Assessment Reopening on basis of Audit Objection not valid

By | February 10, 2016

Held

Only on account of audit objection a well settled practice is sought to be disturbed. The Division Bench of this Court in Purity Techtextile (P.) Ltd. v. Asstt. CIT [2010] 325 ITR 459  (Bom.) has found that such reopening where the Assessment Officer relied exclusively on audit objection in absence of tangible material cannot be accepted. The jurisdictional condition under Section 147 of the said Act is the formation of belief by the Assessment Officer that income chargeable to tax has escaped assessment. In the present matter, the Assessment Officer expressly did not accept the audit objection and later on acted under the dictate of superior authorities. In IL & FS Investment Managers Ltd. v. ITO [2008] 298 ITR 32 (Bom.)a, the Division Bench of this Court has in paragraph no.8 held such initiation of reassessment on the directions of superiors is bad in law. There also the Assessment Officer had opposed the reopening.

HIGH COURT OF BOMBAY

Commissioner of Income-tax-I, Nagpur

v.

Akot Ginning & Pressing Factory Ltd.

B.P. DHARMADHIKARI AND V.M. DESHPANDE, JJ.

IT APPEAL NO.112 OF 2013

DECEMBER  8, 2015

Anand Parchure, Adv. for the Appellant. K.P. Dewani, Adv. for the Respondent.

JUDGMENT

B.P. Dharmadhikari, J. – The department has attempted to raise the following questions as the substantial questions of law in this appeal :—

“1. Whether on the facts and circumstances of the case and in law, the Hon’ble ITAT has erred in holding that the assessee was entitled to the deduction u/s 80P(e) of the Income Tax Act, 1961 in respect of the alleged rental income computed @ 50% in respect of ginning and pressing charges received/earned by the assessee during the year ?
2. Whether the Tribunal below has perversely appreciated the facts and law while upholding the order of CIT(A) and setting aside the order of the A.O., resulting in serious miscarriage of justice warranting interference at the hands of this Hon’ble Court?
3. Whether the authorities below were justified in reopening the proceedings merely on the basis of change of opinion?
4. Whether the authorities below were justified in placing the reliance on the judgments not relating to the controversy in the matter to reopen the proceedings in a grossly perverse manner?”

2. The facts show that for the assessment year 2003-2004 the respondent Cooperative Society filed return on 31-10-2003 declaring the total income at Rs. Nil after claiming the exemption under Section 80P(2) of the Income Tax Act, 1961 [for short, ‘the said Act’]. This return was processed under Section 143(1) of the said Act on 27-02-2004 and during the scrutiny a notice was issued to the assessee on 20-10-2004. The gross total income during that year was of Rs. 31,22,952/-. We are concerned about the provisions of Section 80P(2)(e) of the said Act and the assessee claimed deduction of Rs. 47,95,215/- i.e. at 50% of the ginning and pressing charges. It pointed out that it was as per the order dated 14-12-1994 for the assessment year 1990-1991 in assessee’s own case passed by the Commissioner of Income Tax (Appeals)-I, Nagpur [CIT (A)]. The CIT (A) in turn had followed the view of the Nagpur Bench of the Income Tax Appellate Tribunal, Nagpur.

3. A notice under Section 148 of the said Act was issued on 19-03-2008. The assessee on 29-03-2008 adopted its return filed on 31-10-2003. The assessee opposed the reopening and also pointed out that there was no error. The Income Tax Officer passed the assessment order on 29-12-2008 and after recording the finding that the assessee did not receive any commission income from the Cotton Federation in respect of the ginning and pressing services under any agreement for the assessment year 2003-2004, the said deduction on 50% of ginning and pressing charges under Section 80P(2)(e) of the said Act was disallowed. Because of this reasoning, the ratio of decision in case of CIT v. Bhandara Zilla Sahakari Kharedi Vikri Sangh Ltd. [1995] 212 ITR 124  (Bom.) was held not applicable. The assessee approached the CIT (A) and the appellate authority allowed the appeal after noticing the previous practice and after recording a finding in favour of the assessee. The above mentioned ruling was, therefore, found applicable to the case of the assessee. The ITAT rejected the appeal filed by the Revenue.

4. Learned Advocate Shri Parchure for the appellant has submitted that as the assessee was not receiving any commission separately from the Cotton Growers’ Federation, the deduction under Section 80P(2)(e) of the said Act on 50% of ginning and pressing charges is not permissible. He points out that there is no specific provision allowing the deduction on 50% of ginning and pressing charges. As the deduction was allowed on 50% of such ginning and pressing charges, income of Rs. 47,95,215/- had escaped the assessment and therefore notice under Section 148 of the said Act was rightly issued.

5. Learned Advocate Shri Dewani for the assessee submits that the Income Tax Officer had while passing the initial order of assessment applied the law as settled in case of assessee itself had granted 50% of ginning and pressing charges for deduction under Section 80P(2)(e). The deduction is not illegal. Similarly, when the settled law has been followed, the assessment could not have been reopened under Section 148 of the said Act.

6. The Division Bench of this Court in judgment reported at Bhandara Zilla Sahakari Kharedi Vikri Sangh Ltd.’s case (supra) noted that there was fertilizer agreement and the paddy agreement with the assessee namely Bhandara Zilla Sahakari Kharedi Vikri Sangh Ltd. As per the fertilizer agreement which related to wholesale distribution, the assessee was to hold stocks, store the goods in godowns, preserve them, maintain accounts and sell the goods as per directions of the Government. It was to get commission at varying rates ranging between Rs. 35 to Rs. 50 per ton of goods actually sold. The Division Bench after interpreting this agreement found that the agreement before it and the agreement considered by the Hon’ble Apex Court in case of CIT v. South Arcot District Co-operative Marketing Society Ltd. [1989] 176 ITR 117 was same. Applying that ratio, the Division Bench found that the whole of income derived under the fertilizer agreement was entitled to deduction under Section 80P(2)(e) of the said Act. As far as paddy agreement is concerned, the Division Bench notices that the activities were split into two groups viz; (i) pertaining to milling and (ii) pertaining to use of godowns. As sufficient material was not available on record to enable the adjudication of exact quantum of deduction, applying law in Supreme Court judgment in case of South Arcot District Co-operative Marketing Society Ltd. (supra), the Tribunal was directed to find out the exact quantum of income and decide the deduction.

7. Learned Advocate Shri Parchure for the appellant has placed reliance upon the judgment in case of Janata Sahakari Prakriya Sanstha Ltd. v. First ITO [1990] 32 ITD 476 (Nag.), to persuade this Court. The said Tribunal observes that the deduction is available only in respect of rent and in that case it was specifically provided for in the agreement. In Udaipur Sahkari Upbhokta Thok Bhandar Ltd. v. CIT [2009] 315 ITR 21  (SC) the Hon’ble Apex Court after considering the material on record finds that the assessee was storing commodities in its godown as its own trading stock. It is, therefore, held not entitled to deduction under Section 80P(2)(e) of the said Act. Thus, the view reached is on account of a specific finding about the ownership of stocks. In case of Surat Vankar Sahakari Sangh Ltd. v. CIT [1971] 79 ITR 722 (Guj.), the Gujarat High Court has held that the deduction under Section 14(3)(iv) of the Indian Income-tax Act, 1922 corresponding to Section 80P of the present Act was not available on income derived by the assessee from processing or facilitating marketing of goods. The assessee there was a cooperative society. Its activities were processing of gray cloth on labour basis, purchasing of gray cloth from the local market and after processing, selling it to its members as well as outsiders. It earned income during the assessment year from processing gray cloth on labour basis and also from processing its own gray cloth. The assessee claimed exemption from tax in respect of income from processing and facilitating the marketing of commodities. As the income from letting out godowns or warehouses for storage, processing or facilitating the marketing of commodities was exempted and claim for exemption was for income not falling in that category, the claim was declined. The High Court also accepted that view. Thus, there the claim was not towards letting out of godowns or warehouses.

8. The facts at hand show that in initial assessment order for the assessment year 2003-2004 the assessee disclosed gross total income at Rs. 31,22,952/-. It claimed exemption under Section 80P(2)(c) of the said Act of Rs. 50,000/-, under Section 80P(2)(d) of Rs. 6,17,608/- and under Section 80P(2)(e) of Rs. 47,95,215/-. This last deduction was 50% of ginning and pressing charges as already mentioned supra. This 50% ginning and pressing charges has been accepted towards the letting of godown as per the order of CIT (A) dated 14-02-1994 since the assessment year 1990-1991 in case of the assessee itself. The effort made to distinguish the judgment of this Court in case of Bhandara Zilla Sahakari Kharedi Vikri Sangh Ltd.(supra), overlooks the fact that the amount received by the assessee from the Cotton Growers’ Federation was inclusive of the charges towards letting of houses or godowns is not in dispute. The appellant department has accepted this fact from the assessment year 1990-1991. As such without finding on record any material to reach a contrary view and only on the basis of data always and already on record, the assessment order has been passed and a contrary view has been reached. The fact that 50% of ginning and pressing charges received by the assessee has been allowed to be appropriated as income derived by it from letting of godowns or warehouses, is not in dispute. We find that the substantial question of law as sought to be urged vide question no.1 does not arise for consideration. The judgments relied upon by learned Advocate Shri Parchure for the appellant, mentioned supra, take a contrary view because of the facts available on record. The Revenue has not come up with a fact that the commodity i.e. cotton in relation to which the petitioner is receiving ginning and pressing charges is not stored in its godown. In absence of such assertion, the CIT (A) as also the ITAT are justified in holding that the controversy stands concluded by the Division Bench judgment of this Court in case of Bhandara Zilla Sahakari Kharedi Vikri Sangh Ltd. (supra).

9. The ITAT has found that an audit objection was raised with regard to the availability of deduction under Section 80P(2)(e) of the said Act on 17-10-2006 by the Revenue Audit Party. The Assessment Officer did not accept that audit objection. However, a decision to issue notice under Section 148 of the said Act was taken because of the subsequent direction from the higher authorities. The appellate authority has relied upon several judgments including the judgment of Hon’ble Apex Court and held that the reopening was not permissible as notice under Section 148 of the said Act was based only on the audit objection. The appellate authority has specifically found that in later order the Assessment Officer proceeded under wrong impression that the assessee claimed deduction of 50% ginning and pressing charges. In fact, the assessee had claimed deduction under Section 80P(2)(e) of the said Act on godown rent and the claim was based on the order dated 14-02-1994 of the CIT (A) for the assessment year 1991-1992.

10. We have already noted supra that there is no finding reached by the Assessment Officer and the appellant has also not come up before us with a case that the deduction is being claimed without letting out godown or warehouse. Thus, only on account of audit objection a well settled practice is sought to be disturbed. The Division Bench of this Court in Purity Techtextile (P.) Ltd. v. Asstt. CIT [2010] 325 ITR 459  (Bom.) has found that such reopening where the Assessment Officer relied exclusively on audit objection in absence of tangible material cannot be accepted. The jurisdictional condition under Section 147 of the said Act is the formation of belief by the Assessment Officer that income chargeable to tax has escaped assessment. In the present matter, the Assessment Officer expressly did not accept the audit objection and later on acted under the dictate of superior authorities. In IL & FS Investment Managers Ltd. v. ITO [2008] 298 ITR 32 (Bom.)a, the Division Bench of this Court has in paragraph no.8 held such initiation of reassessment on the directions of superiors is bad in law. There also the Assessment Officer had opposed the reopening.

11. We, therefore, find that even the other questions sought to be raised as substantial questions of law do not arise for consideration in the present matter.

12. Consequently, the appeal is dismissed. No costs.

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