Mere change of opinion not based for reopening of assessment

PCIT Vs Lanco Hills Technol park pvt. Ltd (Telangana High Court)

Telangana High Court held that as all the material facts were fully and truly disclosed, reopening of assessment on mere change of opinion is unsustainable in law.

Facts- This appeal has been preferred by the revenue u/s. 260A of the Income Tax Act, 1961 against the order passed by ITAT for A.Y. 2010-11.

The issue is that case of the respondent was reopened u/s 147 by issuing notice u/s 148. AO completed the assessment by disallowing the claim towards debiting of Profit & Loss account due to reversal on account of cancellation and price revision.

CIT(A) allowed the appeal of the respondent both on technical and merit ground. Revenue preferred appeal before the Tribunal which was dismissed.

Conclusion- The fact that the reopening of assessment was ordered on mere change of opinion has been upheld by two lower appellate authorities. It is evident that respondent had disclosed fully and truly all material facts to the assessing officer during the assessment proceeding on the basis of which assessment order dated 27.12.2012 was passed under Section 143(3) of the Act. By change of opinion holding that reduction of Rs.113,19,93,808.00 towards reversal on account of cancellation and price revision and deducting the same from the profit and loss account was irregular thereby having reason to believe that taxable income had escaped assessment, the concluded assessment could not have been reopened. At the stage of third round of appeal we do not find any substantial question of law for interference by the High Court under Section 260A of the Act. We are, therefore, of the view that there is no merit in this appeal.

FULL TEXT OF THE JUDGMENT/ORDER OF TELANGANA HIGH COURT

Heard Mr. J.V.Prasad, learned Standing Counsel for Income Tax Department appearing for the appellant.

2. This appeal has been preferred by the revenue as the appellant under Section 260A of the Income Tax Act, 1961 (briefly, ‘the Act’ hereinafter) against the order dated 07.09.2021 passed by the Income Tax Appellate Tribunal, Hyderabad ‘A’ Bench, Hyderabad (Tribunal) in I.T.A.No.1021/Hyd/2019 for the assessment year 2010-11.

3. Appellant has proposed the following questions as substantial questions of law:

1. Whether on the facts and in the circumstances of the case, the Tribunal is correct in upholding the orders of the Commissioner of Income Tax (Appeals) – 4?

2. Whether information devoid of corroborative evidence and supporting documents constitute true and full disclosure for the purpose of Section 147 of the Act?

3. Whether on the facts and in the circumstances of the case, the Tribunal is correct in not considering the fact that full details of ‘cancellation & price revision’ were not disclosed by the assessee during the original assessment proceedings and therefore there was failure on the part of the assessee to fully and truly disclose all material facts for completion of assessment?

4. Respondent before us is an assessee under the Act. It is a private limited company engaged in the business of development and sale of office space, residential buildings, commercial complexes etc. For the assessment year 2010-11, it had filed return of income on 25.09.2010 admitting loss of Rs.29,24,79,084.00 after setting off long term capital gain of Rs.3,85,41,685.00. Subsequently respondent filed revised return of income on 27.09.2011 declaring higher loss of Rs.36,03,42,295.00 after setting off long term capital gain of Rs.3,85,41,685.00. Assessing officer passed the assessment order on 27.12.2012 under Section 143(3) of the Act accepting the loss returned on 25.09.2010.

5. Later on, case of the respondent was reopened under Section 147 of the Act by issuing notice under Section 148 dated 31.03.2016. Following the laid down procedure, assessing officer completed the assessment on 27.11.2017 under Section 143(3) read with Section 147 of the Act by disallowing the claim of Rs.113,19,93,808.00 towards debiting to the profit & loss account due to reversal on account of cancellation and price revision. It was held that the same was not an acceptable method of revenue reversal and was accordingly disallowed by adding the same back to the returned income.

6. Aggrieved by the aforesaid order dated 27.11.2017, respondent preferred appeal before the Commissioner of Income Tax (Appeals) 4, Hyderabad (briefly referred to hereinafter as ‘CIT (A)’). By the appellate order dated 30.03.2019, CIT (A) allowed the appeal of the respondent both on technical grounds as well as on merit. It was held that action of the assessing officer in reopening of assessment was bad in law; so also the addition of Rs.113,19,93,808.00 made on account of reversal of revenue due to price revision/cancellation. The same was accordingly directed to be deleted. It was held as follows:

“8.9 From the above analysis it is clear that the appellant has reversed the revenue to the extent of Rs.40.76 crores on account of price revision which is forming part of earlier years revenue recognition to that extent has tabulated below:

This proves that to this extent it was already recognized by adopting original value of contract as existing in the AY 2008-09 when the real estate market was in upward swing. Now, the price being revised during the pending of the project before final conclusion of the sale, the revised price needs to be adopted to arrive at relevant revenues recognition as applicable to relevant assessment years. Considering this fact the same amount as applicable for reversal on account of offering the same as income the same needs to be reversed to the extent to reflect the true incomes of the appellant as qualified in the auditor report of this assessment year 2010-11. Hence, the price revision effect stands duly corrected in this assessment year as applicable as prudent accounting norms for arriving at correct picture of income and expenditure of the appellant as per percentage completion method. Hence, the appellant claim on merits on this issue of price revision adjustments as made in P&L Account is justified and hence, the grounds raised in this regard are allowed.

9. Further, on the issue of cancellation, it is noticeable that appellant strongly contends the case of cancellations where the relevant buyers could not proceed further due to economic recession prevailing during the period and forcing the cancellations. On this issue the AO was of the view that such cancellations would benefit the appellant. These observations of the AO are not based on verifiable fact. It is a known fact in the real estate business during the times of recession most of the customers would like to take back the advances to the extent possible and even in few cases with interest on the advances given to the appellant. In such a scenario it would be improper to hold to the extreme view that cancellations will result in forfeiture of advances making no loss to the appellant. To maintain the reputation of the builder in the real estate market, it is a normal practice to instil confidence in many instances cancellations are accepted by returning the advances to the extent possible so as to attract at least new customers for sale of remaining unsold/cancelled flats in the best interest of appellant reputation. In view of these facts, the appellant contentions on cancellations that advances received have been admitted in earlier years stands reconcilable and seems reasonable. The AO has not brought on record any adverse findings on this issue contrary to the claims of appellant during the original assessment or at least during the re-visited assessment which clearly proves that no specific findings countering the claims of the appellant were made by the AO. Hence, on the similar analysis of accounting as above as in the issue of price revision, the effect of cancellation needs to be reversed in this assessment year to that extent to reflect true income and expenditure of appellant for the year under appeal as a going concern following percentage completion method. Accordingly, appellant succeeds on these grounds for revenue reversal involving cancellation adjustments to the extent of Rs.72.43 crores. As a result, the appellant grounds of appeal on this issue are allowed on merits notwithstanding technical grounds on which appeal was allowed above. To sum up, the AO’s action in reopening of assessment was bad in law and also the addition of Rs.113,19,93,808/- made on account of reversal of revenue on account of price revision/cancellation is not correct and hence directed to be deleted.”

7. Revenue preferred appeal before the Tribunal against the aforesaid order of CIT(A) dated 30.03.2019. By the order dated 07.09.2021, Tribunal dismissed the appeal of the revenue by upholding the order of CIT(A). Tribunal held as follows:

“4. We have heard rival pleadings and perused the case file. We note first of all that the Assessing Officer recorded the following reasons for forming his opinion that the assessee’s taxable income had escaped assessment:

“it is gathered from the information available with this office that the assessee was debited an amount of Rs.113,19,93,808/- towards ‘Reversal on account of cancellation and price revision; and finally reported a book loss of Rs.38,28,51,371/-. The reduction of Rs.113,19,93,828/- towards Reversal on account of cancellation and price revision ‘from the Profit and Loss Account for the year ended 31.03.2010 is irregular, the same need to be brought to tax. In view of the above, I have reason to believe that income has escaped assessment as per the provisions of section 147 of the IT Act.”

There is hardly any dispute that we are in Assessment Year 2010-11 wherein the Assessing Officer had framed his section 143(3) regular assessment on 27.12.2012 followed by recording of the foregoing reasons culminating in issuance of section 148 notice dt.31.3.2016. This impugned reopening therefore has been initiated beyond the specified period of four years from the end of the relevant assessment year in light of section 147(1) ^1st proviso. The said proviso stipulates that such a reopening would only be initiated if it is found that the assessee had not disclosed all the relevant particulars “fully” and “truly” before the Assessing Officer in the first round. Learned CIT-DR to dispute that the Assessing Officer’s sole reopening reason has placed reliance on the assessee’s books only regarding “reversal on account of cancellation and price revision (supra)”. We therefore quote Hon’ble Bombay High Court’s landmark decision in Hindustan Lever Limited Vs. R.B. Wadekar (2014) 268 ITR 332 (Bom) that an Assessing Officer’s reopening reasons have to be read on standalone basis; as it is, without any scope of further improvement at a later stage by way of addition, deletion or substitution therein. We thus quote that to conclude that the impugned reopening has been rightly quashed by the CIT(A) as a mere change of opinion only. All this renders the latter issue on merits as academic.

No other argument has been pressed before us.”

8. Thus, according to the Tribunal, the reopening was initiated beyond the specified period of four years from the end of the relevant assessment year. In the light of Section 147(1) first proviso of the Act, Tribunal further noted that reopening of assessment is only permissible if the assessee had not disclosed all the relevant particulars fully and truly before the assessing officer. Relying on a decision of the Bombay High Court in Hindustan Lever Limited v. R.B.Wadekar¹, Tribunal held that assessing officer’s reopening reasons have to be read on a standalone basis, without any scope for further improvement at a later stage by addition or deletion or substitution. Therefore, Tribunal held that CIT(A) was justified in taking the view that reopening of assessment was on account of mere change of opinion.

9. We are in agreement with the views expressed by the Tribunal.

10. The fact that the reopening of assessment was ordered on mere change of opinion has been upheld by two lower appellate authorities. It is evident that respondent had disclosed fully and truly all material facts to the assessing officer during the assessment proceeding on the basis of which assessment order dated 27.12.2012 was passed under Section 143(3) of the Act. By change of opinion holding that reduction of Rs.113,19,93,808.00 towards reversal on account of cancellation and price revision and deducting the same from the profit and loss account was irregular thereby having reason to believe that taxable income had escaped assessment, the concluded assessment could not have been reopened. At the stage of third round of appeal we do not find any substantial question of law for interference by the High Court under Section 260A of the Act. We are, therefore, of the view that there is no merit in this appeal.

11. Appeal is accordingly dismissed.

Miscellaneous applications pending, if any, shall stand closed. However, there shall be no order as to costs.