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Background
The Bombay High Court in the case of Rallis India Ltd. 1 (“the assessee”) has held that an assessment could be reopened on the basis of law as it exists on the date of issue of notice under section 148 of the Income-tax Act, 1961 (“the Act”).
It has also been reiterated that the assessment could not be re-opened in the absence of tangible material as laid down by the Supreme Court in the case of Kelvinator of India Limited2.
Facts
For the assessment year 2004-05, the assessee filed its tax return declaring a loss of INR 528.7 million after claiming a deduction of bad debts of INR 120 million. The assessee also computed a book loss of INR 421.4 million under section 115JB of the Act. Thereafter, the tax return was
1 Rallis India Ltd v. ACIT [2010-TIOL-173-HC-MUM-IT]
2 CIT v. M/s Kelvinator of India Limited [2010] 320 ITR 561 (SC)
revised and a loss of INR 53.20 million was declared. The tax return was selected for scrutiny assessment wherein a specific query was raised with regard to the allowability of bad debts claimed under section 36(1)(vii) read with section 36(2) of the Act and on computation of book profits under section 115JB of the Act. While passing the assessment order, the Assessing Officer (“AO”) disallowed the claim of bad debts amounting to INR 55.4 million out of INR 120 million. On appeal, the Commissioner of Income-tax (Appeals) (“CIT(A)”) allowed the entire claim of bad debts amounting to INR 120 million under section 36(1)(vii) of the Act. Cross appeals filed by the assessee and by the revenue were pending before the Income-tax Appellate Tribunal.
Meanwhile, a notice under section 148 of the Act for re-opening the assessment was issued to the assessee stating the following reasons:
Validity for reopening a tax assessment is to be determined based on the law prevalent on the date of issue of notice Tax & Regulatory Services
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• The assessee had not written off the debts / advances by debiting the Profit and Loss account (“P&L account”); the bad debts written off had been claimed by debiting provision for doubtful debts and advances; and
• In computing the book profits under section 115JB of the Act, the assessee had not considered the provision for doubtful debts, provision for doubtful advances and provision for diminution in the value of investments.
Aggrieved, the assessee filed a writ petition before the High Court.
Issues
• Whether the notice issued under section 148 of the Act is valid even if the AO has applied his mind in partially allowing bad debts during the scrutiny assessment.
• Whether the validity of the notice is to be determined on the basis of the law prevailing on the date of the issue of notice and retrospective amendments taking place thereafter will not be considered.
Assessee’s contentions
• A detailed inquiry was made by the AO during the course of scrutiny assessment.
• The write-off of bad debts had been made out of the debtors provided in the books of account in the earlier assessment years, which income had been added back to the income and offered to tax in the respective assessment years. Since in those assessment years the amounts were added back to income, a corresponding claim has been made in the current year when the debts have been written off in the books of account.
• On the basis of material provided, the AO had allowed the claim of bad debts to the tune of INR 64.6 million out of INR 120 million.
• The reasons for reopening the assessment were extraneous to the provisions of section 36(1)(vii) of the Act, since the statute did not require that the write off of debts / advances should be reflected in the P&L account for the assessment year in which the claim for deduction was made.
• Re-opening of the assessment was not warranted since the AO had applied his mind to the issue of allowability of claim of bad debts during the course of assessment proceedings.
• With regard to the computation of book profits, it was submitted that on the basis of the law as it then stood i.e. on the date of issue of notice under 148 of the Act, a provision for doubtful debts and advances and for diminution in the value of investments did not fall within the purview of section 115JB of the Act.
• Although, the amendment by insertion of clause (i) to Explanation (1) to section 115JB of the Act to disallow these provisions was introduced by the Finance Act, 2009 with retrospective effect from 1 April, 2001, the amendment was brought about after the notice was issued by the AO seeking to re-open the assessment.
• The validity of the notice of the AO seeking to re-open the assessment would have to be determined on the law as it prevailed on the date of the notice3.
Revenue’s contentions
• Whether bad debts had been written off by the assessee was not clear during the course of assessment proceedings.
• The assessee would not be entitled to deduction under section 36(1)(vii) of the Act as the assessee had reflected a ‘Nil’ provision for bad debts in the annual accounts.
3 CIT v. Max India Limited [2007] 295 ITR 282 (SC)
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• The issue regarding the computation of book profit, was not raised during the course of assessment proceedings, hence the AO was not precluded from re-opening the assessment.
• The Supreme Court judgment of Max India Limited (above) on which reliance had been placed must be confined to section 80HHC of the Act.
High Court Ruling
• During the assessment proceedings, the AO specifically applied his mind to the claim of the assessee for deduction on account of bad debts and thus, the re-opening is merely a case of change of opinion without any tangible material.
• It is now a well settled position of law that a mere change of opinion would not justify the AO in seeking recourse to the powers under sections 147 and 148 of the Act.
• The principle that there must be tangible material before the AO to prove that income chargeable to tax has escaped assessment has been established by the Supreme Court in the case of Kelvinator of India Limited (above).
• It is not a requirement contained in section 36(1)(vii) of the Act that the assessee should have debited the amount towards write off of debts/advances to the P&L account.
• The Principles laid down in case of Max India Limited (above) would be attracted.
• On the date on which the AO purported to exercise his power to reopen the assessment under section 147 of the Act, the legislative amendment by the insertion of clause (i) to Explanation (1) to section 115JB had not been brought into force on the statute book.
• The subsequent amendment could not have been and is not a ground which has been taken by the AO while reopening the assessment.
• The validity of the notice issued by the AO in seeking to reopen the assessment must be determined with reference to the reasons which are found in support of the reopening of the assessment.
• These reasons cannot be allowed to be supplemented on a basis which was not present to the mind of the AO and could not have been so present on the date on which the power to reopen the assessment was exercised.
Conclusion
The decision reiterates the position that mere change of opinion cannot be ground for re-opening assessment. Secondly, validity of reopening the assessment has to be determined on the basis of law prevailing on date of issue of section 148 notice and not on retrospectively amended law.
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