IN HIGH COURT OF DELHI AT NEW DELHI ITA 1444/2018 PR. COMMISSIONER OF INCOME TAX DELHI-21 Appellant Through: Mr.Ajit Sharma, Sr. Standing Counsel with Ms.Adiba Mujahid and Ms.Priya Sarkar, Advocates. versus LALIT BAGAI Respondent Through: Mr.Gagan Kumar with Mr.Amit Kaushik, Advocates. CORAM: JUSTICE S.MURALIDHAR JUSTICE TALWANT SINGH ORDER 21.08.2019 Dr. S. Muralidhar, J.: 1. Revenue is in appeal against order dated 9th March 2018 passed by Income Tax Appellate Tribunal ( ITAT ) in ITA No.5833/Del/2015 for Assessment Year ( AY ) 2006-07. 2. issue sought to be urged by Revenue is whether ITAT was justified in quashing reassessment proceedings under Section 147 of Act on ground of change of opinion on applicability of Section 40 (a) (ia) of Act even when Assessing Officer ( AO ) had not expressed any opinion on applicability of such provision during original ITA 1444/2018 Page 1 of 10 assessment proceedings under Section 143(3) of Act? 3. admitted factual position is that for AY in question return of income was filed by Assessee on 31st October 2006 declaring income of Rs.1,02,35,913/-. return was picked up for scrutiny and notice to Assessee was issued by Assessing Officer ( AO ) under Section 143(2) and 142(1) of Act on 19th October 2007 along with detailed questionnaire to assessee. 4. Consequent thereto assessment order was passed on 28th March 2008 assessing business income of Assessee at Rs.71,66,970/- and taxable long term capital gains(LTCG) at Rs.37,85,502/-. In course of framing of assessment AO disallowed wage expenses to extent of 1% of Rs.4,71,86,794/- which equals to Rs.4,71,867/- to cover up leakage in income. There was also disallowance of miscellaneous expenses. 5. Thereafter, on 28th March 2008 notice was issued to Assessee under Section 147/148 of Act. In order of reassessment dated 28th March 2014 AO disallowed Rs.4,89,15,024/- under Section 40 (a) (ia) on ground that Assessee had not deducted TDS on payments made to labour. Assessee was also found to have made payment of job work charges amounting to Rs.84,03,444/- and rent charges of Rs.31,83,736/-. However, TDS had only been deducted on sum of Rs.78,84,248/-. 6. Aggrieved by above order of AO Assessee filed appeal ITA 1444/2018 Page 2 of 10 before Commissioner of Income Tax (Appeals) [CIT (A)]. By order dated 7th August 2015 CIT (A) allowed appeal of Assessee essentially on ground that reopening by AO was based on change of opinion. 7. Revenue s appeal against aforementioned order of CIT (A) was dismissed by ITAT by impugned order and that is how Revenue is in appeal before this Court. 8. On 14th December 2018 while directing notice to issue in present appeal following order was passed by this Court: 2. By impugned order dated 19.2.2018, Income Tax Appellate Tribunal ( Tribunal for short) has affirmed finding given by Commissioner of Income Tax (Appeals) that this was case of change of opinion; and, therefore, reassessment proceedings initiated against respondent Lalit Bagai for assessment year 2006-07 were contrary and bad in law. 3. It is accepted and admitted position that original tax return of respondent/assessee for assessment year 2006-07 was taken up for scrutiny assessment. Vide assessment order under Section 143 (3) dated 28th March, 2008, additions were made including dis-allowance of one per cent of wage expenses of Rs.4,71,86,794, i.e. Rs.4,71,867/- to cover up leakage or wrongful claims. 4. At this stage itself, we may record, that respondent/assessee had claimed that he had incurred wage expenses of Rs.4.71 crores based upon muster roll which was relied upon before Assessing Officer. 5. Subsequently, re-assessment proceedings under Section 147 ITA 1444/2018 Page 3 of 10 read with Section 148 of Income Tax Act were initiated by issuance of notice to respondent/assessee after four years from end of relevant assessment year recording following reasons: "Reasons for reopening case u/s 147. assessment in this case was completed u/s 143(3) on 28.3.2008 at income of Rs. 1,09,52,472/-. On examination assessee has not shown receipts in Profit and Loss account of Rs.2,61,84,628/- which appear inform 16 of relevant previous year, thereby showing less income. Further on perusal of records it is also seen that assessee has not deducted any tax on payment of Rs.5,27,52,272/- payment. Therefore, provisions of section u/s 40 (a) (ia) attract on above mention amount. assessee neither at time of Assessment proceedings nor at time offling of returns of income disclosed above mentioned facts. In view of these facts and after due application of mind, I have reason to believe that income chargeable to tax has escaped assessment for A.Y. 2006-07 for reason of failure on part of assessee to disclose fully and truly all mentioned facts necessary for his assessment. Therefore, case is fit for reopening assessment u/s 147/148 of IT Act. prior sanction of CIT is required before issue of notice u/s 148 of IT Act as per provision of Section 151 (1) Income Tax Act. " 6. second reason/ground recorded above refers to alleged failure on part of respondent/assessee to deduct tax at source on payment of Rs.5.27 crores and attracting provisions of Section 40(a)(ia) of Act. ITA 1444/2018 Page 4 of 10 7. Contentions of counsel for appellant/Revenue is that this amount of Rs.5.27 crores includes labour charges of Rs.4.71 crores, job work charges of Rs.84 lakhs and rent of Rs.31.83 lakhs. He submits that while it is possible to argue that payment to labour i.e. wages was examined in first round, payments made for job work and rent were not examined and verified in first round. He submits that this aspect has escaped notice of Commissioner of Income Tax (Appeals) and Tribunal. 8. Issue notice, returnable on 18th March, 2019. 9. appellant would also produce relevant assessment records including records of first assessment. 9. This Court has heard submissions of learned counsel for parties. It is seen that entire exercise of reopening of assessment was triggered by objections raised by audit party. first of these objections was contained in letter dated 6th August 2009 addressed by Deputy Commissioner of Income Tax CP-1 (Audit-1) to Deputy Commissioner of Income Tax (DCIT) Circle 38(1), New Delhi calling for comments on audit observations enclosed with letter. said audit observations referred to payment of labour charges, job work and rent for hiring. 10. On 10th May 2010 Assistant Commissioner of Income Tax Circle 38(1) i.e. Assessing Officer ( AO ) replied to above audit objections. perusal of said reply reveals that issue of non-deduction of TDS on labour charges, job work and rent were specifically addressed. facts and figures were set out by AO and it was concluded that Assessee had correctly accounted for its turnover also by Income Tax Laws. ITA 1444/2018 Page 5 of 10 Accordingly, AO requested ACIT audit to treat said issue as settled. 11. For second time on 28th November 2011 yet another letter was addressed by CIT Audit to AO calling for explanation. On 7th December 2011 AO sent again addressing in detail above issue. 12. On 11th December 2012 for third time Income Tax Officer (Audit 1) wrote to AO stating as under: To Asstt. Commissioner of Income Tax Cir-38(I), New Delhi. Sir/Madam, Sub: -Audit Objection in case of Sh. Lalit Bagai for Asst. Year 2006-07-reg. Please refer to your letter F. No. ACIT/Cir-38(I) 1201 1-12 dated 07.12.2011 on above mentioned subject. As explanation/ reply in respect of case above is not acceptable. I am directed to request you to take necessary remedial action in this case as required earlier as per audit objection raised. You are requested to please give your reply & complete report within week of receipt of this letter. 13. On 28th March 2013 AO wrote to DCIT (Audit-1) and specific to present Assessee for AY 2006-07 it was stated as under: ITA 1444/2018 Page 6 of 10 1. Lalit Bagai (PAN AAAPB2885L) A. Y - 2006-07 After receiving audit objection, case has been considered for reopening assessment u/s 147/148 of IT Act. After approval of Ld. Commissioner of Income Tax, Delhi-XIII New Delhi, notice u/s 148 has already been issued. As necessary remedial action has been taken, audit objection may be treated as settled. 14. It is further seen that on 17th February 2014 Joint Commissioner of Income Tax (JCIT) (Audit-1) wrote to AO asking that outcome of reassessment proceedings in respect of issue for AY 2006-07 and remedial action for AY 2007-08 may be intimating to this office, in proper channel. It is in above context that ACIT Circle 38(1) proposed to reopen assessment by initiating steps in that regard on 26 th March 2013. 15. It is clear from above correspondence that there was no independent decision arrived at by AO to form reasons to believe for reopening of assessment after being satisfied that there was escapement of income. above correspondence also indicates that not once but on two separate occasions AO clearly formed opinion that this was not case fit for reopening of assessment and that AO was constrained, notwithstanding that opinion, to reopen assessment on express instructions issued to him vide letter dated 11th December 2012 of Addl. CIT Audit-1 referred to hereinbefore. 16. In Larsen and Toubro v. State of Jharkhand (2017) 103 VST 1 (SC) Supreme Court was dealing with reopening of assessment under ITA 1444/2018 Page 7 of 10 Section 19 of Bihar Finance Act, 1981 in respect of return of registered dealer for period 1991-92. Section 19 of BFA is in para materia with Section 147 of Act. There again reopening required forming of independent opinion by AO regarding escapement of turnover for purpose of tax. On facts of that case, having examined note of audit party and correspondence between AO and audit party Supreme Court came to following conclusion in para 29 of order which reads as under: 29. From perusal of last paragraph of aforementioned report of audit party, it is clear that Assessing Officer was of opinion that as goods had not been transferred to Appellant-Company but had been consumed, so it does not come under purview of taxation. In other words, Assessing Officer was not satisfied on basis of information given by audit party that any of turnover of Appellant-Company had escaped assessment so as to invoke Section 19 of State Act. From above, it also appears that assessing officer had to issue notice on ground of direction issued by audit party and not on his personal satisfaction which is not permissible under law. 17. In Adani Infrastructure & Developers (P.) Ltd. v. ACIT (2019) 101 taxmann.com 256 (Gujarat) Gujarat High Court was dealing with similar case where notice under Section 148 of Act for reopening of assessment was challenged on ground that it was not based on any independent opinion arrived at by AO but merely based on objections of audit party. relevant portion of said judgment reads as under: 8. learned Senior Standing Counsel also produced for perusal of court original file containing audit query. ITA 1444/2018 Page 8 of 10 perusal of file reveals that Assessing Officer has not accepted objections raised by audit party and has given his reasons for same and has further stated that he had considered applicability of provisions of section 14A of Act and was satisfied in adopting 0.5% of average value of investment for disallowance under section 14A of Act. He was, accordingly, of view that objection raised by audit party could not be accepted and is required to be dropped. 9. perusal of reasons recorded shows that assessment for year under consideration is sought to be reopened on ground that disallowance of expenditure under section 14A of Act read with rule 8D of rules had not been correctly worked out. On other hand, Assessing Officer, after considering audit objections, has not accepted same has stated that after considering applicability of section 14A of Act, he was satisfied with disallowance made, despite which impugned notice has been issued seeking to reopen assessment on very ground to which he has objected, which is indicative of fact that reopening of assessment is not based on satisfaction of Assessing Officer but on audit objections. 10. Thus, record of case clearly reveals that Assessing Officer has not accepted objections raised by audit party and on contrary, has objected to such objections by communicating internally as referred to hereinabove. Evidently therefore, Assessing Officer has not formed any independent belief that income chargeable to tax has escaped assessment and on contrary has stated that he had considered applicability of provisions of section 14A of Act and was satisfied in adopting 0.5% of average value of investment for disallowance under section 14A of Act. Evidently, therefore, notice under section 148 of Act has merely been issued on basis of audit objection without Assessing Officer having formed requisite ITA 1444/2018 Page 9 of 10 belief regarding escapement of income as contemplated under section 147 of Act. It is by now well settled that assessment cannot be reopened merely on basis of audit report without Assessing Officer independently forming belief, may be on basis of such report, that income chargeable to tax has escaped assessment. above referred decision would, therefore, be squarely applicable to facts of present case. impugned notice issued by respondent under section 148 of Act being based merely upon audit objection and not because Assessing Officer had reason to believe that any income chargeable to tax has escaped assessment, cannot be sustained. 18. In present case also Court finds that AO had in fact applied his mind to audit party objection and formed clear opinion that there is no justification for reopening of assessment and yet it is only on insistence of Addl. CIT Audit that AO changed his opinion and decided to reopen assessment. Consequently, reopening of assessment in present case, which was based on change of opinion was vitiated in law as it did not satisfy legal requirement of Section 147 of Act. 19. In circumstances, view taken by ITAT calls for no interference. No substantial question of law arises, appeal is dismissed. S. MURALIDHAR, J. TALWANT SINGH, J. AUGUST 21, 2019 tr ITA 1444/2018 Page 10 of 10 Pr. Commissioner of Income-tax, Delhi-21 v. Lalit Bagai