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* IN THE HIGH COURT OF DELHI AT NEW DELHI
Date of decision: 31st July, 2013
+ W.P.(C) 7974/2012
SELECT VACATIONS PVT LTD ..... Petitioner
Through Mr. Ajay Vohra and Ms. Kavita
Jha, Advocates.
versus
INCOME TAX OFFICER AND ANR ..... Respondent
Through Mr. N.P. Sahni, Sr. Standing
Counsel.
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE SANJEEV SACHDEVA
SANJIV KHANNA, J. (ORAL)
1. The petitioner has impugned the re-assessment notice dated 29th
March, 2012 issued under Section 148 of the Income Tax Act, 1961
(Act, for short). The notice relates to the assessment year 2006-07.
2. The reasons recorded by the Assessing Officer for issue of
notice as postulated and required by Section 147 read with Section 151
of the Act read as under:-
"The assessment of M/s Select Vacations Pvt. Ltd. for
the assessment year 2006-07 was completed after
scrutiny in December 2008 determining a loss of
Rs.44,28,400/-. Audit scrutiny revealed that the
assessee has shown total income of Rs.52,36,040/-
whereas as per TDS certificates assessee's total income
is Rs.1,11,65,657/-. In view of above the mistake
W.P. (C) 7974/2012 Page 1 of 11
resulted in underassessment of income of Rs.
59,29,617/- involving tax effect of Rs.19,95,909/-.
The escapement of income has been on account of
failure on the part of the assessee to truly and fully
disclose all the material facts necessary for assessment.
Thus it is a fit case for initiation of proceedings u/s 148
of I.T. Act, 1961.
Therefore, I have reason to believe that the
income of Rs.59,29,617/- has escaped assessment within
the meaning of Section 147 of the I.T. Act, 1961. In
view of the above, as per provisions of section 151, it is
requested to kindly accord approval for issuance of
notice u/s 148 for AY 2006-07."
3. The petitioner after receipt of the reasons to believe had filed
written objections to the initiation of the re-assessment proceedings in
terms of the decision of the Supreme Court in GKN Driveshafts India
Ltd. vs. ITO, (2003) 259 ITR 19 (SC). The said objections have been
disposed of by the impugned order dated 14 th November, 2012
recording:-
"The only objection to the reopening as narrated
by you is that the assessment has been re-opened
on the basis of mere change of opinion. In this
regard it is stated that the assessment has been
reopened on the basis of reasons to believe that
the income as calculated as per the TDS
certificates is much more than the returned
income. It is therefore, not a change of opinion,
but a strong ground to investigate as to why
income as per TDS certificates has not been
shown. As per the record this aspect was not
checked at the time of assessment done in the
case, therefore, on the basis of strong ground, the
cases was reopened after taking prior approval of
the concerned Commissioner of Income Tax as
per the provisions of section 151.
Reasons to believe can emanate from facts already
W.P. (C) 7974/2012 Page 2 of 11
on record. It the AO has issued notice u/s 154 &
dropped it, still the proceedings u/s 147 can be
initiated. This view has been upheld by the
courts. WTO vs Aditya Narula (ITAT, Cal) 68
ITD 61 and Rama Boiled Modern Rice Mill Vs.
ITO (ITAT, Hyd) 97 ITD 379."
(emphasis supplied)
4. The contention of the petitioner before us is three-fold:-
(i) The reasons to believe do not show any nexus with escapement
of income and ignores the method of accounting followed by the
petitioner assessee year after year, which has been accepted and not
adversely commented upon in the reasons to believe.
(ii) It is a case of change of opinion as the entire receipts or incomings
on which TDS was deducted, was examined during the course of the
assessment proceedings. Reliance is placed upon letter dated 24 th
October, 2008, by which the assessee had furnished details of TDS
certificates, bills raised by the petitioner and other details including
invoices, credit taken to different accounts, etc.
(iii) The assessee had made full and true disclosure of material facts.
Explanation (1) is not applicable and nothing was to be inferred or
deduced. Material facts as disclosed were clear and no decoding or
decrypting was required. Nothing had to be inferred or gathered from
the said facts.
5. Senior Standing Counsel appearing for the Revenue submits that
the Assessing Officer had not examined the difference between the
W.P. (C) 7974/2012 Page 3 of 11
TDS certificates and the income or receipts declared by the assessee.
TDS was deducted on amount of Rs. 1,11,65,657/-, whereas the receipt
of income as declared was Rs. 52,36,040/-. No explanation was called
from the assessee to ascertain and know the reason/cause for the
difference. The assessee had failed to disclose income or receipt of
Rs.59,29,617/-.
6. The petitioner is engaged in the business of tours and travels. It
specialises in arranging tours, hotel bookings for individuals and
groups for travel within and outside India. It also handles incentives,
meetings and conferences. In the objections filed, the petitioner had
submitted that the income on tours was accounted after netting off
directed expenses relating thereto. In other words, the income taken to
the profit and loss account was not the gross receipts but gross receipts
minus direct costs paid/transferred to third parties. The income
declared consists of margin earned on services relating to tour
arrangements i.e. after reducing from the billing, direct costs incurred
like hotel, transport, guides etc. These costs were directly matched
with the revenue earned and balance being the margin earned, was
transferred to "income from tours accounts". This exercise was
undertaken at the time of original assessment.
7. For the assessment year 2006-07, the petitioner had filed its
return of income on 29th November, 2006 declaring loss of
W.P. (C) 7974/2012 Page 4 of 11
Rs.44,50,039/-. The return was taken up for scrutiny and vide
assessment order dated 5th February, 2008, the loss was computed at
Rs. 44,28,400/-.
8. During the course of the assessment proceedings, queries were
raised by the Assessing Officer on the method of accounting adopted
by the petitioner. This is apparent from the reply given by the
petitioner vide letter dated 24th October, 2008, wherein in response to
query number 6, the petitioner had furnished the following details:-
"The certificates include certificates for TDS
deducted by clients while making payment of bills
raised by assessee company and certificate for TDS
deducted by ticketing agents (suppliers) from whom
the assessee company purchased tickets for its
clients taking tours from the assessee company.
Since the ticketing agents parts with the
commission he earns, he deducts TDS on the
commission passed on to the assessee. He adds the
amount of TDS on the bill that he raises on the
assessee company.
The assessee company is engaged in the business of
providing tours for its clients. A separate tour
account is opened for each tour and the scheme of
accounting entries is as follows:
1. When invoice is raised on the client
Debit: Client A/c (with the amount of invoice)
Credit: Tour A/c (with the amount of invoice)
2. When client makes payment after deducting TDS
Debit: Banck A/c (with amount received)
Debit: TDS (TDS deducted by client)
Credit: Client A/c (with the amount of invoice)
3. When bill are received from suppliers like
Hotels, Ticketing agents from whom services are
W.P. (C) 7974/2012 Page 5 of 11
taken for the client
Debit: Tour A/c (with the net cost of ticket)
Debit: TDS (With TDS deducted on
commission part by the supplier and added to the
bills)
Credit: Ticketing Agent (with the amount payable
to the supplier i.e. net cost of the ticket plus TDS)
4. After completion of the tour and after bills from
all suppliers are received and debited to the Tour
A/c, the balance in the tour a/c represents the profit
earned on the particular tour. The accounting entry
for the recognizing the profit on tour is as under:
Debit: Tour A/c (with the balance remaining in the
tour a/c after all expenses for the tour have been
accounted for)
Credit: Income from Tour services.
Hence, it is not the amount of billing which is
shown as income but the profit earned on the tours
after deducting all direct costs. This is the standard
accounting policy followed by all the tour
companies."
(emphasis supplied)
Thus, the system and method of accounting was explained.
Reference was made to the TDS certificates received and they were
collated with the "income" disclosed.
9. A bare perusal of the said letter would indicate that the method
of accounting adopted by the petitioner was that the direct costs were
deducted from the billings and this was the standard method of
accounting adopted by the petitioner and other tour operators. Thus,
the Assessing Officer in the first or original round of assessment was
fully conscious and aware of the method of accounting followed by the
petitioner. This method of accounting has been accepted by Delhi
W.P. (C) 7974/2012 Page 6 of 11
High Court in CIT Vs. International Travel House Ltd. (2010) 344
ITR 554 (Del).
10. The reasons to believe recorded above clearly do not reflect any
application of mind on the accounting practice adopted by the
petitioner being a tour operator. It is obvious that the assessing officer
ignored and was oblivious to said factum. If he had noticed the said
position, the reasons to believe would not have recorded that there was
difference in the payment/receipt mentioned in the TDS certificates
and the amount of income disclosed by the assessee. We notice that
audit objection or query was raised and the Assessing Officer in
response to the said audit objection had informed that he had fully
examined the said aspect i.e. difference in the value on which TDS was
deducted and the income declared during the course of assessment
proceedings and had stated there was no loss of revenue. The said
letter has been enclosed at page 25 of the rejoinder.
11. Reassessment provisions are wide, but are not plenary. They are
circumscribed and controlled by pre-conditions and must satisfy the
prescribed statutory requirements. This is the reason why it is
mandatory for the Assessing Officer to record "reasons to believe" in
writing and state why and on what account or reason income
chargeable to tax has escaped assessment. Sufficiency of reasons is not
a matter which can be gone into by the court, but very
W.P. (C) 7974/2012 Page 7 of 11
existence of belief is a subject matter which can be examined and
scrutinized by the Court. Reassessment notice can be quashed if the
"belief" is not bona fide or is based on vague, irrelevant and non -
specific information. There should be a link and nexus between the
reasons and the evidence/material available with the Assessing Officer
for initiation of re-assessment proceedings. It should not be a mere
pretence. The expression "reason to believe" means cause or
justification of the Assessing Officer to believe that income has
escaped assessment and does not mean that the Assessing Officer
should have finally ascertained the said fact by legal evidence or
reached a final conclusion, as this is determined and decided in the
assessment order which is the final stage before the Assessing Officer.
{see Signature Hotels P. Ltd. Vs. Income-Tax Officer and Another,
[2011] 338 ITR 51 (Delhi), which refers to ITO versus Lakhmani
Mewal Das, [1976] 103 ITR 437 (SC), Ganga Saran and Sons Private
Limited versus Income-Tax Officer-I, [1981] 130 ITR 1 (SC) and
Phool Chand Bajrang Lal and Another versus Income-Tax Officer
and Another, [1993] (203) ITR 456 (SC) and Income-Tax Officer,
New Delhi, and Another versus Dwarka Dass and Brothers , [1981]
131 ITR 571 (Del)}.
12. Recently we had quashed reassessment notice issued in the case
of Le Passage to India Tours & Travels (P) Ltd. Vs. ACIT, W.P
W.P. (C) 7974/2012 Page 8 of 11
(C) 8685/2010 decided on 9th March, 2011 recording as under:-
"13. The ground and reasoning for reopening
quoted above relate to the very basic nature and
character of the accounting method adopted by
the petitioner. The petitioner has adopted a
system of netting as their billing was inclusive
of "direct costs" incurred which were paid to
third parties. It is impossible to perceive and
accept the contention of the Standing Counsel
for the Revenue that the Assessing Officer
during the course of the original assessment
proceedings would have not reflected and
considered the method of accounting adopted
by the petitioner. This is not possible as the
Assessing Officer at the very first instance was
required to examine the said aspect. The
method of accounting adopted by the petitioner
was set out in clear terms and explained by the
petitioner in their letter dated 31st October,
2008, which has been quoted above. The
petitioner has stated that they have always and
continue to follow the said method of
accounting. This is not a case where
explanation 1 to Section 147 is applicable. The
question relates to the WPC 8685/2010 Page 12
of 13 very method and manner of accounting,
which will be apparent and clear to any person
when scrutiny of the return and accounts is
undertaken. The reopening is, therefore, bad for
want of jurisdictional pre-condition under
Section 147 of the Act. It is a case of change of
opinion and the ratio in the case of Kelvinator
(supra) is applicable."
13. Here it will be appropriate to reproduce the observations of the
Supreme Court in Commissioner of Income Tax vs. Kelvinator of
India Ltd. (2010) 2 SCC 723:-
"5. On going through the changes, quoted above,
made to Section 147 of the Act, we find that, prior
W.P. (C) 7974/2012 Page 9 of 11
to the Direct Tax Laws (Amendment) Act, 1987,
reopening could be done under the above two
conditions and fulfilment of the said conditions
alone conferred jurisdiction on the assessing officer
to make a back assessment, but in
Section 147 of the Act (with effect from 1-4-1989),
they are given a go-by and only one condition has
remained viz. that where the assessing officer has
reason to believe that income has escaped
assessment, confers jurisdiction to reopen the
assessment. Therefore, post-1-4-1989, power to
reopen is much wider. However, one needs to
give a schematic interpretation to the words "reason
to believe" failing which, we are afraid, Section 147
would give arbitrary powers to the assessing officer
to reopen assessments on the basis of "mere change
of opinion",which cannot be per se reason to
reopen.
6. We must also keep in mind the conceptual
difference between power to review and power to
reassess. The assessing officer has no power to
review; he has the power to reassess. But
reassessment has to be
based on fulfilment of certain precondition and if
the concept of "change of opinion" is removed, as
contended on behalf of the Department, then, in the
garb of reopening the assessment, review would
take place.
7. One must treat the concept of "change of
opinion" as an in-built test to check abuse of power
by the assessing officer. Hence, after 1-4-1989, the
assessing officer has power to reopen, provided
there is "tangible material" to come to the
conclusion that there is escapement of income from
assessment. Reasons must have a live link with the
formation of the belief. Our view gets support from
the changes made to Section 147 of the Act, as
quoted hereinabove. Under the Direct Tax Laws
(Amendment) Act, 1987, Parliament not only
deleted the words "reason to believe" but also
inserted the word "opinion" in Section 147 of the
Act. However, on receipt of representations from
the companies against omission of the words
W.P. (C) 7974/2012 Page 10 of 11
"reason to believe", Parliament reintroduced the
said expression and deleted the word "opinion" on
the ground that it would vest arbitrary powers in the
assessing officer."
14. Looking at the aforesaid facts, the petitioner is entitled to
succeed in the present case on all three counts. Firstly, there is failure
on the part of the Assessing Officer to examine the original assessment
record and ascertain the method of accounting adopted by the assessee
and whether the quantum of receipts disclosed was correct as per the
method of accounting and the amount reflected in the TDS certificates
was examined by the Assessing Officer in the original assessment
proceedings; secondly, it is a case of change of opinion because the
method of accounting adopted by the assessee and the TDS certificates
were examined by the first Assessing Officer; and thirdly the assessee
had made full and true disclosure at the time of original proceedings
about the method of accounting adopted by him and the quantum of
receipts disclosed. The writ petition is accordingly allowed and the
impugned notice dated 29th March, 2012 and the reassessment
proceedings initiated thereby are quashed. If any assessment order has
been passed, the same will be treated as null and void.
Dasti.
SANJIV KHANNA, J.
JULY 31, 2013/NA SANJEEV SACHDEVA, J.
W.P. (C) 7974/2012 Page 11 of 11
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