Whether additional reasons recorded after date of issuance of notice u/s 148 can be looked into for purposes of determining validity of proceedings initiated u/s 14& - NO: Delhi HC

THE issues before the Bench are - Whether additional reasons recorded after the date of issuance of notice u/s 148 can be looked into for the purposes of determining the validity of the proceedings initiated u/s 147; Whether until and unless, there was an addition on the basis of the original reasons, no other additions could be made in view of the expression “and also” used in Explanation 3 to Section 147; Whether the validity of the proceedings initiated upon a notice u/s 148 have to be judged from the stand point of the reasons which existed at the point of time, when the Section 148 notice was issued; Whether it is permissible for the AO to conjure
up a different set of reasons by combining the original reasons and the additional reasons, recorded sometime later after the issuance of notice u/s 148 and Whether the AO is supposed to be fair to the Department as also to the assessee and to be honest to the record. And the verdict goes in favour of the assessee.

Facts of the case

The assessee income was assessed u/s 143(3), however, later on upon scrutiny the AO realized that the assessee had deducted amount on account of the provision for doubtful debts, no longer required, but in the Profit & Loss Account the said amount had not been added to the taxable income. It was contended that this resulted in under assessment of income and hence notice u/s 148 was issued. Nine months later after issuance of the notice u/s 148, additional reasons were recorded by the AO. The reasons were that the assessee had long term capital gains and therefore the balance unabsorbed depreciation should have been adjusted against the same. This resulted in excess carry forward of unabsorbed depreciation. The second reason supplied was that by mistake the AO had disallowed less amount of expenditure with respect to exempted dividendincome as per section 14A. Thereafter, the assessee submitted its objections which were rejected and the reassessment was completed.

On appeal, the CIT(A), while upholding the issuance of notice u/s 148 and the proceedings u/s 147, deleted the addition in respect of bad debts as also the disallowance u/s 14A. However, the CIT(A) held in favour of the revenue and confirmed the addition on account of the issue with regard to unabsorbed depreciation. Both the revenue and the assessee filed the appeals before the Tribunal. The revenue was aggrieved with regard to the deletion on account of the issue pertaining to bad debts, whereas the assessee was aggrieved with regards to the ground of unabsorbed depreciation had been accepted. The Tribunal, passed a common order dismissing Revenue’s appeal with regard to the issue of bad debts and allowed the assessee’s appeal that the proceedings initiated u/s 147/148 were invalid as also on the plea of unabsorbed depreciation.

Aggrieved, the Revenue has filed this appeal before the High Court on the sole issue against the finding of the Tribunal that the proceedings u/s 147/148 of the said Act were invalid and that the carried forward unabsorbed depreciation could not be set off against the long term capital gains.

Having heard the parties, the High Court held that,

+ the first point which needs to be examined is whether the proceedings under Section 147/148 were validly initiated or not. We have already noticed above that the purported reasons recorded on 19.01.2010 only contain the issue with regard to bad debts. It is only subsequently that, sometime in October 2010, additional reasons were recorded with regard to the issue pertaining to unabsorbed depreciation and the disallowance under Section 14A of the said Act. In our view, the additional reasons could not have been recorded. The notice under Section 148 would stand or fall depending upon the reasons prior to the issuance of the notice. In the present case, according to the counsel for the respondent/assessee, no notice under Section 148 of the said Act has been issued pertaining to the purported additional reasons which were allegedly recorded sometime in October 2010 and served upon the assessee on 29.10.2010. Therefore, the additional reasons cannot be looked into for the purposes of determining the validity of the proceedings initiated under the notice dated 19.01.2010 issued under Section 148 of the said Act;

+ that being the position, the only thing that has to be seen is whether the reasons recorded on 19.01.2010 could, at all, form the basis of reopening of an assessment under Section 148 of the said Act. One point is clear, in that so far as the issue of bad debts is concerned the present appeal is not concerned with it and therefore, the deletion of the addition made on account of bad debts has become final. Until and unless, there was an addition on the basis of the original reasons, no other additions could be made in view of the expression “and also” used in Explanation 3 to Section 147. This was the subject matter of the decision of the Bombay High Court in the case of CIT v. Jet Airways. This was followed by this Court in Ranbaxy Laboratories Limited v. CIT and also in CIT v. Software Consultants. It was also subject matter of a recent decision of this court in the case of CIT v. Cheil Communications India Pvt. Ltd. decided on 17.04.2013. Therefore, no additions in absence of any addition on the issue of bad debts could have been made by the Assessing Officer;

+ the Tribunal also noted that the respondent/assessee had not claimed the said amount of Rs.1,87,41,755/- in as much as the said amount had been written back by the assessee and the total deduction claimed by the respondent/assessee under the head of doubtful debts written off were only to the extent of Rs.46,37,814/- which had not been denied by the Assessing Officer in the original assessment framed on 26.12.2008. In fact, the entire issue of the provision for bad debts was discussed by the Assessing Officer at the time of original assessment and, therefore, the Tribunal was also right in holding that the attempt to re-assess was based on a mere change of opinion;

+ with regard to the additional reasons which were recorded subsequent to the issuance of notice under Section 148 of the said Act, we have already observed that this could not have been done by the Assessing Officer. The validity of the proceedings initiated upon a notice under Section 148 of the said Act would have to be judged from the stand point of the reasons which existed at the point of time when the Section 148 notice was issued. The additional reasons cannot be provided or recorded subsequent to the issuance of notice under Section 148. It is, of course, open to the Assessing Officer, if some other information comes within his knowledge to issue another notice under Section 148 for different reasons. But that is not the case here. On the basis of the very same notice issued under Section 148, the Assessing Officer has recorded additional reasons subsequent to the issuance of notice and this is impermissible in law;

+ before parting with this matter, we would also like to point out that the Assessing Officer has not dealt with this matter in the proper manner. In the order rejecting the objections as also in the assessment order under Section 147/143(3) dated 08.12.2010 the Assessing Officer has stated the reasons for reopening the income tax assessment to be as under;

+ it is, therefore, clear that the Assessing Officer has conjured up a different set of reasons by combining the original reasons and the additional reasons allegedly recorded sometime in October 2010. This is impermissible and does not behove of the Assessing Officer who is supposed to be fair to the department as also to the assessee and to be honest to the record!

+ the Assessing Officer was also wrong in stating that the reasons as indicated by him involving three issues had been recorded before issuance of the notice under Section 148. To make it clear, the reasons recorded prior to the issuance of the notice under Section 148 pertained only to the issue of bad debts. The other purported reasons pertaining to the issues of unabsorbed depreciation and disallowance under Section 14A of the said Act were, admittedly, recorded after the issuance of notice under Section 148. In view of the foregoing, no interference with the impugned order by the Tribunal is called for as it does not raise any substantial question of law. We make it clear that, in view of the fact that we found that the Tribunal was right in concluding that the proceedings under Section 147/148 were itself bad, we have not examined the merits of the issue with regard to the carry forward of unabsorbed depreciation.