Allowed

Dr. Ajit Gupta v. Assistant Commissioner of Income Tax

Delhi HC3 Mar 2016W.P.(C)/1045/2014

Case brief

AI extract

What is this about?

The Supreme Court quashed reopening of income tax assessments under Section 148 for four assessment years. The revenue's action relied on an erroneous premise that the assessee had erroneously changed accounting methods, which the court found was a clerical mistake in an audit report.

What did the court decide?

The impugned notices under Section 148 dated 25/28/05/07 March for AYs 2006-07 to 2009-10 and the subsequent orders rejecting objections are quashed.

Dr. Ajit Gupta Vs Assistant Commissioner of Income Tax — Income Tax | Delhi HC (2016)

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(0 Signature Not Verified Signed By:RAM DATT Signing Date:01.10.2024 16:36 Certify that the digital and physical file have been compared and the digital data is as per the physical file an d no page is missing.

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Through:Mr. SalilKapoorwith Mr. SanatKapoor, Ms.AnanyaKapoor, ^.Sumit Lai Chandani and Mr. Arun Vir Singh, Advocates.

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versus

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ASSISTANTCOMMISSIONEROF INCOMETAX Respondent Through: Mr. Rahul Chaudhary, Senior Standing Counsel with Mr. Raghvendra Singh and Mr.Sharad Agarwal, Advocates.

AND

W.P.(C)3078/2015& CM 5500/2015(for stay)

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DR. AJIT GUPTA Petitioner

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Through:Mr. SalilKapoorwith Mr. SanatKapoor, Ms.Ananya Kapoor, Mr.Sumit Lai Chandani and Mr. Arun Vir Singh, Advocates.

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versus

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ASSISTANTCOMMISSIONEROF INCOMETAX Respondent Through: Mr. Rahul Chaudhary, Senior Standing Counsel with Mr. Raghvendra Singh and Mr.Sharad Agarwal, Advocates.

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CORAM:

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JUSTICE S. MURALIDHAR

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JUSTICE VIBHU BAKHRU

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ORDER

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% 03.03.2016 CM No. 1874/2014tfor exemption)in W.P. rci No. 924/2014 CM No. 2152/2014(for exemntioniin W.P. fCI No. 1045/2014

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Exemptionsallowedsubjectto all just exceptions.

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The applicationsare disposedof.

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W.P.(C)Nos. 924/2014,1045/2014,3077/2015&3078/2015

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2of11

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W.p.(0 No. 924/2014 & CM No. 1873/2014 (for stav^ W.P.(C) No. 1045/2014& CM No. 2151/2014(for stay) W.P.(C) No. 3077/2015& CM No. 5498/2015(for stay) W.P.(C) No. 3078/2015& CM No. 5500/2015(for stay)

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These four writ petitionsby Dr. Ajit Gupta, a medicalpractitionerwho is an Assessee, challenge the notices issued to the Assessee by the Deputy Commissionerof Income Tax ('DCIT'), Circle 37(1), New Delhi under Section 148 of the Income Tax Act, 1961 ('Act') seeking to reopen the assessmentfor AssessmentYears ('AYs') 2006-07to 2009-10.

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The Assesseefiled a return of income on 31'^ October2006 for AY 200607 which was picked up for scrutiny by the AssessingOfficer ('AO'). An assessmentorder was passed by the AO under Section 143(3) of the Act on 22"''December2008 assessingthe taxableincomeat Rs.14,40,226as against the declaredincomeof Rs.12,35,268.

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The Assessee filed a return for AY 2007-08 on 3D' October2007 which again was picked up for scrutiny. An assessmentorder was passed on 29"" December2009 assessingthe taxable income at Rs.36,95,120as againstthe declaredincomeof Rs.36,00,313.

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The Assessee filed a return of income on 30"" September2008 for AY 2008-09which was processedunder Section143(1)ofthe Act. The returned incomewas Rs.1,14,96,331.

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The Assesseefiled areturnon 29"' September2009 for AY 2009-10.This was picked up for scrutinyand an assessmentorder was passed by the AO

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W.P.(C)Nos. 924/2014,1045/2024,3077/2015&3078/2015

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on 26th April 2011. As against the declared income of Rs.2,10,82,780,the incomewas assessedat Rs.2,19,53,505.

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On 25 March 2013, the DCIT issued a notice to the Assessee under Section 148 of the Act seekingto reopen the assessmentorder for AY 200607. The Petitionerreplied by a letter dated 29''^ April 2013 stating that the original return filed on 31'^ October 2006 should be treated as return pursuant to the said notice.

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By a letterdated 17"' September2013, the AO reproducedthe reasons for reopeningof the assessment,the relevantportionof which read as under:

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"The assessee is a Doctor by profession and derived income from proprietarybusiness from M/s. Park Hospital and M/s. Sunil Hospital & Nursing. The assessee filed its return of income on 31.10.2006declaringthe income of Rs.12,35,268/-. On the basis of information gathered while scrutiny proceedingsu/s. 143(3) for A. Y. 2010-11 and as per para 11(a) of Tax Audit Report u/s. 44AB dated 28.10.2006 of the assessee (M/s. Park Hospital and Sunil Hospital and Nursing Home), the assessee is regularly following mixed system of accounting. As per section 145 of the I.T.Act, 1961, income chargeable under the head 'profits and gains of business or profession'shall be computedin accordancewith either cash or mercantile system of accounting regularly employed by the assessee. XXX

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ollowing the cash basis of accounting, unpaid expenses or expensespayable or provisionfor expenses are not allowed as de^ctibleexpenditure.Since, there is an outstandingbalance of Rs.5,97,750/-and Rs.4,12,215/-in the Sundry creditorsand amounts payable respectivelyin M/s. Park Hospital and M/s. Sunil Nursing Home respectivelyduring the F.Y 2005-06, the same are not an allowable expenditureunder Cash system of W.P.(C)Nos. 924/2014,1045/2014,3077/2015&3078/2015 ^

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accounting. Following the mercantile system of accounting, bills raised and accrued income has to be shown as taxable income. Since, the assessee is not showing any debtors or receivablesin the balancesheet, accruedincome duringthe F.Y 2005-06 has escaped from the assessment.

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The case has been completed u/s. 143(3) on 22.12.2008 assessing the total income at Rs.14,40,230/-. The assessee neither at the time of assessment nor while filing the Income Tax Return disclosed the above mentioned facts. Therefore, the income chargeableto tax has escaped assessment by reasons of the failure on the part of the assessee to disclose flilly and truly all material facts necessary for his assessment.

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In view of above facts, I have reason to believe that the assessee has income which has escaped from assessment and fit case to issue notice u/s 148 of the I.T Act, 1961."

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Within three days of the, earliernotice, i.e., on 28^*^ March 2013, another notice under Section 148 of the Act was issued by the DCIT seeking to reopen the assessment for AY 2008-09. The same reasons, as extracted hereinbefore, were given to the Assessee for the reopening of the said assessment for AY 2008-09.

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As far as AY 2007-08 is concerned, the notice under Section 148 of the Act was issued by the Assistant Commissionerof Income Tax ('ACIT'), Circle 37(1) on 5^*^ March 2014. The reasons conveyedto the Assessee by the letter dated 9'^ October 2014 were more or less similar to the above reasons. It was stated further as under:

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"During the assessment proceedings for A.Y. 2010-11, the assessee submitted in his reply on 14.03.2013 that he has been following cash system of accounting until F.Y 2008-09 and shiftedoverto mercantilesystem of accountingfor F. Y. 2009-

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Page5of 11

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fV.P.(C) Nos. 924/2014,1045/2014,3077/2015&3078/2015

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[)>

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Assessee during the assessment proceedings of the A.Y. 2007-08 never submitted that he had been following cash system of accounting. It was only during the assessment proceedings of A.Y. 2010-11 that the assessee submitted this fact.

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Following the cash basis of accounting, sundry creditors and expensespayable are not allowed as deductibleexpenditure.In the balancesheet ofPark Hospitaland Sunil NursingHome, the followingsundrycreditorsand expensespayableare appearing: 1. Park Hospital 31.03.2007 Amount

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Sundry Creditors	6,95,940/-
Expenses	18,86,956/-
Payable

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2.	Sunil Nursing Home 31.03.2007	Amount
	Sundry Creditors	-
	Expenses Payable	4,33,011/-

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As, Sundry creditors and amounts/expensespayable are not allowedto be claimed as expenditureunder the cash system of accounting. Accordingly, Rs. 30,15,907/- is not allowable as expenditure, thus, Rs. 30,15,907/- has escaped from assessment."

¶50

For AY 2009-10,the notice was issued two days later, i.e., on 7^^ March 701A, again by the ACIT where the reasons were identical for the reasons for AY 2007-08.

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The Assessees objectionto the reopeningofthe above assessmentwere negativedby orderspassedby the AO on 13^^ December2013 as far as AYs 2006-07 and 2008-09were concernedand by orders dated 1 March 2015 W.P.(C) Nos. 924/2014,1045/2014,3077/2015&3078/2015 Page6of11

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as far as AYs 2007-08 and 2009-10 were concerned.

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While directingnotice to be issued in W.P. (C) No. 924 and 1045 of 2014 (for AYs 2006-07 and 2008-09) on 7^*^ February 2014, the Court restrained further proceedings pursuant to the impugned notices. Similar orders were passed at the time of issuance of notices in the other two petitionsW.P. (C) Nos. 3077 and 3078 of 2015( for AYs 2007-08and 200910).

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The Court has heard the submissions of Mr. Salil Kapoor, learned counsel for the Petitioner and Mr. Rahul Chaudhary, learned Senior Standing counsel for the Revenue.

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The main reason for the reopeningof the assessmentis admittedlythe letter given by the Assessee while the assessment for AY 2010-11 was under scrutiny.It is statedthat in the reply dated 14"" March 2013 addressedto the DCIT in reply to the notice dated 8^^ March 2013, the Assesseevolunteered that "we have followedthe cash system of accountinguntil FY 2008-09and shiftedover to mercantilesystem of accountingfor FY 2009-10 (AY 201011). The same has been confirmedby our CharteredAccountantin the tax audit report as well as the confirmation letter dated 01.10.2012".

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The reasons furnished to the Assessee for the reopening of the assessmentfurther show that consequentupon the said disclosure,the AO came to the conclusion that the balances in sundry creditors were not allowableexpenditure.For AY 2006-07,it was concludedthat the Assessee was not showing any details of receipts and, therefore, the above accrued

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W.P.(C) Nos. 924/2014,1045/2014,3077/2015&3078/2015 Page 7of11

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income, being the outstanding balance shown as sundry creditors has escapedassessmentand would requireto be added back. It is stated that the escapement of income was on account of the failure on the part of the Assessee to "disclose fully and truly and material facts necessary for assessment".

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As far as AY 2006-07 is concerned,it is significantthat the assessment order dated 22"^* December 2008 itselfnotes against column 10 as under "method of accounting: mercantile". Further in the objections to the reopening of assessment, the Assessee pointed out that all relevant particularsfor AY 2006-07 were duly furnished before the AO; that there were no sundry creditorsoutstandingand the only amount due was against expenses payable. It was stated that since the mercantile system of accounting was followed, the liability against the expenses payable was accountedfor in the books. Sincethe hospitalwas not allowingcreditto any patient, there was no debtor appearing in the books. These factors were examined by the AO during the original assessmentproceedingsand the books of accountswere also produced.It was pointedout that the mercantile system of accountingwas being followed by the Assessee not only during AY 2006-07 but the earlier and subsequentyears as well. Counsel for the Assessee has produced before the Court the assessment order dated 17^*^ November2006 for AY 2004-05which shows that the methodofaccounting in the said AY was 'mercantile'.It was explainedthat the word 'mixed' was inadvertentlymentionedin the audit report under Section 44AB ofthe Act but actually it was only the mercantile system which was followed. The auditor had issued a clarification in this regard. This is specifically

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fV.P.(QNos. 924/2014,1045/2014,3077/2015&3078/2015 p^ge8of11

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mentioned in the objections filed by the Assessee in its letter dated 21^' October 2013. This letter dated 1^' December 2012 of the auditor states "in this audit report by clericalmistake the method of accountingis mentioned as 'mixed' but it is on mercantilesystem basis and insteadof mixed method it should be treated as mercantile basis".

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Similar objectionswere also filed as regards the notices under Section 148 of the Act issued for the other three AYs. As regardsAYs 2007-08 and 2009-10,in its objectionsthe Assesseein the letterdated O'" December2014 pointedout that the letterdated 14^^ March 2013 was writtenby the Assessee under some misconception as he "does not understand as what is the mercantileor cash based accounting."It was further stated: "Firstof ail, this letter was written by the assessee in some misconceptionas he does not understandas to what is the mercantileor cash basis of accounting.He is a layman as regards to accounting systems, records, policies etc. He is a doctor by professionand does not have accountingknowledge. This letter was written by him withoutunderstandingthe meaning of it. Therefore,no cognizanceshouldbe taken ofit as the contentsofthis letter are contraryto the facts on record."

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In a, further letterdated 9^'' March 2015, the Assesseepointedout that if the cash systemwas to be followedfor AYs 2006-07to 2010-11,the overall impact would be 'nil' and there would be no escapementof income. The only controversywas whetherincomewas to be taxed in the first year or the next year and overallit would be tax neutral.There was also no revenueloss as the maximumslab of tax rate in all the AYs was the same, i.e., 30%. It

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JV.P.(QNos. 924/2014,1045/2014,3077/2015&3078/2015 Page9of11

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was further pointed out that for AY 2009-10 "by changing the method as cash basis, the assessed income would be reduced".

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The Court finds that none of the above objectionshave been adequately dealt with bythe AO while rejectingthe objections.

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Duringthe courseof today's hearing,apart from the mistakemade in the audit report by mentioning the system of accounting of the Assessee as 'mixed' and the letter issued by the Assessee himself, no other 'tangible material' was cited to justify the reopeningof assessmentfor AY 2006-07 and 2007-08,the two years for which the reopeningwas beyond the period of four years. The reasons providedwere the same reasons suppliedfor the reopeningof the assessmentfor AYs 2008-09 and 2009-10 althoughfor AY 2008-09 the earlier assessmentwas completedunder Section 143 (1) of the Act. The fact of the matter was that the reason for the reopening of the assessmentwas a mistaken factual premise that the Assessee,had changed the system of accounting from the mercantileto the cash system. It was more than adequatelyexplainedby the Assesseethat this was an inadvertent error. The Assesseehas convincinglyshown that he has consistentlybeen followingthe mercantilesystemof accountingnot only for AYs in question but for the earlier and later AYs as well.

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Since the action of the Revenue was based on a factually erroneous premise, the Court is ofthe view that the reopeningofthe assessmentsfor the said AYs is not sustainablein law. The Court is also satisfiedthat the requirement of the law, as explained by the Court in Commissionerof Income Tax. v. KelvinatorofIndiaLimited(2010) 320ITR561 (SC), and W.P.(C)Nos. 924/2014,1045/2014,3077/2015&3078/2015 page wof11

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reiteratedin the laterdecisions,has not been fulfilledinthe presentcase.

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Accordingly the impugned notices under Section 148 of the Act dated 25th March 2013 (for AY 2006-07),28th March 2013 (for AY 2008-09),5th March 2014 (for AY 2007-08) and 7th March 2014 (for AY 2009-10) and the corresponding orders dated 13th December 2013 and 11th March 2015 rejecting the objections of the Assessee to the said notices, are hereby quashed.

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The writ petitions are allowed but in the circumstances with no order as to costs. The pendingapplicationsare also disposedof.

S. MURALIDHAR, J

VIBHU BAKHRU, J

MARCH 03, 2016 dn

W.P.(C) Nos. 924/2014,1045/2014,3077/2015&3078/2015

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Dr. Ajit Gupta v. Assistant Commissioner of Income Tax

Case brief

What is this about?

What did the court decide?

Dr. Ajit Gupta v. Assistant Commissioner of Income Tax

Case brief

What is this about?

What did the court decide?

What the court decided

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