Income Tax Appellate Tribunal - Ahmedabad
Dutta Construction, Surat vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH "D" AHMEDABAD
Before Shri Mahavir Singh, Judicial Member, and
Shri D. C. Agrawal, Accountant Member
ITA No.2013/ Ahd/2008
Assessment Year :2004-05
Date of hearing:5.1.11 Drafted:6.1.11
Income Tax Officer, V/s. M/s. Dutta Construction,
W ard-3[2], Surat A/2-11, B-13, Tirumala
Complex, B/h. Bhulka
Bhavan School, Adajan
Road, Surat
PAN No. AADFD0026E
(Appellant) .. (Respondent)
Appellant b y :- Smt. Sumit Kaur, DR
Respondent by:- Shri M.J. Shah, AR
ORDER
PER Mahavir Singh, Judicial Member:-
This appeal by the Revenue is arising out of the order of Commissioner of Income-tax (Appeals)-II, Surat in appeal No.CAS/II/433/06-07 dated 29-02- 2008. The assessment was framed by ITO Ward-3(2), u/s143(3) r.w.s. 147 of the Income-tax Act, 1961 (hereinafter referred to as 'the Act') vide his order dated 28-12-2007 for assessment year 2004-05.
2. The first issue in this appeal of Revenue is against the order of CIT(A) in deleting in quashing the notice u/s.148 of the Act made by Assessing Officer.
ITA No.2013/Ahd/2008 A.Y.2004-05ITA Wd-3(2) SRT v. M/s. Dutta Construction Page 2
3. The brief facts leading to the above issue are that assessee is engaged in the business of fabrication and civil maintenance work on job work basis mainly for L & T Ltd. as also for certain other companies. The assessee on receipt of the notice u/s 148 of the Act the assessee had requested for a copy of the reasons recorded before issuing such notice vide letter dated 17-10- 2007 and Assessing Officer had furnished the following reasons:-
"In this case, return of income was filed on 1.11.2004 declaring total income at Rs.3,11,475. The same was processed u/s 143(1) of the Act on 2.3.2005. During the year, assessee has shown total labour job work receipt of Rs.1,61,19,639 and gross profit of Rs.38,91,171 in terms of percentage at 24.14% and net profit at1.93% The N.P. declared is very low, which requires verification. Therefore, I have reason to believe that this is a fit case for re-opening."
Ld. counsel for assessee stated that the reopening of the assessment was bad in law and assessment had been reopened only on the ground that the net profit declared during the year was very low and that it required verification The reason recorded by AO was very vague and unsubstantiated. While the assessment had been reopened on the basis of an audit objection and as held by the Hon'ble jurisdictional High Court in the case of Rajan Leasing & Finance Ltd. (supra) proceedings u/s147 cannot be initiated on the basis of the audit report and he submitted that reassessment be quashed as it was bad in law. We find that CIT(A) has considered this issue as under:-
"5. I have carefully considered both the positions. I have also discussed the matter with the AO who passed the impugned order. He ha accepted the fact that the reassessment proceedings were initiated because of an audit objection. There are tow aspects to this issue. Firstly, whether the assessment could be reopened on the basis of an audit objection and secondly, whether there was any application of mind by the AO. In the case of Indian & Eastern News] Paper Society Ltd. Vs. CIT (1979) 119 ITR 996, the Hon. Supreme Court held that the information of the audit party on a point of law cannot be the basis for ITA No.2013/Ahd/2008 A.Y.2004-05 ITA Wd-3(2) SRT v. M/s. Dutta Construction Page 3 initiating reassessment proceedings. It was held that the opinion of the Audit Party is still an opinion, but is not information which is good enough to justify the reopening of the assessment. This view of the Hon. Supreme Court was followed in CIT Vs. Muittur Chemicals and Industrial, Corpn. (2000) 242 ITR 119 (Mad). The Hon. Supreme Court then reiterated the view taken in Indian & Eastern News Paper Society Ltd. in the case of CIT Vs. Lucas TVS Ltd.(2001) 249 ITR 306, where the Hon. Supreme Court then reiterated the view taken in Indian & Eastern News Paper Society Ltd. in the case of CIT Vs. Lucas TVS Ltd. (2001) 249 ITR 306, where the Hon. Court observed that an audit objection, in the absence of any other information, could not justify are opening of an assessment. Even though this judgement was delivered in the context of the pre-amended provisions of Sec.147(3), this position of law continues even under the amended provisions w.e.f. the assessment year 1989-90. It was also held that if the Audit party draws the attention of the AO to the correct position of law, it could be a basis for reassessment as was held in the case of CIT Vs. Assembly Rooms (2000) 242 ITR 64 (Mad). Varying slightly from the decision of the Hon. Supreme Court in Indian News Eastern News Paper Society Ltd, a also in Lucas TVS Ltd., it has been held by certain High Courts that in spite of the audit objection if the AO applies his own mind and comes to the conclusion that reopening is necessary then proceedings u/s.147 cannot be questioned. This view has been expressed in the following cases:
1. CIT v. Juhi Metal Works (2003) 263 ITR 287 (All)
2. Indira Devi V. CIT (1994) 210 ITR 537 (Mad)
3. Tube Suppliers V. CIT (1995) 216 ITR 596 (Mad)
4. New Light Trading Co. v. CIT (2002) 256 ITR 391 (Del) 5.1 Thus where there is no application of mind on the part of the AO, the notice for reassessment cannot be justified. This was held in ITA No.2013/Ahd/2008 A.Y.2004-05 ITA Wd-3(2) SRT v. M/s. Dutta Construction Page 4 Transworld International Income. V. JCIT (2005) 273 ITR 242 (Del).
What emerges from the views expressed by the Hon. Courts is that, firstly, reassessment is not justified, if the AO acts purely on an objection raised by the audit party without applying his own mind. In the case of assessee, while recording the reasons for reopening, the AO merely reproduced the objection raised by the audit party. There was absolutely no application of his own mind nor did the audit party point out either any factual error or the correct position of law. The only ground was that, the net profit disclosed by the assessee as compared to the total turnover was low at 1.93%, which required verification. There was no specific finding given that a particular income under a particular head had escaped assessment.
Sec. 147 of the IT Act begins with the words 'If the AO has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may ... ...'. It is absolutely clear that it is the AO who has to himself ensure that income assessable to tax has escaped assessment. For this purpose, he has to give a specific finding as to how income has escaped assessment. It has been held by the Hon. Madras High Court in the case of S. Harinivas Chowdry v. Asst. CIT (2000) 246 ITR 256 that the inference of escapement should be clearly indicated in the grounds for reopening a completed assessment. The reasons for reopening must be objective, and not vague, farfetched or fanciful. This has been repeatedly pointed out by several courts. The expression, 'reason to believe' cannot possibly cover cases based upon vague, unspecific conjectures and surmises. In the case of assessee, the reason to believe was based purely on surmises and conjectures since, it only referred to the low percentage of net profit which, according to the AO, needed verification. In other words, what could be taken up in scrutiny, the AO sought to do the same by reopening the assessment. In the case of Vipan Khanna v. CIT (2002) 255 ITR 220, the Punjab & Haryana High Court pointed out that Sec.147 is not an ITA No.2013/Ahd/2008 A.Y.2004-05 ITA Wd-3(2) SRT v. M/s. Dutta Construction Page 5 extension of the right u/s.143(2) of the IT Act. In the case of assessee the AO had no specific information, nor did he have any specific ground to reopen the assessment. What he wished to do was only to conduct fishing inquiries which was not permissible, as held by the Hon. Bombay High Court in IBM Wordtrade Corpnh. V. ND Bhatt IAC, (1982) 138 ITR
742. 5.3 Taking the above discussion into consideration, it is held that the AO was not competent to reopen the assessment merely on the basis of an audit objection especially when the audit objection itself was vague and baseless. It did not point out either any factual error or the correct position of law. On the other hand, the AO failed to apply his mind to the issue. He merely sought to verify the net profit disclosed by the assessee which allegedly was very low. This was a subject-matter of proceedings u/s.143(2) and the reassessment proceedings could not be used as an extension and/or substitution for such power. The non- application of mind by the AO and his failure to record his own reasons had vitiated the provisions of Sec. 147 of the Act. The reassessment proceedings initiated was thus absolutely bad in law and is therefore, quashed."
Aggrieved, revenue came in second appeal before tribunal.
4. We have heard rival contentions and gone through facts and circumstances. We find that the Assessing Officer had recorded reasons for reopening of assessment that he want to verify the correctness of Net profit assessed by his predecessor. Whether, in such circumstances, reopening is permissible or not? This question has been answered by CIT(A) in his order that the Assessing Officer is not competent to reopen the assessment merely on the basis of an audit objection especially when the audit objection itself was vague and baseless. We find that even now before us Ld.SR DR could not find out any factual error or escapement of any income which suggest reopening. Rather, the AO failed to apply his mind to the issue and merely ITA No.2013/Ahd/2008 A.Y.2004-05 ITA Wd-3(2) SRT v. M/s. Dutta Construction Page 6 sought to verify the net profit disclosed by the assessee which allegedly was very low. We are of the view that CIT(A) has rightly held that this is a subject- matter of proceedings u/s.143(2) and the reassessment proceedings could not be used as an extension and/or substitution for such power. The non- application of mind by the AO and his failure to record his own reasons had vitiated the provisions of Sec. 147 of the Act. Accordingly, CIT(A) has rightly quashed the reassessment proceedings and we uphold the same.
5. In the result, revenue's appeal is dismissed Order pronounced in Open Court on 21/01/2011 Sd/- Sd/-
(D.C.Agrawal) (Mahavir Singh)
(Accountant Member) (Judicial Member)
Ahmedabad,
Dated : 21/01/2011
*Dkp
Copy of the Order forwarded to:-
1. The Assessee.
2. The Revenue.
3. The CIT(Appeals)-II, Surat
4. The CIT concerns.
5. The DR, ITAT, Ahmedabad
6. Guard File.
BY ORDER,
/True copy/
Deputy/Asstt.Registrar
ITAT, Ahmedabad