HIGH COURT OF DELHI AT NEW DELHI % Judgment delivered on: 16.12.2014 + W.P.(C) 1874/2014 and CM No. 3915/2014 AVTEC LIMITED ... Petitioner versus DEPUTY COMMISSIONER OF INCOME TAX ... Respondent Advocates who appeared in this case: For Petitioner : Mr Salil Kapoor, Mr Vikas Jain and Mr Varun Gupta For Respondent : Mr Balbir Singh and Mr Abhishek Singh Baghel CORAM:- HON BLE MR JUSTICE BADAR DURREZ AHMED HON'BLE MR. JUSTICE I.S.MEHTA JUDGMENT BADAR DURREZ AHMED, J (ORAL) 1. This writ petition is directed against notice dated 28.03.2013 issued under Section 148 of Income-tax Act, 1961 (hereinafter referred to as said Act ) whereby petitioner s assessment for assessment year 2006-07 is sought to be re-opened. petition is also directed against order dated 14.03.2014 whereby Assessing Officer has rejected objections raised by petitioner pursuant to issuance of impugned notice dated 28.03.2013. W.P.(C) No. 1874/2014 Page 1 of 9 2. original assessment under Section 143(3) of said Act was made on 24.12.2008. 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. 3. recorded reasons for initiating re-assessment proceedings are as under:- M/s Avtec Limited. A.Y. 2006-07 28.03.2013 Reasons for re-opening of assessment by issue of notice u/s 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 & 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, CIT also, having been satisfied that it is fit case for issue of notice u/s 148 has conveyed his approval/ sanction for issue of notice vide F. No. CIT/LTU/2012-13/1703 dated 28.03.2013, proceedings u/s 147 are hereby initiated to assess income chargeable to tax which has escaped assessment by issuing Notice u/s 148 of Act. DCIT, LTU, Delhi W.P.(C) No. 1874/2014 Page 2 of 9 4. 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 ` 19,90,92,944/- which has resulted in escapement of income from assessment. 5. petitioner submitted its objections on 27.02.2014. 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 19 Feb 2005 as per which transfer was effected on 28 June 2005. This fact is clearly mentioned in schedule 18 of Balance Sheet & 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. 6. objections, however, were not accepted by Assessing Officer who passed impugned order dated 14.03.2014. W.P.(C) No. 1874/2014 Page 3 of 9 7. 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. 8. 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 ` 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 AY 06-07, CIT 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 Para 2 (regarding alleged understatement of stock) and Para 10 (regarding alleged omission to incorporate insurance and other claims receivables) are factually incorrect and hence do not require any remedial action. W.P.(C) No. 1874/2014 Page 4 of 9 Regarding Para 3 (relating to depreciation on assets not registered in name of assessee) also, objection is at least partly incorrect in as much 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 U/S 154 is out of question. Time limit for action U/S 263 has expired on 31st March 2011 (assessment was completed on 24th December 2008) Time limit for action U/S 147 expires on 31st March 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 AO's letter dated 6th October 2008) and was replied by assesssee by letter dated 7th November 2008. In these circumstances it may not be possible to involve provision of section of 147 when period of 4 years has already expired on 31st March 2011. Submitted ADD. CIT, LTU 22nd June 2012 9. 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 ` 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 W.P.(C) No. 1874/2014 Page 5 of 9 Transfer from Hindustan Motors Limited 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 Stocks. (352,935) Increase in Inventories (57,642,819) It was pointed out that petitioner did not have any opening stock as of 01.04.2005. 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 of work in progress, finished goods and scrap amounted to ` 19,90,92,944/-. At end of year, that is, on 31.03.2006, inventories were valued at ` 25,63,82,828/-. difference between said initial stock and closing stock was ` 5,76,42,819/-, which is clearly reflected as increase in inventories. This figure of ` 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 consumed 15 2,636,343,710 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 W.P.(C) No. 1874/2014 Page 6 of 9 10. 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 ` 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 24.12.2008 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. 11. learned counsel for respondent reiterated stand taken by Assessing Officer in order dated 14.03.2014 and submitted that stock position has not been accurately indicated. 12. 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 01.04.2005. By virtue of Business Transfer Agreement dated 19.02.2005, petitioner received stock W.P.(C) No. 1874/2014 Page 7 of 9 valued at ` 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 31.03.2006, came to ` 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 ` 5,76,42,819/-, has been increased. 13. 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. 14. 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 CIT, 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 W.P.(C) No. 1874/2014 Page 8 of 9 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. 15. In view of foregoing impugned notice dated 28.03.2013 as also order dated 14.03.2014 are quashed. writ petition is allowed as above. There shall be no order as to costs. BADAR DURREZ AHMED, J I.S.MEHTA, J DECEMBER 16, 2014 SU W.P.(C) No. 1874/2014 Page 9 of 9 Avtec Limited v. Deputy Commissioner of Income-tax