Guidelines on reopening cases for AO for strict compliance laid by Bombay High Court
Fact and Issue of the case
Petitioner is a wholly owned subsidiary of Tata Capital Limited and a Systematically Important Non-Deposit Accepting Non-Banking Finance Company (NBFC) registered with Reserve Bank of India (RBI). Petitioner is required to comply with the directions issued by RBI from time to time to all NBFCs. It is petitioner’s case that RBI had, by Notification No. DNBS 193/DG(VL) – 2007 dated 22nd February, 2007, issued directions relating to prudential norms to NBFC in exercise of its powers conferred under Reserve Bank of India Act, 1934 (RBI Act). Clause 3(2) of the said directions require that income including interest/discount or any other charges of NPA (Non-Performing Assets) shall be recognised only when it is actually realised. In compliance with said requirement petitioner recognised income of NPA only when it is actually realised. The said income accordingly was not offered to tax in the return of income on accrual basis but is offered to tax on actual receipt basis. Petitioner stated that in its Annual Report of previous year ending 31st March, 2013 relevant to the Assessment Year 2013-14, this fact was specifically disclosed in the significant account policies. Petitioner also states that in the tax audit report it is also stated that interest and other charges due Rs.25,66,54,010/- on Non-Performing Assets are not credited to statement of Profit and Loss Account pursuant to RBI directions.
Petitioner’s case was selected for scrutiny and during the course of assessment proceedings, petitioner received a notice dated 7th August, 2015 under Section 142(1) of the Income Tax Act, 1961 (the Act) calling upon petitioner to furnish various details. In reply, petitioner, by a letter dated 20th August, 2015, submitted copies of return of income, computation of income, annual report, financial statements including schedules and notes to accounts and tax audit report in Form 3CD along with exhibits. After this was filed, the assessment order dated 8th March, 2016 came to be passed under Section 143(3) of the Act making a disallowance only under Section 14A of the Act. Petitioner challenged the disallowance which is still pending but that is not relevant to the petition at hand.
Thereafter, petitioner received a notice dated 30th March, 2021 under Section 148 of the Act stating that there are reasons to believe that petitioner’s income chargeable to tax for A.Y. 2013-14 has escaped assessment within the meaning of Section 147 of the Act. By a letter dated 18th May, 2021 petitioner filed its objections to the said notice. Thereafter, by a letter dated 6th August, 2021 from respondent petitioner received reasons for re-opening. In the objections to the re-opening, petitioner raised various points including the fact that interest and other charges on NPA ought to be taxed on actual realisation basis and not on accrual basis and placed reliance on judgment of the Delhi High Court in the matter of Commissioner of Income Tax vs. Vasisth Chay Vyapar Ltd.1 It was also brought to the notice of respondent that the Delhi High Court has held that where the assessee was NBFC it was governed by the provisions of RBI Act. In such a case, interest income could not be said to have accrued to the assessee having regard to the provisions of Section 45Q of the RBI Act and prudential norms issued by RBI in exercise of its statutory powers. As per these norms, the ICD has become NPA and on such NPA where the interest was not received and possibility of recovery was almost NIL, interest could not be treated to have been accrued in favour of the assessee. It was also brought to the notice of the Assessing Officer that the Delhi High Court in the said judgment of Vasisth Chay Vyapar Ltd. (supra) had considered the Hon’ble Apex Court’s decision in Southern Technologies Ltd. vs. Joint Commissioner of Income Tax2 (relied upon by the Assessing Officer to reopen the assessment) and held its applicability is dependent on facts. It was also brought to the notice of the Assessing Officer that the decision of the Delhi High Court in Vasisth Chay Vyapar Ltd. (supra) has been confirmed by the Hon’ble Supreme Court of India in Commissioner of Income Tax vs. Vasisth Chay Vyapar Ltd.3 Apart from these, various other judgments have also been cited in support of petitioner’s case that notice under Section 148 of the Act should not have been issued.
In the order passed on 17th December, 2021, rejecting the objections the Assessing Officer has not dealt with all these points. The Assessing Officer was duty bound to deal with all the submissions made by petitioner in its objections and not just brush aside uncomfortable objections under the carpet. We have to note that petitioner had, with the objections, also requested the Assessing Officer to provide photocopies of documents evidencing request sent by the Assessing Officer to the Principal Chief Commissioner of Income Tax/Chief Commissioner/Principal Commissioner/ Commissioner in terms of Section 151(1) of the Act for obtaining an approval for re-opening of the assessment for the year under consideration and documents evidencing the approval received from the Principal Chief Commissioner of Income Tax/Chief Commissioner/Principal Commissioner/ Commissioner.
Observation of the Court
The assessee e-filed its return of income of A.Y.2013-14 on 30.11.2013 declaring total income of Rs. 503,83,37,500/-. Subsequently, the assessee company filec revised its return on 31.03.2015 declaring total income at Rs.502,89,39,320/-. The case was selected for scrutiny and assessment u/s 143(3) of the Act was completed on 08.03.2016 assessing total income under the regular provision of the Act at Rs. 528,49,86.040/- and Book Profit u/s. 115JEI of the Act at Rs.546,71,38.086/-.
On perusal of the assessment records of the assessee for A.Y.2013-14, it is seen that the scrutiny of 3CO Report revealed that at Sr. No. 13(d). the CA has qualified that interest and other charges of Rs. 25,66,54,010/- on non performing assets was not credited to Profit and Loss Account pursuant to the Reserve Bank of India Guidelines. However, in view of the decision of Hon’ble Supreme Court in the case of M/s. Southren Technologies Ltd. versus Joint Commissioner of Income Tax, Coimbatore (320 ITR 577). the assessee was required to offer this income to tax. Failure to do so has resulted in under assessment of income of Rs. 25,66,54,010/- with consequent short levy of tax of Rs. 8,32,71,394/-,
In view of the above, interest and other charges of Rs. 25,66,54,0101- on nor performing assets has to be disallowed and added to the total Income of the assessee. Therefore, the order of the AO is erroneous in so far as it is prejudicial to the interests of Revenue. Hence, it is clear that there is failure on the part of assessee to disclose fully and truly all material facts necessary for the assessment for the year in question within the meaning of First provision to section 147(1) of the Act.
In view of the above, I have reason to believe that income chargeable to tax to the ture of Rs. 25,66,54,010/- has escaped assessment within the meaning of section 147 of the Act for the A.Y.2013-14. It is therefore proposed to issue notice u/s 148 of the Income-tax Act. 1961 for A.Y.2013-14 to reassess such income and also any other income chargeable to lax which has escaped assessment and which may come to notice subsequently in the course of proceedings under this section.
We are surprised to notice that paragraph no.3 in the actual reasons is missing in the letter dated 6th August, 2021. Paragraph no. 4 in the letter dated 6th August, 2021 is missing in the reasons given for obtaining approval.
If one considers paragraph no.3 of the actual reasons submitted for obtaining approval, which is missing in the letter of 6th August, 2021, it clearly shows change of opinion. It also gives us an impression this omission was deliberate, being aware of the legal position. We are also surprised how the approval was also given after reading paragraph no.3 of the actual reasons.
In the circumstances, the Revenue is directed to adhere to the following:
(a) While communicating the reasons for re-opening the assessment, a copy of the standard form/request sent by the Assessing Officer for obtaining approval of the Superior Officer should itself be provided to the assessee. This would contain comment or endorsement of the Superior Officer with his name, designation and date. The Assessing Officer shall not merely state the reasons in the letter addressed to the assessee.
(b) If the reasons make reference to any other document or a letter or a report, such document or letter or report should be enclosed to the reasons. Such portion as it does not bear reference to the assessee concerned could be redacted.
(c) The order disposing the objections should deal with each objections and give proper reasons for the conclusion.
(d) A personal hearing shall be given and minimum seven working days advance notice of such personal hearing shall be granted.
(e) If the Assessing Officer is going to rely on any judgment/order of any Tribunal or Court reference/ citation of these judgment/orders shall be provided alongwith notice for personal hearing so that the assessee will be able to deal with/distinguish these judgments/ orders.
A copy of this order be placed before the members of the Central Board of Direct Taxes who shall issue guidelines to all its officers based on the directions given above with clear instructions that they shall be strictly followed. We only hope that, this will reduce the same errors being repeated by the concerned revenue authorities and will not drive the assessee to rush to the court. Thereby, the burden on the court will also get reduced. Petition accordingly disposed with no order as to costs.
The court has disposed off the petition and ruled in favour of the assessee