounting principles. In such circumstances, referred toabove, Mr. Soparkar prays that there being merit in this writapplication, the same be allowed and the impugned noticemay be quashed. 4.6On the other hand, this writ application has beenvehemently opposed by Mr. Patel, the learned senior standingcounsel appearing for the Revenue. Mr. Patel would submit thatif a particular issue is brought to the notice of the AssessingOfÏcer by the audit party, and the Assessing OfÏcer, on hisown, upon application of mind, finds that the ground is valid,the reopening of the assessment cannot be quashed merelybecause such ground was brought to the notice of theAssessing OfÏcer by the audit party. In support of hissubmission, Mr. Patel seeks to place reliance on the decision ofthe Supreme Court in the case of Commissioner of IncomeTax vs. P.V.S Beedies Pvt. Ltd., 1999 237 ITR 13. Mr. Patelpointed out that the decision of the Supreme Court in the caseof P.V.S. Beedies (supra) has been referred to and relied upon by a Coordinate Bench of this Court in the case of N.K.Industries vs. Income Tax OfÏcer, 362 ITR 502. Mr. Patelinvited the attention of this Court to the observations made bythe Coordinate Bench in N.K. Industries (supra) as under; “With respect to the first of the two reasons recorded bythe Assessing Officer therefore it clearly emerges thatshe was acting at the instance of the audit party,though she herself held a contrary belief that no incomechargeable to tax has escaped assessment on these twocounts. Had this being the sold reason for issuing noticefor reopening, we would have perhaps allowed thepetition and quashed the notice. In the present case,however, the Assessing Officer was convinced that onthird ground recorded in the reasons, incomechargeable to tax had escaped assessment. It is truethat such ground was also brought to her notice by theaudit party and that by itself would not mean that shewas acting at the instance of the audit party. As heldby the Supreme Court in case of Commissioner ofIncome-Tax v. P.V.S Beedies Private Limited,reported in [1999] 237 ITR 13 (SC), if a particular issueis brought to the notice of the Assessing Officer by theaudit party and the Assessing Officer of his/herapplication of mind finds that the ground is valid,reopening of assessment cannot be quashed merelybecause such ground was brought to the notice of theAssessing Officer by the audit party. In this context,even the counsel for the petitioner was unable todispute that the question of depreciation requirere-examination since the question whether the asset forwhich the depreciation was claimed was put to usebefore 30[th] September of the year under consideration,and therefore, whether full depreciation at the specifiedrate during the year under consideration wasallowable.” 4.7Mr. Patel, thereafter, invited our attention to Page-24of the paper-book. Page-24 of the paper-book is the trading account ended on 31[st] March, 2011. Referring to the documentof trading account, he pointed out that the purchase price ofthe land is Rs.9,11,00,000/-. By sales, the total is shown atRs.6,50,09,501/-. The closing stock has been shown atRs.6,22,13,506/-. According to Mr. Patel, from thebalance-sheet Form No.3CD, i.e, the tax audit report, theassessee had claimed an expenditure at Rs.9,11,00,000/- onaccount of the purchase of the land. The assessee had shownincome at Rs.6,50,09,501/- as sales. The income towards thesales was bifurcated in two parts, i.e. (I) sales of 15 flats innumbers at the rate of 10 Lakh aggregating toRs.1,50,00,000/-. and (ii) sales termed as construction incomeof Rs.5,00,09,501/- in respect of 36 flats. Mr. Patel furtherpointed out that the assessee showed the closing stock ofRs.6,22,13,506/- as on 31[st] March, 2011. This was done on thebasis of the valuation undertaken by the site supervisor.However, the principal argument of Mr. Patel is that there wasno basis or any foundation for the site supervisor to issue sucha certificate. Mr. Patel further pointed out that it is only on thebasis of the sample copy of the document that it was revealedthat the assessee had executed two deeds, one relating to thesale of proportionate share of land at Rs.10,00,000/- and theother relating to the construction cost at Rs.32,00,000/-. Mr.Patel pointed out that the assessee declared his closing stockat Rs.6,00,00,000/- on the basis of the valuation undertaken bythe site supervisor and which resulted into under assessmentof income by Rs.1,61,00,000/- According to Mr. Patel, the caseis not one of just change of opinion but, in fact, the declarationon the part of the assessee was in such a manner that theAssessing OfÏcer could not have carried out the assessment inthe manner it was shown. In such circumstances, referred to above, Mr. Patel prays that there being no merit in this writapplication, the same be rejected. ANALYSIS above, Mr. Patel prays that there being no merit in this writapplication, the same be rejected. ANALYSIS 5.Having heard the learned counsel appearing for theparties and having gone through the materials on record, theonly question that falls for our consideration is whether theimpugned notice for reassessment under Section 148 of theAct should be quashed. 6.With regard to the objection or rather the argument of Mr.Soparkar that the reassessment is on the basis of the report ofthe audit party, we are of the view that the same, by itself,may not be sufÏcient to quash the impugned notice. Theposition of law in this regard is well settled. The two decisions,referred to above, i..e, one of the Supreme Court in the case ofP.V.S. Beedies Pvt. Ltd. (supra) and another of this Court in thecase of N.K. Industries (supra) makes the picture clear. 7. However, we are not able to accept the submission of Mr.Patel that the case is not one of mere change of opinion. Wetake notice of the fact that the sample copy of the document inrespect of the sale of Flat No.702 in favour of one Shri RajeshPanchori was already on record. If it is the case of the revenuethat the reassessment is on the basis of the materials whichcame to be noticed, for the first time, through the sample copyof the document, then we are afraid, the same sample copy ofthe document was very much before the Assessing OfÏcerduring the time of scrutiny assessment. Besides the same, theonly ground on which the assessment is sought to be reopenedis the under valuation of the stock to the extent of Rs.1,60,00,000/-. It appears that the assessee had furnished allthe necessary details with regard to the valuation of the stock.The stock certificate of the valuation issued by the sitesupervisor was also on record. In the tax audit report, we findreference as regards the method of valuation. It has beenstated therein that “the assessee is a developer and builder”.The assessee is in the business of construction and sale offlats, buildings, land etc. it is impracticable to maintain itemwise quantitative records of the items of building materials,which is shown in the Balance-Sheet as a closing stock in tradewhich is incomplete work at site. The valuation is taken on thebasis of the valuation carried out by the site engineer. We,once again, go back to the reasons assigned for the purpose ofreassessment. In the reasons, we find reference of thebalance-sheet Form No.3CD, profit and loss account, and thevery same material is now sought to be looked into for thepurpose of reassessment. 8.In the overall view of the matter, we are convinced thatthis is a case of mere change of opinion. The law in this regardis well settled as explained by the Supreme Court in the caseof CIT vs. Kelvinator of India Ltd., reported in (2010) 320ITR 561 (SC) . 9.In the result, this writ application succeeds and is herebyallowed. The impugned notice is hereby quashed and setaside. (J. B. PARDIWALA, J) (BHARGAV D. KARIA, J)