Assessing authority ought not to reopen regular assessment on the ground that it had not applied correct provision of law in finalizing scrutiny assessment in absence of tangible material as the same would amount to mere change of opinion in such circumstances.
In Hitachi Home & Life Solutions (I) Ltd. vs. ACIT [ITA Nos. 3045/Ahd/2013 & 104/Ahd/2014, decided on 17.01.2017], briefly, the assessee being a company manufacturing/trading in air conditioners filed return of income on 20.12.2006 stating total income of Rs.15,62,01,340/-. It however returned nil income after adjusting carry forward losses. The AO completed a regular/MAT assessment on 26.02.2010 assessing total income as Rs.28,02,009/- followed by computation of book profit amounting to Rs.5,34,29,578/-.
The AO formed reasons to believe that assessee’s taxable income liable to be assessed had escaped assessment. He issued section 148 notice dated 25.08.2010 for the sole reason that the assessee had debited a provision of Rs.2,68,16,000/- in its P&L account without making a corresponding addition thereof in its book profits. He quoted section 115JB(2) explanation 1(i) as amended by the Finance Act, 2009 with retrospective effect from 01.04.2001 prescribing that any amount set aside as a provision for diminution in the value of any asset and debit to P&L account leads to increase input profit to the extent of the very figure.
The assessee filed its reply to the above reopening notice on 17.09.2010. It sought to treat its original return as the one filed in furtherance to reopening notice. It would thereafter ask for a copy of reopening reasons. The AO very fairly furnished the same. He then completed the impugned re-assessment on 17.10.2011 adding the above sum of Rs.2,68,16,000/- in assessee’s book profits computation.
The assessee filed appeal inter alia raising three folded grounds challenging validity of reopening, correctness of the above book profits addition on merits followed by interest levied by the AO under section 234B and E of the Act. The CIT(A)’s order under challenge declines first of the above argument challenging validity of reopening by observing that although the AO had duly called for all relevant details pertaining to the above MAT computation, he did not consider implication of assessee’s provision of bad debts under section115JB explanation 1(i) of the Act. He further opined that the AO did not apply his mind nor raised any specific query as per the above amended provision. He sought to validate the same rather by concluding that the reopening was well within four years from the end of the relevant previous year. This followed CIT(A)’s findings on remaining two issues (supra). He partly accepted assessee’s challenge to the impugned additions on merit in restricting the above book profits addition of Rs.2.68crores to Rs.82,57,118/- thereby deleting the addition pertaining to provision of obsolete stock amounting to Rs.1,85,59,435/-. He further agreed with assessee’s plea challenging the above interest levies by observing that the same were not sustainable as involving impugned assessment year 2006-07 sought to be covered under the amended provision made in the Finance Act, 2009 w.e.f. 01.04.2001.
The learned Members of the Ahmedabad, ITAT came to the legal issue of opening of the assessment and observed that there was admittedly no dispute that the CIT(A) has been fair enough in agreeing to assessee’s plea that the AO had in fact called for all relevant detail pertaining to the impugned provision of bad debts whilst framing regular assessment in its case on 26.02.2010. The above retrospective amendment in section 115JB explanation 1(i) (supra) had come very well by then vide Finance Act, 2009 w.e.f. 01.04.2001. It was rather manifest enough that the AO computed assessee’s book profits alongwith other disallowances / additions including the one pertaining to obsolete stock addition under normal provisions as sought to be revived in Revenue’s cross appeal. It thus could not be said that the AO had not taken a conscious decision of not making the impugned addition. Thereafter, learned Members came to Revenue’s argument that the AO has reopened the above regular assessment as per the above statutory provision so as to make the impugned addition of provision of bad debts. They were not impressed with this argument. It was evidently not the AO’s case that he had some tangible material apart from assessee’s details already on record forming reasons to believe that some taxable income had escaped assessment. The case file also did not indicate any such circumstance. The learned Members relied on Hon’ble jurisdictional high court in General Motors India Pvt. Ltd. vs. DCIT (2013) 354 ITR 244 (Gujarat), Gujarat Power Corporation Ltd. vs. ACIT(2013) 350 ITR 266 and CIT vs. Kelvinator of India Ltd. (2010) 320 ITR 561 (SC) to observe that such a course of action amounts to mere change of opinion not sustainable in the eyes of law. Their lordships of Hon’ble jurisdictional high court rather formulate the second question in General Motors decision that an assessing authority ought not to reopen regular assessment on the ground that it had not applied correct provision of law in finalizing scrutiny assessment in absence of tangible material as the same would amount to mere change of opinion in such circumstances. The reopening of the case was quashed by ITAT, Ahmedabad.