Audit objection satisfied by AO canot base for reassessment

By | March 25, 2016

Case law on Audit objection

Audit objection

Facts of the case

It is stated that the petitioner manages consumer loyalty programs for its partner organizations, whereby the customers of its partners become entitled to loyalty points on purchase of certain goods or services, which can be redeemed towards future purchases. The loyalty program is managed by the petitioner at an agreed price with its partners. For the assessment year 2008-09, the gross amount received from the partners towards the redemption of the loyalty points was accounted upfront as income and was offered to tax and the cost of redemption of points was claimed as a deduction in computing the said income.

Insofar as the unredeemed loyalty points are concerned, the petitioner had created a provision for its liability towards the same based on past experience and a scientific methodology, and the petitioner claimed the same also as a deduction in computing its business income.

During the course of the petitioner’s assessment for the assessment year 2008-09, specific inquiries regarding the aforesaid provision were raised by the assessing officer and being satisfied that no disallowance was called for, the assessment was said to have been completed allowing the deduction claimed by the petitioner.

Issue of Audit objection

Audit objection was raised by the Audit Officer on the basis that the deduction in respect of the aforesaid provision ought not have been allowed.

Consequently  re-assessment proceedings initiated  under Section 147 of the Income-tax Act,1961 by the Assessing officer.

Held

Having regard to the audit objection having been addressed by the assessing officer, there would remain no basis for reassessment four years after the assessment order,

The learned Senior Advocate would point out that it is the settled law that if the assessee has brought the issue to the attention of the assessing officer and even though there may be no consideration in the course of the assessment order on the issue which is highlighted by the assessee, it is deemed to have been considered by the assessing officer. In this regard, reliance is placed on a full bench decision of the Delhi High Court in the case of CIT v. Usha International Ltd.[2012] 348 ITR 485

The petitions are allowed. The impugned orders are quashed.

HIGH COURT OF KARNATAKA

Loyalty Solutions & Research (P.) Ltd.

v.

Deputy Commissioner of Income-tax, Circle-4(1) (1), Bangalore

ANAND BYRAREDDY, J.

WRIT PETITION NOS. 6565 & 6566 OF 2015 (T-IT)

FEBRUARY  11, 2016

K.P. Kumar, Sr. Adv. and T. Suryanarayana, Adv. for the Petitioner. Jeevan J. Neeralgi, Adv. for the Respondent.

ORDER

1. Heard the learned Senior Advocate Shri K.P. Kumar appearing for the learned counsel for the petitioner and Shri Jeevan J. Neeralgi, learned counsel appearing for the respondents.

2. The petitions coming on for preliminary hearing are considered for final disposal having regard to the facts and circumstances of the case.

3. The facts are as follows:—

It is stated that the petitioner manages consumer loyalty programs for its partner organizations, whereby the customers of its partners become entitled to loyalty points on purchase of certain goods or services, which can be redeemed towards future purchases. The loyalty program is managed by the petitioner at an agreed price with its partners. For the assessment year 2008-09, the gross amount received from the partners towards the redemption of the loyalty points was accounted upfront as income and was offered to tax and the cost of redemption of points was claimed as a deduction in computing the said income.

Insofar as the unredeemed loyalty points are concerned, the petitioner had created a provision for its liability towards the same based on past experience and a scientific methodology, and the petitioner claimed the same also as a deduction in computing its business income.

Initially, during the course of the petitioner’s assessment for the assessment year 2008-09, specific inquiries regarding the aforesaid provision were raised by the assessing officer and being satisfied that no disallowance was called for, the assessment was said to have been completed allowing the deduction claimed by the petitioner. The petitioner has subsequently learnt that an audit objection was raised by the Audit Officer on the basis that the deduction in respect of the aforesaid provision ought not have been allowed. Simultaneously, the petitioner’s assessment for the assessment year 2009-10 was said to be under process and the assessing officer had raised a specific query as regards the provision for liability towards the unredeemed loyalty points. The petitioner is said to have explained in detail on the accounting as well as tax treatment, on account of which, no disallowance was made in the assessment for the assessment year 2009-10. The audit objection raised for the assessment year 2008-09 was also rejected, obviously because the assessing officer was satisfied that the provision was allowable as a deduction.

In this state of affairs, beyond the stipulated period of four years from the end of the relevant assessment year, by a notice dated 11.03.2014, the first respondent is said to have initiated re-assessment proceedings under Section 147 of the Income-tax Act,1961, on the ground that the provision towards unredeemed loyalty points ought not to have been allowed as a deduction, by virtue of which, there was income which had escaped assessment. In terms of the First proviso to Section 147 of the IT Act, where an assessment under Section 143(3) of the IT Act is completed, reassessment proceedings, according to the petitioner, cannot be initiated after a period of four years from the end of the relevant assessment year, unless income chargeable to tax has escaped assessment on account of non- disclosure of material facts by an assessee.

Although the reasons recorded for initiation of the proceedings alleged non-disclosure of material facts by the petitioner, according to the petitioner, the facts indicate that the treatment of the provision towards the unredeemed loyalty points was specifically examined earlier and therefore, all facts were within the knowledge of the assessing officer. Evidently, detailed examination was made and there was an opinion formed at the time of the original assessment and subsequently, during the audit objection raised. Moreover, the financial statements of the petitioner for the period ended 31.03.2008 had clear disclosures on the said provision. Therefore, there can be no justification for reopening of an assessment after four years from the end of the relevant assessment year.

The petitioner filed objections as regards the first respondent’s jurisdiction to re-open the assessment, which were rejected on 10.01.2015. The first respondent sought to justify the same by contending that the earlier assessing officer had not examined the issue with due diligence, which according to the petitioner, is incorrect.

4. The department has filed its statement of objections to refute the petition averments and it is particularly contended that before the finalization of the assessment, the assessing officer had gone through the entire claim of the petitioner and the petitioner had disclosed the material particulars. It is contended that from the perusal of the assessment order, it is seen that the assessing officer had not expressed any opinion on the claim of the petitioner and that it was silent as regards the aspect which the petitioner was claiming that the assessing officer had considered the same before finalizing the assessment. Since it is claimed that as per the Accounting Standards applicable to companies, the petitioner is entitled to make provision for accrued liability and assessment order should have considered this aspect while determining the income or loss in accordance with the mercantile system of accounting. This would indicate that all necessary material for determining the allowance or disallowance of expenditure on account of such provision being made was not before the assessing officer at the time of finalization and that the audit objection was raised only on 12.10.2011, which was subsequent to the assessment order dated 16.11.2010. Hence, the assessing officer had no occasion to examine the said objection and reject the same.

The contention of the petitioner that it is not a contingent liability, but would have to be considered as an accrued liability, it is contended, is not a correct legal proposition. In the case of loyalty programme, the liability arises only when the claim for redemption is made. Any liability which is not accrued within the year end or there is nothing on record to remotely indicate that the entry is based on an event accruing after the date of balance sheet, it cannot be allowable as crystallized liability. Hence, in the instant case, the liability is a contingent liability. It is contended that the liability accrues only when the customer makes a claim for redemption.

It is in this vein that the petition is sought to be contested.

5. However, the learned Senior Advocate would submit that the entire premise on which the petitions are sought to be contested is that there was an audit objection raised subsequent to the assessment order and therefore, the assessing officer did not have the benefit of addressing a particular aspect, which is highlighted in the audit objection and hence the assessment order being liable for reassessment is an incorrect statement, for the reason that there cannot be an audit objection unless there is an assessment order. And as regards the audit objection there is material on record, whereby the assessing officer has replied to the audit objection as per letter dated 20.10.2011 explaining the business model of the petitioner and how the revenue recognition and cost booking by the company are done. The assessing officer has also narrated the essential features of accrual basis of accounting during the assessment proceedings and has concluded that the provision for the expenses for the unredeemed points was made since the liability thereof was certain, only its quantification was based on calculation based on past experience of such nature of transactions. And the liability or provisions for the unredeemed points was reversed as and when the life cycle of the unredeemed points expired. Further, as the transactions were entered into by the company with the relevant concerns, in the year ended 31.3.2009, the liability arose in that accounting year since a time limit of 3 years is fixed by those concerns for redeeming the points allotted to each user, the provision made by the assessee was therefore, fair and reasonable and has thus held that the objection was not acceptable. This letter however, it is claimed by the learned Counsel for the respondents was overlooked.

6. Having regard to the audit objection having been addressed by the assessing officer, there would remain no basis for reassessment four years after the assessment order, when the audit objection has been met by the assessing officer as per the letter referred to above.

In these two petitions which pertain to the assessment years 2008-09 and 2009-10, though the proposal to reopen the assessment order is passed within four years, having regard to the explanation that is forthcoming from the assessing officer as regards the audit objection raised, there is substance in the contention of the petitioner.

Incidentally, it is pointed out that one other contention by the respondents is that the assessment order does not indicate that the assessing officer had dealt with the issue at length and hence it cannot be said that it was present to the mind of the assessing officer. The learned Senior Advocate would point out that it is the settled law that if the assessee has brought the issue to the attention of the assessing officer and even though there may be no consideration in the course of the assessment order on the issue which is highlighted by the assessee, it is deemed to have been considered by the assessing officer. In this regard, reliance is placed on a full bench decision of the Delhi High Court in the case of CIT v. Usha International Ltd.[2012] 348 ITR 485

Accordingly, the petitions are allowed. The impugned orders are quashed.

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