Whether when assessee fails to establish that deferred revenue is actually declared as income in subsequent AYs, no fault can be attributed if AO resorts to reassessment - YES: HC

THE issue before the Bench is - Whether when assessee fails to establish that deferred revenue is actually declared as income in subsequent AYs, no fault can be attributed if AO resorts to reassessment. YES is the answer.

Facts of the case

The assessee company is engaged in the manufacture and sale of computer hardware and related products. For A.Y 2009-10, the assesee had filed its return declaring a total loss of Rs. 39,56,399/-. Thereafter, assessment was taken up u/s 143(3) proposing to make several additions to the income of assessee. After hearing objections of assessee, the DRP confirmed the proposed addition, on the basis of which order u/s 143(3) r/w/s 144C came to be passed on 31st Jan, 2014. Accordingly, the assessee filed appeal before CIT(A), however, the same was pending. In the meanwhile, the AO issued a notice u/s 148 indicating thereunder that he had reason to believe that income in respect of which assessee was assessable to tax for A.Y 2009-10 had escaped assessment within the meaning of section 147. Hence, in order to assess/re-assess the income u/s 147, the assessee was called upon to file the return in the prescribed form within 30 days from the date of service of notice. The assessee intimated the AO that return filed on 30th Sep, 2009 to be treated as the return of income filed in response to notice issued u/s 148. Thereafter, the AO also intimated the assessee reasons for reopening, indicating thereunder that deferred revenue totaling Rs. 216,89,00,773/- which was deferred in A.Y 2009-10 was not added while computing total income for the relevant A.Y, and the assessee ought to have admitted said revenue in A.Y 2010-11 and having not offered same to tax in the subsequent A.Y. Similarly reconciliation between sale of goods as per sale tax return and sale of goods as per I-T return had been requested which was furnished and on examination it was noticed that smart debits deferred revenue amounting to Rs. 216,89,00,773/- for A.Y 2009-10 was not admitted for sales in A.Y 2010-11. On this ground also, the AO had opined that he had reason to believe that income of Rs. 216,89,00,773/- assessable to tax had escaped the assessment for A.Y 2009-10 and as such he proposed to reassess the income of assessee. Hence, assessee had approached this court for quashing of notice issued u/s 148.

Having heard the parties, the High Court held that,

++ a perusal of section 147 indicate that prior to amendment, Section 147 enabled the AO to re-open the assessment if he had formed an opinion about any income chargeable to tax had escaped assessment and reasons for such re-opening was required to be recorded by him in writing. In other words, the AO had to base his reasons for such re-opening of the assessment and mere change of opinion could not form the basis for reopening of such concluded assessment u/s 148. A notice is required to be issued by the AO to reopen the assessment, if has reason to believe that any income chargeable to tax had escaped assessment at the time of passing the assessment order. The formation of belief by the AO is essentially within his subjective satisfaction at the stage of issuing notice u/s 148. The only question is whether there was sufficient material on which a man of reasonable prudence could have formed such belief or not. As to whether commencement of re-assessment proceedings is valid or not can be considered when questioned in a court by examining it from the point of view of an AO namely as to whether there was prima facie 'reasonable belief' entertained by the AO prior to issue of such notice or it is only because of change of opinion. Keeping these principles in mind when the facts on hand are examined, it would indicate that during the course of assessment proceedings for A.Y 2009-10, the assessee had requested the AO to reconcile the sales as per sales tax return and sales declared in the return of income. Said returns on comparison was found by AO that sales as per sales register and sales tax return was Rs. 3185,47,04,713/- and a sum of Rs. 81,26,94,037/- was further added as service income not included in the VAT return. On this, various adjustments were made to reach the net revenue of Rs. 3110,85,96,000/-. One of the reduction which was claimed was in a sum of Rs. 216,89,00,773/- as smart debits deferred revenue account in the schedule of other liabilities as smart debits deferred revenue account. In the reasons furnished by AO for reopening the assessment, it has been noticed by the AO that deferred revenue in the reconciliation statement and the deferred revenue in the balance sheet were more or less same. The AO noticed that deferred revenue in the reconciliation statement and deferred revenue in the balance sheet namely as reflected as 'other liabilities' were more or less the same. The AO for A.Y 2009-10 did not add such deferred revenue while computing the total income for the relevant A.Y as indicated in the assessment order for the reasons now assigned for re-opening the assessment, namely that assessee may have admitted the sales in the subsequent A.Y;

++ as noticed earlier, the assessee is engaged in the sales of computer hardware and related products by offering to its customers warranty services for different period the details of which is not available before this court and nor it was made available by the assessee before the AO. The warranty services in respect of which the assessee had claimed said amount to be treated as deferred revenue was on the basis that it would accrue as income of the assessee only on such warranty being claimed by its customers over a period and it cannot be construed as income for next assessment year. Said reasoning was not required to be accepted by the AO at the stage of considering reply submitted by the assessee to the reopening notice for reasons more than one. Firstly details of such break up are not forthcoming. There might be situations where warranty expiring after one year, or even two years or three years which might have been offered by assessee to its customers. Thus, it depends on factual aspects. It is because of this precise reason, the AO has called upon the assessee to furnish details thereof in order to ascertain as to whether said warranties in respect of which the assessee had claimed as deferred revenue had been factually offered in the subsequent years. In the instant case, the deferred revenue for A.Y 2009-10 according to the AO ought to have been admitted or included by the assessee in the A.Y 2010-11 and on account of same having not been offered, has given rise for reopening of the assessment. Nothing prevented the assessee to place such material to establish that such deferred revenue totaling Rs. 216,89,00,773/- has been actually included as its income in the subsequent A.Ys and if so, the details thereof with the break up, which the AO had called for at the first instance. In that view of the matter, it cannot be held that the reasons assigned by the AO for reopening the assessment for the year 2009-10 suffers from any jurisdictional error. The issue involved is the escapement of income to tax for the A.Y 2009-10. As such, the burden is on the assessee to demonstrate that said deferred revenue totaling to Rs. 216,89,00,773/- has been offered to tax in A.Y 2010-2011 or in any subsequent years. In that view of the matter, there seems no jurisdictional error having been committed by the AO to reopen the assessment for A.Y 2009-10. Though assessee's counsel has made an attempt to contend that this Court has no jurisdiction to entertain the writ petition on the ground of assessee having alternate and efficacious remedy available under law, this court is not inclined to accept the said contention inasmuch as in catena of Judgments, this Court as well as the Apex Court has held that exercise of extraordinary jurisdiction is available where the assessee assails action of the authorities on various grounds including without jurisdiction, violation of principles of natural justice, without authority of law and validity or vires of the statutory provision being under challenge.