Avtec Ltd. v. Deputy Commissioner of Income-Tax
[Citation -2014-LL-1216-2]

Citation 2014-LL-1216-2
Appellant Name Avtec Ltd.
Respondent Name Deputy Commissioner of Income-Tax
Court HIGH COURT OF DELHI AT NEW DELHI
Relevant Act Income-tax
Date of Order 16/12/2014
Judgment View Judgment
Keyword Tags reassessment proceedings • income chargeable to tax • reopening of assessment • excess depreciation • reason to believe • work-in-progress • audit objection • issue of notice • closing stock • opening stock • audit report • excise duty
Bot Summary: The recorded reasons for initiating the reassessment proceedings are as under: M/s. Avtec Ltd. assessment year 2006-07 28-3-2013 Reasons for reopening of assessment by issue of notice under section 148 I have reason to believe that by reason of failure on the part of the assessee to disclose fully and truly all material facts for the said year necessary for the assessment of the said year, the aggregate amount to the extent of Rs. 22,76,19,293 has escaped assessment as under: 1. As in view of reasons cited above, the Commissioner of Income-tax also, having been satisfied that it is a fit case for the issue of notice under section 148 has conveyed his approval/sanction for issue of notice, vide F. No. CIT/LTU/2012-13/1703, dated March 28, 2013, the proceedings under section 147 are hereby initiated to assess the income chargeable to tax which has escaped assessment by issuing notice under section 148 of the Act. Alleged understatement of closing stock of Rs. 19,90,92,944 It is wrongly stated that there is understatement of closing stock by the abovementioned amount. The learned counsel for the petitioner also drew our attention to an internal note of the Assessing Officer to the audit objection which had been raised specifically with regard to the figure of Rs. 19,90,92,944 as the stock of finished goods which had been received from Hindustan Motors Ltd. The note at point No. 7 reads as under: 7. The difference between the said initial stock and the closing stock was Rs. 5,76,42,819, which is clearly reflected as the increase in inventories. The relevant entries under expenditure are as under: Expenditure Raw materials and components 15 2,636,343,710 consumed Personnel expenses 16 270,749,587 Operating and other expenses 17 362,749,583 in inventories 18 Financial expenses 19 134,201,383 3,346,401,444 It was pointed out by the learned counsel for the petitioner that under the head expenditure the increase in inventories has been shown as a negative figure which implied that the said sum of Rs. 5,76,42,819 has been reduced from expenditure resulting in increase in income. There were additions to the said stock and the difference between the initial stock and the closing stock at the end of the year, that is, on March 31, 2006, came to Rs. 5,76,42,819.


JUDGMENT judgment of court was delivered by Badar Durrez Ahmed J.-This writ petition is directed against notice dated March 28, 2013, issued under section 148 of Income-tax Act, 1961 (hereinafter referred to as "the said Act"), whereby petitioner's assessment for assessment year 2006-07 is sought to be reopened. petition is also directed against order dated March 14, 2014, whereby Assessing Officer has rejected objections raised by petitioner pursuant to issuance of impugned notice dated March 28, 2013. original assessment under section 143(3) of said Act was made on December 24, 2008. notice under section 148 has been issued beyond four years from end of assessment year 2006-07, therefore, proviso to section 147 would come into play. recorded reasons for initiating reassessment proceedings are as under: "M/s. Avtec Ltd. assessment year 2006-07 28-3-2013 Reasons for reopening of assessment by issue of notice under section 148 I have reason to believe that by reason of failure on part of assessee to disclose fully and truly all material facts for said year necessary for assessment of said year, aggregate amount to extent of Rs. 22,76,19,293 has escaped assessment as under: 1. Insurance and other claims receivable of Rs. 1,18,46,599 were not included in income. 2. Excess depreciation of Rs. 1,66,79,750 on buildings and vehicles was claimed and allowed. 3. There was understatement of closing stock by amount of Rs. 19,90,92,944. As in view of reasons cited above, Commissioner of Income-tax also, having been satisfied that it is fit case for issue of notice under section 148 has conveyed his approval/sanction for issue of notice, vide F. No. CIT/LTU/2012-13/1703, dated March 28, 2013, proceedings under section 147 are hereby initiated to assess income chargeable to tax which has escaped assessment by issuing notice under section 148 of Act. Deputy Commissioner of Income-tax, LTU, Delhi." At this stage, itself we may point out that learned counsel for Revenue does not press reasons (1) and (2) referred to above pertaining to insurance and other claims as well as alleged excess depreciation. entire matter before us was considered from stand point of allegation that there was understatement of closing stock by amount of Rs. 19,90,92,944 which has resulted in escapement of income from assessment. petitioner submitted its objections on February 27, 2014. Paragraph 4 of said objections specifically dealt with alleged understatement of closing stock and same is reproduced herein below: "4. Alleged understatement of closing stock of Rs. 19,90,92,944 It is wrongly stated that there is understatement of closing stock by abovementioned amount. figure of 19,90,92,944 is not closing stock rather it is opening stock which was transferred from HML to AVTEC Ltd. as per business transfer agreement dated February 19, 2005, as per which transfer was effected on June 28, 2005. This fact is clearly mentioned in schedule 18 of balance-sheet and also in note 3 of schedule 21. audit report is annexed as annexure 4. From above its clear that notice of escapement of income is wrongly issued." objections, however, were not accepted by Assessing Officer who passed impugned order dated March 14, 2014. learned counsel for petitioner submitted that notice under section 148 was issued beyond period of four years from end of relevant assessment year and, therefore, it was necessary for Revenue to establish that there was failure on part of assessee to fully and truly disclose all material particulars necessary for assessment. He submitted that in this context during original assessment proceedings as also in return and balance-sheet and profit and loss account which were placed before Assessing Officer and examined by him position with regard to closing stock has been fully disclosed. There has been no withholding of information and as such notice under section 148 as also all proceedings pursuant thereto are misconceived. learned counsel for petitioner also drew our attention to internal note of Assessing Officer to audit objection which had been raised specifically with regard to figure of Rs. 19,90,92,944 as stock of finished goods which had been received from Hindustan Motors Ltd. note at point No. 7 reads as under: "7. Noting's on pre-may kindly be pursued where, while approving draft replies to RA in respect of audit objections raised by it for assessment year 2006-07, Commissioner of Income-tax has given directions for insuring that remedial action is initiated even if objection is not accepted. In this connection, matter was examined and it may be stated that objections raised by paragraph 2 (regarding alleged understatement of stock) and paragraph 10 (regarding alleged omission to incorporate insurance and other claims receivables) are factually incorrect and, hence, do not require any remedial action. Regarding paragraph 3 (relating to depreciation on assets not registered in name of assessee) also, objection is at least partly incorrect inasmuch as depreciation on building is clearly admissible in light of Supreme Court decision in case of Mysore Minerals. However, issue may be debatable one as far as vehicles are concerned, although available High Court decisions favour assessee on this issue. Now, considering very nature of issue involved action under section 154 is out of question. Time limit for action under section 263 has expired on March 31, 2011 (assessment was completed on December 24, 2008). Time limit for action under section 147 expires on March 31, 2013, but such time is available only if statement of income is attributable to failure on part of assessee to fully and truly disclose all material facts. This may not be possible because during course of assessment proceedings specific query was raised by Assessing Officer (item No. 5 of Assessing Officer's letter dated October 6, 2008) and was replied by assessee by letter dated November 7, 2008. In these circumstances it may not be possible to invoke provisions of section of 147 when period of 4 years has already expired on March 31, 2011. Submitted Addl. CIT, LTU 22nd June, 2012." It was also brought to our attention that balance-sheet entries at page 86 of paper book with regard to schedule 18 (increase in inventories) clearly shows stock of Rs. 19,90,92,944. relevant entries of schedule 18 are as under: Schedule 18: Increase in inventories Inventories as at March 31, 2006 work-in-progress 159,828,151 finished goods 96,137,578 scrap 417,099 256,382,828 Transfer from Hindustan Motors Ltd. As per business transfer agreement (refer note No. 3 of schedule 21) work-in-progress 91,782,338 finished goods 107,260,996 scrap 49,610 199,092,944 (57,289,884) Differential excise duty on opening and closing (352,935) stocks. (57,642,819) Increase in inventories It was pointed out that petitioner did not have any opening stock as of April 1, 2005. initial stock was received on account of transfer from Hindustan Motors Ltd. as per business transfer agreement in course of year. That initial stock which comprised work-in-progress, finished goods and scrap amounted to Rs. 19,90,92,944. At end of year, that is, on March 31, 2006, inventories were valued at Rs. 25,63,82,828. difference between said initial stock and closing stock was Rs. 5,76,42,819, which is clearly reflected as increase in inventories. This figure of Rs. 5,76,42,819 has been indicated in profit and loss account under head of expenditure. relevant entries under expenditure are as under: Expenditure Raw materials and components 15 2,636,343,710 consumed Personnel expenses 16 270,749,587 Operating and other expenses 17 362,749,583 (Increase) in inventories 18 (57,642,819) Financial expenses 19 134,201,383 3,346,401,444 It was pointed out by learned counsel for petitioner that under head expenditure increase in inventories has been shown as negative figure which implied that said sum of Rs. 5,76,42,819 has been reduced from expenditure, consequently, resulting in increase in income. It was, therefore, submitted by learned counsel for petitioner that all stocks have been accurately indicated and income has been correctly reflected in return as well as in accompanying documents including balance- sheet and profit and loss account which were subject matter of assessment in first round when assessment order dated December 24, 2008, was passed under section 143(3) of said Act. Consequently, learned counsel submitted that there was full and true disclosure of all material facts and, therefore, notice under section 148 was bad in law and was liable to be quashed. learned counsel for respondent reiterated stand taken by Assessing Officer in order dated March 14, 2014, and submitted that stock position has not been accurately indicated. After having heard learned counsel for parties, we are of view that position taken by learned counsel for petitioner is correct. petitioner did not have any opening stock on April 1, 2005. By virtue of business transfer agreement dated February 19, 2005, petitioner received stock valued at Rs. 19,90,92,944 from Hindustan Motors Ltd. which became its initial stock in year in question. There were additions to said stock and difference between initial stock and closing stock at end of year, that is, on March 31, 2006, came to Rs. 5,76,42,819. This has been reflected in profit and loss account as same has been reduced from expenditure as pointed out by learned counsel for petitioner. clear implication of which is that income, by amount of Rs. 5,76,42,819, has been increased. In these circumstances, we are in agreement with submissions made by learned counsel for petitioner that there has been no failure on part of petitioner to make full and true disclosure of material facts pertaining to closing stock and that allegation raised by respondents is not borne out by records. Before parting with this matter, we may also point out that initial view of Assessing Officer also coincided with view taken by petitioner but because there was some circular which had been issued by Commissioner of Income-tax even though Assessing Officer disagreed with audit objection, he had to take "remedial" steps under section 148 of said Act. This also discloses fact that Assessing Officer had not applied his own mind but was dictated to by circular which he felt he was bound to follow. provision for reopening of assessment under section 147 specifically requires that it is Assessing Officer who must have reason to believe that income chargeable to tax has escaped assessment. belief must be of Assessing Officer himself and not of anybody else. In this case, it has been amply demonstrated by learned counsel for petitioner that although Assessing Officer believed that no income had escaped assessment and he had disagreed with audit objection yet he went on to issue notice under section 148 of said Act. This cannot be countenanced in law. In view of foregoing impugned notice dated March 28, 2013, as also order dated March 14, 2014, are quashed. writ petition is allowed as above. There shall be no order as to costs. *** Avtec Ltd. v. Deputy Commissioner of Income-Tax
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