Vildirect: IncomeTax-caselaws-2007-VIL-338-ITAT-DEL

2007-VIL-338-ITAT-DEL

Equivalent Citation: ITD 110, 535, TTJ 112, 445, [2008] 298 ITR (A. T.) 283 (ITAT [Del])

Income Tax Appellate Tribunal DELHI

I. T. Appeals Nos 2023 and 2024 (Del) of 2004(assessment years 1999-2000 and 2000-01).

Date: 12.01.2007

MITSUI MARUBENI CORPORATION.

DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE 2 (1) , NEW DELHI.

BENCH

Member(s) : N. V. VASUDEVAN., R. C. SHARMA.

JUDGMENT

Per N.V. Vasudevan, Judicial Member.- These are appeals by the assessee against the common order dated 27-2-2004 of the ld. Commissioner of Income-tax (Appeals)-XXIX, New Delhi, relating to the assessment years 1999-2000 and 2000-01.

2. The first ground in both these appeals by the assessee relates to the challenge to the validity of the Assessing Officer assuming jurisdiction under section 147/148 of the Income-tax Act, 1961 [hereinafter referred to as ('the Act').

3.1 The facts and circumstances relevant for adjudication of the aforesaid ground are as follows:-

The assessee is an AOP, of which the members were non-resident foreign companies by name, M/s. Mitsui Construction Company Limited,Japanand M/s. Marubeni Corporation,Japan. M/s. Noida Toll Bridge Company Limited (hereinafter referred to as 'NTBCL') awarded an engineering procurement and construction con tract for the execution of Delhi Noida Bridge Project to the assessee. An agreement dated19-1-1998was entered into between the assessee and NTBCL. The total value of the contract was Rs. 212 crores. Subsequently on28-12-1998the value of the contract got reduced by a sum of Rs. 6,96,81,183 because of the withdrawal of the work relating to Toll Bridge Hardware. Again on26-9-2000the value of the contract work was further reduced by a sum of Rs. 2,03,71,457 whereby the landscape work was also withdrawn from the work. Thus, the estimated contract price stood reduced to Rs. 21,02,99,47,360.

3.2 The assessee set up the project office inIndiaafter Reserve Bank ofIndia's permission dated3-3-1998. The work, however, commenced belatedly on30-12-1998because of the delay on the part of the NTBCL. The project was to be completed within 29 months from the date of issuance of notice to commence, which notice to commence was issued only on30-12-1998.

4.1 For the assessment year 1998-99 the assessee filed return of income on30-11-1998declaring nil income. The assessee had set up a project office as early as3-3-1998, but as on31-3-1998the business had not been set up. Yet, the assessee filed a return of income for assessment year 1998-99 because the project office was set up vide RBI's permission dated3-3-1998. The return of income so filed by the assessee was subjected to an order of assessment dated24-12-2000under section 143(3) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act'). The operative portion of the order of assessment, which is material for adjudication of the common ground of appeal is as follows:-

"The assessee is a joint venture and was constituted between Mitsui Construction Co. Ltd.,Japanand Marubeni Corporation,Japanvide joint venture agreement dated24-1-1997executed inJapan. The bid was submitted in the name of the joint venture namely Mitsui Marubeni Corporation in January, 1997 and the contract was awarded on19-1-1998for Rs. 212 crores. As the contract was awarded on19-1-1998, therefore for operating part of the relevant assessment year the contract was in existence only for two months and the contract was actually begun in the next financial year relevant to assessment year 1998-99. Therefore, there are no receipts during the relevant assessment year. Details called for were examined and the case was discussed.

Assessed under section 143(3) on returned income."

4.2 For assessment year 1999-2000 the assessee filed a return of income declaring nil income. The return was filed on30-12-1999. The assessee had also claimed refund of tax deducted at source of Rs. 2,76,36,752. Along with the return of income the assessee had also filed the following note explaining the reason as to why a nil return of income was filed:-

"(i) Completed Contract Method of Accounting adopted under Accounting Standard AS-7:

The Project Office inIndiais engaged in the execution of only one Civil Construction Contract inIndiaand have no other business inIndia. The construction period is of 29 months and in view of the Contractual terms the profit/loss on the Project can only be ascertained in the year of completion of the Contract. Accordingly, the Project Office inIndiahas adopted the Completed Contract Method of Accounting under Accounting Standard AS-7 for determining the taxable income."

5.1 In the statement of assessable income the assessee has further explained the reason for filing the nil return of income, which reads as follows:-

1. Income from Business/Profession                NIL.

The assessee is executing Delhi Noida

Bridge Contract for Noida Toll Bridge Co.

Ltd., and payments against the Contract,

which have been carried forward as Advances

- "Current Liability" to be taken as revenue

in the year of completion of the Contract

on which TDS at the rate of 4.8 per cent has

been deducted by the Client as per details

hereafter. Corresponding expenses on the

Project have been carried forward as Project

work-in-progress to be claimed in the year

of completion."

5.2 The Assessing Officer issued an intimation under section 143(1)(a) of the Act dated13-3-2001in respect of this return of income filed by the assessee.

6. As far as assessment year 2000-01 is concerned, the assessee filed return of income on 24-10-2000 declaring taxable income under the head 'Income from interest' of Rs. 2,27,250 in a covering letter enclosed along with the return the assessee had duly disclosed the fact that it was adopting the completed contract method of accounting as per the accounting standard AS-7 of Institute of Chartered Accountants of India (hereinafter referred to as 'ICAI'). Therefore, the income from execution of the contract with NTBCL was not declared even in this assessment year. This return of income filed by the assessee was also accepted by the Assessing Officer and intimation under section 143(1)(a) dated9-2-2001had been issued.

7. The Assessing Officer issued a notice under section 148 of the Act for assessment year 1999-2000 dated4-1-2002. Before issue of such notice under section 148 the Assessing Officer recorded the following reasons for re-opening the assessment:-

"4-1-2002: Reasons for re-opening assessment of M/s. Mitsui Marubeni Corporation- Assessment year: 2000-01.- The assessee-company is a joint venture between Mitsui Construction Co., Japan and Marubeni Corporation, Japan. The bid was submitted in the name of Joint Venture in January, 1997 and contract was awarded on19-1-1998for Rs. 212 crores for construction of theDelhi-NoidaBridgeby Infrastructure Leasing & Finance Services Ltd. The operating part of the contract actually began in financial year 1998-99, hence the Assessing Officer did not tax any income from this contract in the assessment order for assessment year 1998-99. However, in the said assessment order dated24-10-2000, it is clearly suggested that the receipts from the contract will be taxable in the assessment year relevant to financial year 1998-99, i.e., assessment year 1999-2000. I, therefore, have reason to believe that contract receipts amounting to Rs. 212 crores have escaped tax, and that income exceeding Rs. 1 lakh has escaped tax for assessment year 2000-01.

Notice under section 148 is hereby issued."

8. In assessment year 2000-01 the Assessing Officer issued a notice under section 148 of the Act on 27-3-2002 after recording the following reasons for re-opening the assessment:-

"27-3-2002: Reasons for re-opening assessment of M/s. Mitsui Marubeni Corporation- Assessment year: 2000-01.- The assessee-company is a joint venture between Mitsui Construction Co., Japan and Marubeni Corporation, Japan. The bid was submitted in the name of Joint Venture in January, 1997 and contract was awarded on19-1-1998for Rs. 212 crores for construction of theDelhi-NoidaBridgeby Infrastructure Leasing & Finance Services Ltd. The operating part of the contract actually began in financial year 1998-99, hence the Assessing Officer did not tax any income from this contract in the assessment order for assessment year 1998-99. However, in the said assessment order dated24-10-2000, it is dearly suggested that the receipts from the contract will be taxable in the assessment year relevant to financial year 1998-99, i.e., assessment year 1999-2000. The same is also applicable for the assessment year 2000-01. I, therefore, have reason to believe that contract receipts amounting to Rs. 212 crores have escaped tax, and that income exceeding Rs. 1 lakh has escaped tax for assessment year 2000-01.

Notice under section 148 is hereby issued."

9. On the above facts the validity of assuming jurisdiction under section 147/148 of the Act was challenged by the assessee before the CIT(A). It was submitted that the reasons recorded do not spell out the belief entertained by the Assessing Officer regarding escapement of income. It was contended that the order of assessment for assessment year 1998-99 did not make any suggestion that the receipts from the contract will be taxable in assessment year 1999-2000. It was contended that the observation to the contrary by the Assessing Officer in the reasons recorded was not proper. It was also contended that the Assessing Officer while framing the assessment for assessment year 1998-99 could not in law give such finding because he had no jurisdiction to do so for assessment year 1999-2000. It was, submitted that there was no live link or nexus, between the information in the possession of the Assessing Officer and the belief entertained by the Assessing Officer. It was also submitted that the contract value of Rs. 212 crores mentioned in the reasons recorded had been subsequently reduced and even this aspect which was duly reflected in the returns of income filed had not been taken note of by the Assessing Officer. It was argued that there was non-application of mind by the Assessing Officer while recording reasons for reopening the assessment.

10. The CIT(A) called for a remand report of the Assessing Officer in respect of the submissions made by the assessee regarding validity of initiation of reassessment proceedings. In such remand report, the Assessing Officer has stated as follows:-

"1. The detailed and self-explanatory reasons for initiation of proceedings under section 148 has been duly recorded by the Assessing Officer. Further by changing the method of recognition of revenue on the basis of percentage completion as against completed contract basis, if became mandatory to re-open the case for the period since the project started, otherwise the revenue pertaining to earlier year could not be taxed as assessee had shown nil income from the project for that year.

2. The method for recognizing the revenue for the project was defective: hence books of account were bound to be defective. In the case of the assessee, the revenue for the period in which the revenue earning activities were undertaken was not shown and had been deferred till the completion of contract. The assessee cannot answer as to what will happen in case the contract had to be scrapped midway. Will the assessee refund the money against which it had undertaken construction and other activity. The answer will be no. Then what will happen to taxation of the income so earned. There had been inherent defect in the method of accounting being adopted by the assessee, therefore, the books of account has to be rejected."

11. On a consideration of the rival submissions, the CIT(A) held that in the order of the Assessing Officer for assessment year 1998-99 it was mentioned that the receipts from contract will be taxable in the assessment year 1999-2000. The CIT(A) also held that as per Explanation 2(b) to section 147 where a return is filed, but no assessment is made and later on the Assessing Officer notices that an assessee has understated his income or has claimed excessive loss, deduction then the same shall be a case of deemed escapement of income. The CIT(A), therefore, held that from the findings of the Assessing Officer for assessment year 1998-99 the Assessing Officer entertained belief regarding escapement of income chargeable to tax and, therefore, was justified in re-opening the assessment under section 147 of the Act. The assessee aggrieved by the aforesaid decision of the CIT(A) has raised the aforesaid common ground of appeal in both the appeals.

12. We have heard the submissions of the learned counsel for the assessee and the learned Departmental Representative. The learned counsel for the assessee reiterated the same arguments as were put forth before the CIT(A). He drew our attention to the order of assessment of the Assessing Officer for the assessment year 1998-99 and submitted that nowhere has the Assessing Officer held that the receipts from contract would be taxable in assessment year 1999-2000.

13. It was further submitted that in the reasons recorded the contract value of Rs. 212 crores, which was already scaled down had not been taken note of. The return of income had been filed by the assessee for both the assessment years prior to the recording of reasons by the Assessing Officer. In the note annexed to the return of income for the assessment year 1999-2000 the assessee had clearly mentioned that it was following a completed contract method of accounting and, therefore, no income is being offered to tax. Nothing has been said about the same in the reasons recorded by the Assessing Officer. It is also not clear as to how the Assessing Officer quantified the income that escaped assessment had a sum of more than Rs. 1,00,000 especially in the light of the averments made in the return of income and the documents annexed thereto. Reliance was placed by the learned counsel for the assessee on the decision of the Hon'ble Supreme Court in the case of Phool Chand Bajrang Lal v. ITO [1993] 203 ITR 456 for the proposition that the belief entertained by the Assessing Officer should be bona fide one and should not be based on vague, irrelevant and non-specific information. Reference was made to the decision of the Hon'ble Allahabad High Court in the case of Indra Prastha Chemicals (P.) Ltd. v. CIT [2004] 271 ITR 113 for the proposition that the reason to believe should be held in good faith and should have a rational connection and relevant bearing on the formation of the belief and should not be extraneous or irrelevant. Reference was made to the decision of the Hon'ble Calcutta High Court in the case of Peerless General Finance & Investment Co. Ltd. v. Dy. CIT [2005] 273 ITR 16 for the proposition that there should be rational connection between the information received by the Assessing Officer and the formation of the belief regarding escapement of income. It was pointed out that in the present case from the mere observations in the order of assessment for assessment year 1998-99 even assuming that there was a reference to the income of the assessee being chargeable to tax in assessment year 1999-2000, in the light of the return of income and the notes filed along with the return of income for the assessment year 1999-2000 the Assessing Officer could not entertain belief regarding escapement of income. Reference was made to the decision of the Hon'ble Delhi High Court in the case of Transworld International Inc. v. Jt. CIT [2005] 273 ITR 242 wherein the above principles laid down in the various decisions have been reiterated.

14. It was also submitted by the learned counsel for the assessee that the Assessing Officer cannot entertain belief regarding escapement of income based on defects in accounts especially without reference to the material for the relevant assessment year in question. Reference in this regard was made to the decision of the Allahabad High Court in the case of Dass Friends Builders (P.) Ltd. v. Dy. CIT [2006] 280 ITR 77. The learned counsel referred to the remand report of the Assessing Officer filed before the CIT (Appeals) wherein he had mentioned about the wrong method of acc0unting adopted by the assessee as a reason for resorting to re-opening proceedings. It was submitted by the learned counsel for the assessee that the reasons recorded do not spell out any such basis for resorting to reassessment proceedings. It was submitted that it was not open to the revenue to sustain the validity of re-opening by substituting some other reasons apart from what was recorded by the Assessing Officer before re-opening to justify the validity of re-opening. In this regard reference was made to the decision of the Hon'ble Bombay High Court in the case of Hindustan Lever Ltd. v. Asstt. CIT [2004] 268 ITR 332. For the proposition that even after the insertion of Explanation 2 (b) to section 147 of the Act, the Assessing Officer should entertain belief regarding escapement of income the learned counsel relied on the decision of the Hon'ble Bombay High Court in the case of German Remedies Ltd. v. Dy. CIT [2006] 285 ITR 26. The learned Departmental Representative submitted that the case laws which have been relied upon by the learned counsel for the assessee are not relevant for the present case for the reason that in all those cases assessments were completed under section 143(3) of the Act and were sought to be re-opened by the revenue. According to him in the present case there was no assessment under section 143(3) of the Act and, therefore, the facts of the present case stand on a different footing. The learned Departmental Representative submitted that under Explanation 2(b) to section 147 where a return of income has not been subjected to an assessment then the Assessing Officer can resort to reassessment proceedings, if he finds that there was a wrong claim of deduction. In such cases there is a deemed escapement of income. According to him there have been reasons recorded for re-opening the completed assessment and the sufficiency of the reasons so recorded cannot be gone into by the Tribunal. It was submitted that in the matter of judging the reasons to believe the subjective satisfaction of the Assessing Officer has to be accepted and should not be interfered with. The learned Departmental Representative placed reliance on the decision of the Hon'ble Delhi High Court in the case of New Light Trading Co. v. CIT [2002] 256 ITR 391 for the proposition that some material must exist for initiating reassessment proceedings and so long as such material exists the validity of initiation of reassessment proceedings cannot be challenged.

15. We have considered the rival submissions. Under the provisions of section 143(1) of the Act as it exists from 1-6-1999 when a return of income is filed the Assessing Officer issues an intimation accepting the return and he has no powers except to demand any tax or interest found due on the basis of such return. If the Assessing Officer has reasons to believe that any claim of loss, deduction or relief claimed in the return is inadmissible or if he considers it expedient to ensure that the assessee has not understated the income he may issue a notice calling upon the assessee to produce evidence in support of the return of income. As a matter of right the Assessing Officer can issue notice under section 143(2) of the Act within a period of 12 months from the end of the month in which the return is furnished. Once the period of 12 months expires the Assessing Officer cannot resort to the provisions of section 143(2) of the Act and has to necessarily invoke the provisions of section 148 of the Act. If the Assessing Officer seeks to invoke the provisions of section 148 of the Act then the condition precedent for exercise of jurisdiction under section 148 has to be satisfied. The argument of the learned Departmental Representative that since in the present case only an intimation under section 143(1) was issued by the Assessing Officer, the Assessing Officer could resort to the provisions of section 148 of the Act on conditions which are less onerous compared to re-opening of an assessment completed under section 143(3) of the Act cannot be accepted. Otherwise the time-limit laid down under section 143 or proviso will become redundant. The provisions of section 147 Explanation 2(b) of the Act, reads as follows:-

Explanation 2.- For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely:-

(a) **

(b) where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return;"

16. Perusal of clause (b) of Explanation 2 reveals that the Assessing Officer should find out under-statement of income or claim of excessive loss, deduction, allowance or relief in the return. This implies that the Assessing Officer has to be guided only by the return and the documents annexed along with the return for coming to the conclusion regarding under-statement of income or claim of excessive loss. In the present case, the Assessing Officer has not even made a reference to the return of income filed by the assessee for both the assessment years in the reasons recorded. In the circumstances, the provisions of Explanation 2 (b) of section 147, in our view, will not come to the rescue of the revenue.

17. In the present case, the return of income for assessment year 1999-2000 had been filed by the assessee on30-12-1999and for assessment year 2000-01 was filed on24-10-2000. The period of 12 months for issuing of a notice under section 143(2) of the Act expires on31-12-2000and31-10-2001respectively. Admittedly no notice under section 143(2) of the Act had been issued in both the assessment years within the aforesaid period. In the circumstances the conditions laid down in section 147 regarding reason to believe that income chargeable to tax has escaped assessment has to be satisfied for validly re-opening the assessment proceedings under section 147 of the Act.

18. A perusal of the reasons recorded shows that the main reason for coming to the conclusion that income of the assessee has escaped assessment is the order of assessment for assessment year 1998-99. In the reasons recorded the Assessing Officer says that in the assessment order for assessment year 1998-99 it has been suggested that the receipts from contracts will be taxed in the assessment year 1999-2000. As rightly contended by the learned counsel for the assessee, firstly the Assessing Officer will not have jurisdiction to make any such observations. Secondly, in the assessment order for assessment year 1998-99 the Assessing Officer has not made any such observations. We have already extracted the relevant portion of the Assessing Officer's order for the assessment year 1998-99. The Assessing Officer has only observed that the contract of construction of Delhi-Noida flyover began only in the next financial year. This observation by no stretch of imagination can be said to be a suggestion that the receipts from the contract will be taxable in assessment year 1999-2000. This is the only reason recorded by the Assessing Officer for coming to the conclusion that income chargeable to tax has escaped assessment. In the circumstances, it cannot be said that the belief entertained by the Assessing Officer was bona fide. In fact the belief entertained by the Assessing Officer was on vague, irrelevant and non-specific information. The decisions relied upon by the learned counsel for the assessee in this regard are squarely applicable to the facts of this case. The reason to belief, in our view, was not based on any relevant material and there was no nexus between the belief entertained by the Assessing Officer and the information coming into his possession. In the remand report before the CIT (Appeals) the Assessing Officer has made a reference to the faulty accounting policy adopted by the assessee. On this basis the learned Departmental Representative attempted to justify a validity of initiation of reassessment proceedings. The law is well-settled that the revenue cannot seek to substitute the reasons already recorded by the Assessing Officer. The validity of re-opening has to be judged solely on the basis of the reasons recorded by the Assessing Officer and any extraneous material in this regard cannot be relied upon. The decision of the Hon'ble Bombay High Court in the case of Hindustan Lever Ltd. clearly supports the plea of the assessee in this regard.

19. On the facts and circumstances of the present case, we are of the view that the Assessing Officer did not assume valid jurisdiction under section 147/148 of the Act. The reasons recorded by the Assessing Officer are found to be not based on relevant or specific information. The belief alleged to be held by the Assessing Officer is held to be not bona fide. There has been non-application of mind on the part of the Assessing Officer. There is no material for the belief regarding escapement of income. There is no nexus between the material coming into the possession of the Assessing Officer and the belief entertained by the Assessing Officer regarding escapement of income. The re-assessment proceedings are, therefore, annulled. In view of the conclusion on the preliminary issue, the other issues raised by the assessee in its various grounds of appeal in both the appeals do not call for any adjudication. The appeals of the assessee are allowed.

20. In the result, both the appeals by the assessee, are allowed.

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