Brief of the Case
Delhi High Court held In the case of Dr. Ajit Gupta vs. ACIT that the reason for reopening of the assessment was a mistaken factual premise that the Assessee had changed the system of accounting from the mercantile to the cash system. It was more than adequately explained by the Assessee that this was an inadvertent error. The Assessee has convincingly shown that he has consistently been following the mercantile system of accounting not only for AYs in question but for the earlier and later AYs as well. Hence reopening based on factual inadvertent error is not sustainable in law.
Facts of the Case
The Assessee filed a return of income on 31st October 2006 for AY 2006-07 which was picked up for scrutiny by AO. An assessment order was passed by the AO under Section 143(3) on 22nd December 2008 assessing the taxable income at Rs.14,40,226 as against the declared income of Rs.12,35,268. The Assessee filed a return for AY 2007-08 on 31st October 2007 which again was picked up for scrutiny. An assessment order was passed on 29th December 2009 assessing the taxable income at Rs.36,95,120 as against the declared income of Rs.36,00,313. The Assessee filed a return of income on 30th September 2008 for AY 2008-09 which was processed under Section 143(1) of the Act. The returned income was Rs.1,14,96,331. The Assessee filed a return on 29th September 2009 for AY 2009-10. This was picked up for scrutiny and an assessment order was passed by the AO on 26th April 2011. As against the declared income of Rs.2,10,82,780, the income was assessed at Rs.2,19,53,505.
On 25th March 2013, the DCIT issued a notice to the Assessee under Section 148 of the Act seeking to reopen the assessment order for AY 2006-07. Within three days of the earlier notice, i.e., on 28th March 2013, another notice under Section 148 of the Act was issued by the DCIT seeking to reopen the assessment for AY 2008-09. As far as AY 2007-08 is concerned, the notice was issued by the ACIT, on 5th March 2014. For AY 2009-10, the notice was issued two days later, i.e., on 7th March 2014. The main reason for the reopening of the assessment is admittedly the letter given by the Assessee while the assessment for AY 2010-11 was under scrutiny. The Assessee volunteered that we have followed the cash system of accounting until FY 2008-09 and shifted over to mercantile system of accounting for FY 2009-10 (AY 201011). The same has been confirmed by our Chartered Accountant in the tax audit report as well as the confirmation letter dated 01.10.2012.
Contention of the Assessee
The ld counsel of the assessee submitted that letter was written by the Assessee under some misconception as he does not understand as what is the mercantile or cash based accounting. It was further stated he is a layman as regards to accounting systems, records, policies etc. He is a doctor by profession and does not have accounting knowledge. This letter was written by him without understanding the meaning of it. Therefore, no cognizance should be taken of it as the contents of this letter are contrary to the facts on record.
In a further letter dated 9th March 2015, the Assessee pointed out that if the cash system was to be followed for AYs 2006-07 to 2010-11, the overall impact would be ‘nil’ and there would be no escapement of income. The only controversy was whether income was to be taxed in the first year or the next year and overall it would be tax neutral. There was also no revenue loss as the maximum slab of tax rate in all the AYs was the same, i.e., 30%. It was further pointed out that for AY 2009-10 by changing the method as cash basis, the assessed income would be reduced.
Held by High Court
High Court held that apart from the mistake made in the audit report by mentioning the system of accounting of the Assessee as ‘mixed’ and the letter issued by the Assessee himself, no other ‘tangible material’ was cited to justify the reopening of assessment for AY 2006-07 and 2007-08, the two years for which the reopening was beyond the period of four years. The reasons provided were the same reasons supplied for the reopening of the assessment for AYs 2008-09 and 2009-10 although for AY 2008-09 the earlier assessment was completed under Section 143 (1) of the Act. The fact of the matter was that the reason for the reopening of the assessment was a mistaken factual premise that the Assessee had changed the system of accounting from the mercantile to the cash system. It was more than adequately explained by the Assessee that this was an inadvertent error. The Assessee has convincingly shown that he has consistently been following the mercantile system of accounting not only for AYs in question but for the earlier and later AYs as well.
Since the action of the Revenue was based on a factually erroneous premise, the Court is of the view that the reopening of the assessments for the said AYs is not sustainable in law. The Court is also satisfied that the requirement of the law, as explained by the Court in Commissioner of Income Tax. v. Kelvinator of India Limited (2010) 320 ITR 561 (SC), and reiterated in the later decisions, has not been fulfilled in the present case.
Accordingly, appeals of the assessee allowed.