IN HIGH COURT OF DELHI AT NEW DELHI Date of decision: 21st November, 2014 ITA 319/2014 COMMISSIONER OF INCOME TAX-VI Appellant Through Ms. Suruchi Aggarwal, Sr. Standing Counsel. versus VALVOLINE CUMMINS LTD.Respondent Through Mr. Ajay Vohra, Sr. Advocate with Ms. Kavita Jha, Advocate. CORAM: HON'BLE MR. JUSTICE SANJIV KHANNA HON'BLE MR. JUSTICE V. KAMESWAR RAO SANJIV KHANNA, J. (ORAL) This appeal by Revenue under Section 260A of Income Tax Act, 1961 (Act, for short), which pertains to assessment year 2006-07, has to be dismissed, albeit for slightly different reasons as recorded in order dated 29 th November, 2012 passed by Income Tax Appellate Tribunal (Tribunal, for short). 2. respondent-assessee had filed return of income declaring income of Rs.9,52,15,517/- for assessment year 2006-07 on 30th November, 2006. After issue of notice under Section 143(2), assessment order under Section 143(3) was ITA 319/2014 Page 1 of 6 passed on 24th December, 2008 accepting returned income. 3. Thereafter, re-assessment notice dated 30th March, 2011, under Section 148 read with Section 147 of Act, was issued. said notice and re-assessment order has been set aside by impugned order passed by Tribunal dated 29th November, 2012. 4. reasons to believe as recorded by Assessing Officer for initiating re-assessment proceedings read as under:- "The Income tax Act, 1961, provides that provision made in accounts for accrued or known liability is admissible deduction, while other provisions made do not qualify for deduction. It has been judicially held that for loss to be deductible, it must have actually arisen and incurred and not merely anticipated as certain to occur in future. assessment of M/s Valvoline Cummins Ltd. for assessment year 2006 - 07 was completed after scrutiny in Dec 2008 determining income of Rs.9,52.15.517/-. assessee made and was allowed provision for expenses amounting to Rs.1,53,57,778/-. As provision towards unascertained liability is not allowable under Act, it should have been disallowed and taxed. omission resulted in underassessment of income by Rs.1,53,57,778/- with consequent tax effect of Rs.68,75,338/ -." 5. first paragraph of reasons to believe correctly records that provision made in accounts for accrued and ITA 319/2014 Page 2 of 6 known liability is admissible deduction. Thus, amounts shown under head provision per se is not to be disallowed as unascertained expenditure. In second paragraph of reasons to believe , Assessing Officer after correctly noticing position in law in first paragraph, contradicted himself and erroneously recorded and inferred that provision for expenses amounting to Rs.1,53,57,778/- were wrongly allowed being unascertained liability. reasons to believe do not state why and how Assessing Officer came to conclusion that provision for expenses of Rs. 1,53,57,778/-was unascertained liability. This has not been explained and clarified. 6. During course of hearing before us, we had asked counsel for Revenue to point out and show that on what ground and reason Assessing Officer came to conclusion that amounts shown under head provision was unascertained liability and not accrued and certain liability. Noticeably, respondent-assessee was following mercantile system of accounting and any liability which had been incurred was to be allowed as deduction, even when payment was not made in said year. 7. Commissioner of Income Tax (Appeals) in first ITA 319/2014 Page 3 of 6 appellate order has reproduced schedule 13 of balance sheet, which for sake of completeness is being reproduced below:- "Schedule As at As at 13: March 31, 2006 March Provisions Rs. 31,2005 Rs. .................. Provision for 16,324,796 12,833,564 Expenses (refer not 2 below) . Note 1 ............................ Note 2: Provision for expenses Opening 12,833,564 17,297,108 Provision Provision 15,357,778 12,833,564 Made during year Amount used during year 11,866,546 17,297,108 Closing provision 16,324,796 12,833,564" Thus, last year there were provisions and this year also provision were made and there were payments. But, there is complete absence and no material has been shown and brought on record to show that amount included under head provisions represented ITA 319/2014 Page 4 of 6 unascertained liability . Further, Commissioner of Income Tax (Appeals) has recorded that provision for commission of Rs.35,09,021/- had been added back in computation of income in accordance with Section 40(a)(ia) of Act, for want of deduction of tax at source. Assessing Officer overlooked this fact indicating non-application of mind. 8. reasons to believe must show live link and nexus with formation of prima facie opinion that income which should be taxed has escaped assessment. In absence of any cogent and relevant material or information to show that amount shown under head provision included unascertained liability, re-assessment proceedings could not have been initiated. There is difference between reasons to believe and reasons to suspect . Mere surmise or suspicion cannot be ground to reopen assessment. 9. It was responsibility of Revenue to bring on record documents and material to show and establish that provisions related to unascertained liability and Assessing Officer while forming his opinion and recording reasons to believe was in knowledge or aware of information or material to show that what was shown under head provision was not certain and accrued liability. In absence of any material or information, reasons to believe it has to be held were not relevant and meet test of ITA 319/2014 Page 5 of 6 satisfaction required to sustain reopening. Use of heading or word provision in balance sheet it is apparent became material or information to reopen. word/expression provision by itself and alone without other information/material, would not reflect and indicate unascertained liability. Thus, assumption drawn by Assessing Officer in reasons to believe is farfetched, vague and mere pretence. It is also extraneous and irrelevant to issue and formation of belief that unascertained liability had been claimed and allowed as expenditure. 10. With aforesaid observations, appeal is dismissed. SANJIV KHANNA, J. V. KAMESWAR RAO, J. NOVEMBER 21, 2014 NA ITA 319/2014 Page 6 of 6 Commissioner of Income-tax-VI v. Valvoline Cummins Ltd