(PER : HONOURABLE MR.JUSTICE AKIL KURESHI) Heard learned counsel for final hearing of the petition.
The petitioner has challenged a notice dated 26th March 2012 issued by the respondent-Assessing Officer reopening assessment of the petitioner for the Assessment Year 2007-08. It can thus be seen that the notice for reopening was issued within a period of four years from the end of relevant assessment year. The Assessing Officer had recorded his reasons for issuing such a notice, which read as under :-
On verification of Form 3CD, Profit & Loss Account and various submissions in respect of rent income and food preparation charges, it is noticed that from the start of the A.Y 2007-08, the assessee has ceased himself from the restaurant business and had leased/licensed his entire assets of restaurant to other parties for which he received rents. As per terms of contracts, repair/maintenance / replacement of leased building/ furniture /ACs/crockery and utensils and local taxes thereof were to be paid by lessee. Further, the assessee had received food preparation charges from lessee which were fixed amount as per agreements signed by assessee and lessee. As per agreements for food preparing charges, assessee was to provide only manpower for preparation of food and all materials and related expenditure was to be provided by lessee. The assessee had provided two persons at one such restaurant incurring salary expenditure of Rs. 1,59,000/= and had provided four persons at another such restaurant incurring salary expenditure of Rs. 3,18,000/=. As the assessee had ceased to do any business and he is deriving his income by virtue of various rent and money received under agreement and his role is limited to provide six persons to his handed over business, his income was required to be treated as income from other sources and not business income and except for salary expenditure on these persons, various business expenditures allowed as deduction as business expenditure was required to be disallowed [Rs. 13,64,205/= - Rs. 18,41,205/= - Rs. 4,77,000/=].
On examination of the document, I have, therefore, reason to believe that income chargeable to tax of Rs. 13,64,205/= has escaped assessment within the meaning of Section 147 of the Act and the assessment for the A.Y 2007-08 is required to be re-opened by issue of notice u/s. 148 of the Act.
In the present case, the sole ground pressed in service by the petitioner was that the Assessing Officer was compelled by the audit party to re-open the assessment, though on the reasons recorded, the Assessing Officer was of the belief that no income chargeable to tax had escaped assessment.
To enable us to examine above contentions of the petitioner, we had requested counsel for the Revenue to make available for our perusal, the original file of the petitioner-assessee. Having perused the file, we noticed that the following facts emerge :
[a] Assessment for the year under consideration was originally framed on 1st July 2009. Such assessment was made after scrutiny;
[b] Audit party brought following facts to the notice of the Assessing Officer :-
Scrutiny of Form 3CD, Profit and Loss Account and various submissions in respect of rent income and food preparation charges revealed that from the start of the A.Y., the assessee had ceased himself from the restaurant business and had leased/licensed his entire assets of restaurant to other parties for which he received rents. As per terms of contract, repair/maintenance/replacement of leased building/ furniture/ ACs/ Crockery and utensils and local taxes thereof were to be paid by lessee. Further, the assessee had received food preparation charges from lessee which were fixed amount as per agreements signed by assessee and lessee. As per agreements for food preparing charges expenditure was to be provided by lessee. The assessee had provided two persons at one such restaurant incurring salary expenditure of Rs. 1,59,000/= and had provided four persons at another such restaurant incurring salary expenditure of Rs. 3,18,000/=. As the assessee had ceased to doing any business and he is deriving his income by virtue of various rent and money received under agreement and his role has limited to provide six persons to his handed over business, his income was required to be treated as income from other sources and not business income and except for salary expenditure on these six persons, various business expenditures allowed as deduction as business expenditure were required to be disallowed {13,64,205 (1841205-477000)}.
Failure to do so resulted in short levy of tax of Rs. 5,87,765/= (including interest) as under :-
Tax @ 30% + 10% SC + 2% ES of Rs.
the same document, we noticed that the audit party recorded as under :-
On this being pointed out the ACIT 12, Ahmedabad replied that as audit objection needs time to examine, detailed reply would be sent later. He further stated that audit objection was not acceptable as the case would be time barred in December 2010. Reply is not acceptable as remedial action has to be taken in suitable cases as prescribed by CBDT for audit observations.
On 8th June 2011, the Assessing Officer did not agree to the above suggestion of the audit party and wrote to the AG [Audit] stating as under :-
3. The assessee has shown in the audit report for year under consideration the nature of business Restaurant Business . When the assessee is shown the income under the head Profit and Gain of business or profession and paid salary to his employees, the salary expenditure is therefore allowable expenditure under the head business expenditure. The assessee has given a part of his asset on contract and managing the rest of his own.
It is clearly mentioned in the decision of Hon ble Supreme Court in the case of S.K Sahana & Sons Limited v. CIT [(1999) 104 Taxman 86/236 ITR 432 (SC)] that where the assessee company leased its colliery to the managing contractor and the assessee was to be paid the profit at a certain rate on the amount of coal raised, as income arose out of a contractual relationship between the principal and the agent, the assessee s income from leasing of its business was to be assessed as business income and not as income from other sources.
In view of the above the audit objection is not acceptable and you are requested to drop the same at earliest.
[d] The audit party, under an undated communication addressed to the Commissioner of Income Tax, which apparently was received after the reply dated 8th August 2011, conveyed as under :-
Kindly refer to your office letter mentioned above in respect of LAR No. 2047 of ACIT, Circle 12, Ahmedabad. Replies to the follows Paras are not acceptable for the reasons mentioned below :
Para No. 22 : Vijay R. Gupta :
A.Y 2007-08 : Reply is not acceptable as judgment of Supreme Court quoted was delivered in 1945 ie., much prior to introduction of current Income Tax Act, 1961. Further, the Hon ble Court decided the issue is assessee entitle to the full amount of depreciation u/s. 102 (vi) of income tax Act, irrespective of period of lease it is evident that objection raised is not covered under the said judgment. Reply may be reconsidered in view of fact mentioned above and the Para.
Thereafter, impugned show cause notice came to be issued with supporting reasons, which we have already recorded earlier.
From the series of evidence, in our opinion, it stands clearly established that the Assessing Officer was under compulsion from the audit party to issue notice for reopening. This we say so because after the audit party brought the controversial issue to the notice of the Assessing Officer, he had not agreed to the proposal for re-examination of the issue. Thereupon, he in fact, wrote a letter dated 8th June 2011 and gave elaborate reasons why he did not agree to make any addition on the controversial issue.
We may recall that the controversy was whether the assessee had discontinued his business of running restaurant and that therefore, the income should be treated as the income from such business or from other sources.
In his letter dated 8th June 2011, the Assessing Officer firmly asserted that the assessee s income from lease was to be assessed as business income and not as income from other sources. Despite his firm assertion, the audit party once again wrote to the jurisdictional Commissioner that the reply of the Assessing Officer is not acceptable. In support of such assertion, the Audit Officer once again referred to and relied upon para-22 of his earlier communication. In short, he reiterated that this was a case where income had escaped assessment and that remedial action therefore be taken. It writs large on the face of the record that the Assessing Officer was compelled to issue notice for reopening, though he held a bona fide belief that the treatment to the income which he had accorded in the original assessment was as per the correct legal position.
By now, it is well settled that even if an issue is brought to the notice of the Assessing Officer by the audit party, it would not preclude the Assessing Officer from acting on such communication as long as the final opinion to take appropriate action is that of the Assessing Officer and not that of the audit party. Referring to the decision in case of CIT v. P.V.S Beedies Private Limited, reported in 237 ITR 13, it is equally well settled however that if the Assessing Officer has acted only under compulsion of the audit party and not independently, the action of re-opening would be vitiated. In a recent decision dated 14th December 2011 rendered in case of Cadila Healthcare Limited v. Assistant Commissioner of Income-tax & Anr., reported in [(2012) 65 DTR (Guj) 385], the High Court had an occasion to examine such issues. It was held and observed as under :-
Under the circumstances, it clearly emerges from the record that the Assessing Officer was of the opinion that no part of the income of the assessee has escaped assessment. In fact, after the audit party brought the relevant aspects to the notice of the A.O., she held correspondence with the assessee. Taking into account the assessee s explanation regarding non-requirement of TDS collection and ultimately accepted the explanation concluding that in view of the Board s Circular, tax was not required to be deducted at source. No income had therefore escaped assessment. Despite such opinion of the Assessing Officer, when ultimately the impugned notice came to be issued the only conclusion we can reach is that the Assessing Officer had acted at the behest of and on the insistence of the audit party. It is well settled that it is only the Assessing Officer whose opinion with respect to the income escaping assessment would be relevant for the purpose of reopening of closed assessment. It is, of course true, as held by the decision of the Apex Court in case of PVS Beedies Private Limited [Supra] and Indian & Eastern Newspaper Society [Supra], if the audit party brings certain aspects to the notice of the Assessing Officer and thereupon, the Assessing Officer forms his own belief, it may still be a valid basis for reopening assessment. However, in the other line of judgment noted by us, it has clearly been held that mere opinion of the Audit party cannot form the basis for the Assessing Officer to reopen the closed assessment that too beyond four years from the end of relevant assessment year.
In the result, we have no hesitation in striking down the impugned notice for re-opening, which we hereby do so. Petition is allowed.
(AKIL KURESHI, J.) (Ms. SONIA GOKANI, J.) Prakash* Page 10 of 10