Case Law Details
Orange Business Services India Solutions Private Limited Vs DCIT (ITAT Delhi)
Facts regarding disallowance of prior period expenses amounting to Rs.1,08,63,174/- and MAT. Whether the assessee disclosed fully and truly all material facts necessary for the assessment:
During the subject assessment year, the assessee has debited prior period expenses amounting to Rs.1,08,63,174/- to its profit and loss account to arrive at the net profit for the year under consideration, in accordance with the provisions of Accounting Standard – 5. In computing the book profits for the purposes of Minimum Alternate Tax (‘MAT’) computation, the Appellant had considered the net profit after deduction of prior period expense and computed profits as per of section 115JB of the Act. The AO disallowed the deduction of prior period expenses in computation of the book profits on the contention that the book profits are to be calculated only on the basis of current year operational profits. In the reasons recorded, the AO stated that an amount of Rs.2,74,88,169/- needs to be added back to the book profits computed under section 115JB of the Act and that Appellant has failed to disclose his income fully and truly and all material facts necessary for the assessment.
In the present case, the financial statements for year ended March 31, 2010 disclosed the prior period expenses of Rs.1,08,63,174/- on the face of the profit and loss account itself as well as the break-up of the same is depicted at Schedule 16 of the financial statements (copy of financials at page 62 to 86 of the PB). The Tax Audit Report (TAR) in Form 3CD for AY 2010-11 (clause 22(b) of TAR and attachment 9 of TAR) depict the prior period expenses of Rs.1,08,63,174/-. A copy of the TAR has been duly furnished before the AO vide Annexure-4 of submission dated May 30, 2013. The computation of Income including the MAT (‘Minimum Alternative Tax’) computation under section 115JB of the Act along with Form 29B for AY 2010-11 depicts that the Company had disallowed the prior period expense of Rs.1,08,63,174/- in the normal computation of income. Further, the same is not disallowed in the MAT computation in line with Form 29B for the subject year. The said documents been duly furnished before the AO vide Annexure-2 and Annexure-3A of the submission dated May 30, 2013 (copy of submission dated May 30, 2013 along with relevant extract of the annexures – page 87 to 100 of the PB).
Thus, in the present case, there is no failure on the part of the Appellant to file its Return of Income. Further, the Appellant has disclosed fully and truly all material facts necessary for his assessment. The facts have been duly disclosed in the Tax Audit Report and vide the Profit and Loss Account. Hence keeping in view the proviso to the section 147, the reassessment proceedings initiated under section 147 of the Income Tax Act 1961 beyond a period of four years are bad in law and deserve to be quashed.
FULL TEXT OF THE ORDER OF ITAT DELHI
The present appeal has been filed by the assessee against the order of the ld. CIT(A)-1, Gurgaon dated 25.06.2018.
2. The assessee has raised following grounds of appeal:
“1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in upholding the reassessment proceedings under section 147/148 of the Income Tax Act, 1961 (‘Act’) without appreciating:
1.1 that the said reassessment proceedings were barred by limitation in view of the proviso to section 147 of the Act on account of the reason that there was no failure on the Appellant’s part to disclose fully and truly all material facts necessary for assessment;
1.2 that the Ld. AO erred in forming the reasons to believe solely on the basis of audit objection without any independent reason based on possession of tangible material/information with the Ld. AO having live nexus and close link with the formation of belief that the income has escaped assessment; and
1.3 that the reassessment proceedings were based on change of opinion on the same set of facts which were existing and considered at the time of original assessment concluded under section 143(3) of the Act.
2. Without prejudice to the above grounds, the Ld. CIT(A) on the facts and in |he circumstances of the case and in law, erred in confirming the addition of prior period expenses amounting to INR 1,08,63,174 in the computation of book profits made by the the Ld. AO, without appreciating that profits as shown in the profit and loss account for the relevant assessment year prepared in accordance with the provisions of Companies Act, 1956 is to be considered while computing the ‘book profits’ as per Explanation 1 to section 115JB of the Act and the said expense was shown separately in the profit and loss account only due to specific requirement of the Accounting Standards prescribed by the Institute of Chartered Accountants of India.
3. On the facts and in the circumstances of the case and in law, the Ld. AO erred in charging interest under section 234B and section 234C of the Act.
4. On the facts and in the circumstances of the case and in law, the Ld. AO erred in short credit of taxes of an amount of 16,410 paid on account of TDS/advance tax/self-assessment tax demand paid under protest.”
3. Orange Business Services India Solutions Private Limited is a Company incorporated on May 17, 2005 under the laws of India and is engaged in providing IT enabled network management/technical support, software development and back-office support service to its group Company. The company was set-up under the Software Technology Parks of India (‘STPI’) Scheme. For the A.Y. 2010-11, the Company filed its return of income on September 30, 2010 vide acknowledgment no. 164722501300910 declaring the total income of Rs.2,76,18,542/-. Thereafter, the case of the Appellant was selected for scrutiny proceedings by issuance of notice under section 143(2) of the Act. During the course of assessment proceedings, various details/information were called for vide questionnaire issued under section 142(1) of the Act dated November 02, 2012 and February 28, 2014 in response to which the Appellant had furnished all the relevant details. The Appellant vide submission dated May 30, 2013 submitted the computation of income including the MAT (‘Minimum Alternative Tax’) computation under section 115JB of the Act, Form 29B and tax audit report (TAR).
4. The assessment was concluded by the Deputy Commissioner of Income-tax, Circle 3(1), Gurgaon vide assessment order dated January 30, 2015 under section 143(3) of the Act, post the directions of Hon’ble Dispute Resolution Panel, at an assessed income of Rs.25,97,19,407/- by making an addition of Rs.23,21,00,865/- on account of Transfer Pricing (TP) adjustment to the returned income.
5. Aggrieved, the Appellant filed an appeal before ITAT, which set aside the matter to the file of AO/TPO for fresh adjudication vide order dated January 21, 2016. Pursuant to the order passed by the ITAT, the said addition has been deleted by the AO after fresh adjudication.
6. Subsequently, the Appellant received a copy of the audit objection issued by audit team of the revenue authorities from the AO’s office whereby the audit team had alleged incorrect computation of book profit under 115JB of the Act (audit objection enclosed at page 1 of the Paper book). In respect to the same, the Appellant filed a submission dated March 30, 2017 before the Ld. AO whereby it submitted that the computation of the book profits under section 115JB of the Act was correct and the Appellant has also obtained and submitted the certificate from Chartered Accountant i.e. Form 29B in this regard.
7. Thereafter, notice dated 31.03. 2017 u/s 148 of the Act and a subsequent clarification letter dated May 1, 2017 (notice u/s 148 along with letter, page 2 to 3 PB), was issued to the Appellant requiring the Appellant to file its return of income, which was duly complied by the Appellant.
8. Further, the Appellant was provided reasons recorded for initiation of reassessment proceedings under section 147/148 of the Act, in respect of which the Appellant filed its objections vide letter dated July 7, 2017 against the initiation of reassessment proceedings. The said objections were disposed of by the AO vide order dated October 24, 2017. Subsequently, a detailed submission on merits of the case was filed by the Appellant vide submission dated November 9, 2017.
9. Thereafter, the AO passed the assessment order under section 147/143(3) of the Act dated December 20, 2017, by making an addition of prior period expenses of Rs.1,08,63,174/- to the book profits of the Company of Rs.26,61,70,439/-, thereby re-computing the book profits at Rs. 27,70,33,613/-.
10. Aggrieved by the addition made vide said assessment order under section 147/143(3) of the Act, the Appellant preferred an appeal before Ld. Commissioner of Income Tax (Appeals) -1 [‘CIT(A)’]. The ld. CIT(A) vide its order dated June 25, 2018 passed under section 250(6) of the Act upheld the addition made by AO.
11. Aggrieved by the aforesaid order of the Ld. CIT(A), the Company has preferred the present appeal.
12. Heard the arguments of both the parties and perused the material available on record.
Reasons recorded by the AO dtd 31.03.2017
The assessee company has filed its return of Income of Rs. 5,87,11,470/-on 01.10.2010. Subsequently, the assessee has revised its return declaring income of Rs. 5,90,68,400/- on 28.03.2012. The assessment u/s 143(3) r.w.s. 144C of the IT Act was completed on 30.01.2015 at Rs. 24,37,14,622/-.
From the perusal of the assessment records it is revealed that the assessee has shown book profit of Rs, 266170439/- u/s 115JB of the IT Act and paid taxes under MAT during the F.Y. 2009-10 relevant to A.Y. 201011. The Book Profit should be computed as per Explanation (1) under sub section (2) of section 115JB of the Act. As per Form 29B, books profit of the Assessee Company has been computed at Rs. 266170439/- whereas, the book profit of the Assessee Company as per explanation (1) under sub section (2) of section 115JB was 293658603/-. Therefore, an amount of Rs. 2,74,88,169 (293658630-266170439) needs to be added back to the total income u/s 115JB of the IT Act under MAT.
In view of the above, I have reason to believe that income of Rs.2,74,88,169/- and any other income which subsequently comes to the knowledge of the AO has escaped assessment within the meaning of section 147 of the I.T. Act, 1961, because of failure on the part of the assessee to disclose his income fully and truly and all material facts necessary for assessment. Issue notice u/s 148 of f the I.T. Act, 1961 for the A.Y. 2010-11.
13. The AO vide order u/s 147/143(3) dated 20.12.2017 disallowed an amount of Rs.1,08,63,174/- and accordingly recomputed the book profits u/s 115JB to Rs.27,70,33,614/-.
14. With reference to the reopening, the provisions Section 147 are as under:
“Income escaping assessment.
147. If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or re-compute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year) :
Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year:
Provided further that nothing contained in the first proviso shall apply in a case where any income in relation to any asset (including financial interest in any entity) located outside India, chargeable to tax, has escaped assessment for any assessment year:
Provided also that the Assessing Officer may assess or reassess such income, other than the income involving matters which are the subject matters of any appeal, reference or revision, which is chargeable to tax and has escaped assessment.
Explanation 1.—Production before the Assessing Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of the foregoing proviso.
Explanation 2.—For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely :—
(a) where no return of income has been furnished by the assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax ;
(b) where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return ;
(ba) where the assessee has failed to furnish a report in respect of any international transaction which he was so required under section 92 E;
(c) where an assessment has been made, but—
(i) income chargeable to tax has been under assessed; or
(ii) such income has been assessed at too low a rate; or
(iii) such income has been made the subject of excessive relief under this Act; or
(iv) excessive loss or depreciation allowance or any other allowance under this Act has been computed;
(ca) where a return of income has not been furnished by the assessee or a return of income has been furnished by him and on the basis of information or document received from the prescribed income-tax authority, under sub-section (2) of section 133C, it is noticed by the Assessing Officer that the income of the assessee exceeds the maximum amount not chargeable to tax, or as the case may be, the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return;
(d) where a person is found to have any asset (including financial interest in any entity) located outside India.
Explanation 3.—For the purpose of assessment or reassessment under this section, the Assessing Officer may assess or reassess the income in respect of any issue, which has escaped assessment, and such issue comes to his notice subsequently in the course of the proceedings under this section, notwithstanding that the reasons for such issue have not been included in the reasons recorded under sub-section (2) of section 148.
Explanation 4.—For the removal of doubts, it is hereby clarified that the provisions of this section, as amended by the Finance Act, 2012, shall also be applicable for any assessment year beginning on or before the 1st day of April, 2012.”
In the present case, the return of income has been filed on 30.09.2010. The P&L account for the year ending March 2010 disclosed the prior period expenses of Rs.1,08,63,174/-. The Tax Audit Report in Form 3CD which depicted this amount have been duly furnished before the AO. The computation of income including the MAT computation u/s 115JB of the Income Tax Act, 1961 along with Form 29B for the A.Y. 2010-11 reveals that the company has disallowed the prior period of expenses in the normal computation of income. Further, the same is not disallowed in the MAT computation in accordance with Form 29B.
The item of prior period expenses in the P&L account is glaring and cannot be said to be embedded under any other expense.”
15. Facts regarding disallowance of prior period expenses amounting to Rs.1,08,63,174/- and MAT. Whether the assessee disclosed fully and truly all material facts necessary for the assessment:
16. During the subject assessment year, the assessee has debited prior period expenses amounting to Rs.1,08,63,174/- to its profit and loss account to arrive at the net profit for the year under consideration, in accordance with the provisions of Accounting Standard – 5. In computing the book profits for the purposes of Minimum Alternate Tax (‘MAT’) computation, the Appellant had considered the net profit after deduction of prior period expense and computed profits as per of section 115JB of the Act. The AO disallowed the deduction of prior period expenses in computation of the book profits on the contention that the book profits are to be calculated only on the basis of current year operational profits. In the reasons recorded, the AO stated that an amount of Rs.2,74,88,169/- needs to be added back to the book profits computed under section 115JB of the Act and that Appellant has failed to disclose his income fully and truly and all material facts necessary for the assessment.
17. In the present case, the financial statements for year ended March 31, 2010 disclosed the prior period expenses of Rs.1,08,63,174/- on the face of the profit and loss account itself as well as the break-up of the same is depicted at Schedule 16 of the financial statements (copy of financials at page 62 to 86 of the PB). The Tax Audit Report (TAR) in Form 3CD for AY 2010-11 (clause 22(b) of TAR and attachment 9 of TAR) depict the prior period expenses of Rs.1,08,63,174/-. A copy of the TAR has been duly furnished before the AO vide Annexure-4 of submission dated May 30, 2013. The computation of Income including the MAT (‘Minimum Alternative Tax’) computation under section 115JB of the Act along with Form 29B for AY 2010-11 depicts that the Company had disallowed the prior period expense of Rs.1,08,63,174/- in the normal computation of income. Further, the same is not disallowed in the MAT computation in line with Form 29B for the subject year. The said documents been duly furnished before the AO vide Annexure-2 and Annexure-3A of the submission dated May 30, 2013 (copy of submission dated May 30, 2013 along with relevant extract of the annexures – page 87 to 100 of the PB).
18. Thus, in the present case, there is no failure on the part of the Appellant to file its Return of Income. Further, the Appellant has disclosed fully and truly all material facts necessary for his assessment. The facts have been duly disclosed in the Tax Audit Report and vide the Profit and Loss Account. Hence keeping in view the proviso to the section 147, the reassessment proceedings initiated under section 147 of the Income Tax Act 1961 beyond a period of four years are bad in law and deserve to be quashed.
In the result, the appeal of the assessee is allowed. Order Pronounced in the Open Court on 09/05/2022.
