® VSJ/BMJ2d September, 2015 Writ Appeal 1145 / 2015 Between Dell India Pvt Ltd (Now Dell International Services India P Ltd) Divyashree Greens # 12/1, 12/1A Koramangala Inner Ring Road Domlur, Bangalore 71 (By Sri Percy Pardiwalla, Sr. Counsel a/w Sri T Suryanarayana, Adv.) And 1 2 (By Sri K V Aravind, Adv.) Jt. Commissioner of Income Tax Large Tax Payers Unit (LTU) JSS Towers, 100 ft. Ring Road Banashankari III Stage Bangalore 85 Commr. Of Income Tax - II Large Tax Payers Unit (LTU) JSS Towers, 100 ft. Ring Road Banashankari III Stage Bangalore 85 Appellant Respondents This is an intra-Court appeal filed by the assessee
ORDERchallenging the order of the learned Single Judge passed in W.P.No.8901/2015 dated 23-03-2015 whereby the writ petition filed by the appellant challenging the initiation of 2 proceedings under Section 147, read with Section 148 of the Income Tax Act, 1961 (for short ‘the Act’), has been dismissed. 2 Briefly stated, the facts of this case are: The appellant/assessee is engaged in the manufacture and sale of computer hardware and related products. As part of the sales of its products, the appellant/assessee offers to its customers, installation and warranty services. Along with sale of such products, a standard warranty is also provided. Such warranty, which is included in the price of the product, is for six months or more. Besides such standard warranty, the consideration whereof is covered in the sale price of the product, the customer may opt for an extended warranty, which may be for one year or more, and which period would commence after the expiry of the standard warranty period. For such upsell or extended warranty, which is provided besides the standard warranty, an additional charge is levied on the customer. The accounting system adopted by the assessee, is not the cash system but the mercantile system 3 of accounting. It is the case of the assessee that consistently, under the mercantile system of accounting, the assessee has adopted the “Smart Debit Deferred Revenue Accounting”, according to which, the amount received for extended warranty after the expiry of the standard warranty, would be recognized as income both in the books of account and for such purpose accruing over such period of extended warranty when it comes in operation and not as an income on the date of receipt/invoicing of such amount received for the extended warranty. It is this “Smart Debit Deferred Revenue Accounting” system followed by the assessee with regard to the extended warranty, which is in question in the present appeal. 3 For the assessment year 2009-10 (financial year 2008-09 and assessment period from 01-04-2008 to 31- 03-2009), as per the Sales Register and Sales Tax returns, the amount of sales disclosed by the assessee was Rs.3185,47,04,713/- and after availing various adjustments, the net revenue of Rs.3110,85,96,000/- was 4 disclosed by the assessee as its turnover. One of the adjustments so made was a sum of Rs.216,89,00,773/- claimed as “Smart Debit Deferred Revenue Account”. This was the amount which was, though received by the assessee during the financial year 2008-09 (assessment year 2009-10), but was not shown as income and was shown as deferred Revenue receipt, which was to be accounted for in such years when the services for receipt of such amount were to be rendered, which would be from the period of commencement of extended warranty. The break-up of the “Smart Debit Deferred Revenue Account” for the assessment year 2009-10, was given by the assessee as under: Rs.58,23,47,873/- Deferred revenue account – Short term deferred revenue warranty- SnP deferred revenue ST- Short term deferred revenue- Rs.31,97,04,229/- Deferred revenue – Long term deferred revenue- SnP deferred revenue LT – Long term deferred revenue- Rs.35,95,76,044/- Rs. 90,75,75,789/- 5 4 The said contention was accepted by the Assessing Officer, who by an assessment order dated 31-01-2014 for the assessment year 2009-10, levied the requisite Income Tax after recording that the said amount of Rs.216.89 crores was reduced on account of deferred revenue account, as it had tallied with the deferred revenue break up given under the head of other liabilities. The said assessment order was challenged by the assessee on certain other grounds, but the question of adjustment of the deferred amount of Rs.216.89 crores towards deferred revenue account had become final. 5 Then for the assessment year 2010-11, the “Smart Debit Deferred Revenue Account” system followed by the assessee, was not accepted by the Assessing Officer, as well as the Dispute Resolution Panel (‘DRP’ for short) and, consequently, a notice dated 27-03-2014 was issued to the assessee under Section 148 of the Act, proposing to assess/reassess the income of the assessee under Section 147 of the Act for the assessment year 2009-10, on the ground that the income assessable to tax had escaped 6 assessment. The assessee, thereafter, on 15-04-2014 intimated that the return of income filed on 30.9.2009 be treated as income filed in response to notice under Section 148 of the Act and further made a request for being provided the reasons for issuance of notice under Section 148 of the Act. Pursuant thereto, vide communication dated 25-04-2014, the reasons for reopening the assessment for the assessment year 2009-10 under Section 147 of the Act were provided to the assessee which, according to the learned counsel for the Revenue, were recorded on 26-03-2014. 6 Then on 9.5.2014, the assessee filed its objections to the said reasons so provided, and prayed for dropping the reassessment proceedings which had been initiated. Thereafter, on 24-02-2015, the order was passed by the Assessing Officer whereby the objections of the assessee against the reasons furnished for reopening the assessment were rejected, and reassessment proceedings were allowed to continue. Challenging the said order dated 24.2.2015, as well as the notice dated 27.3.2014, the 7 assessee filed the writ petition, with a further prayer for declaring the proceedings initiated by the Revenue under Section 147/148 of the Act to be without jurisdiction. Such writ petition, having been dismissed on 23.3.2015 by the learned Single Judge, this appeal has been filed. 7 We have heard Sri Percy Pardiwalla, learned Senior Counsel appearing along with Sri T Suryanarayana, learned counsel for the appellant/assessee as well as Sri K V Aravind, learned counsel for the respondent/Revenue and have perused the records. With consent of the learned counsel for the parties, this appeal has been heard and is being disposed of at the admission stage itself. 8 The main thrust of the submission of the learned Senior Counsel appearing for the appellant is that the Assessing Officer could not have had any reason to believe that the income had escaped assessment, and the reasons for reopening the concluded assessment are based merely on a ‘change of opinion’ on the basis of the assessment order passed for the assessment year 2010-11. It had also 8 been contended that there was no application of mind by the Assessing Officer to the various objections raised by the assessee, to the reasons for reopening the assessment under Section 147 of the Act. It has been submitted that the view taken by the Assessing Officer and the DRP in the assessment for the assessment year 2010-11, in not accepting the method of accounting regularly employed by the assessee for the last several years, was nothing but a ‘change of opinion’ with regard to the system or method of accounting consistently followed by the assessee, which was duly accepted under the Companies Act as well as by the Institute of Chartered Accountants of India and had also always been accepted by the Department prior to the assessment year 2010-11, and such ‘change of opinion’ of the Assessing Officer subsequent to the passing of assessment order for the assessment year 2009-10, could not form the basis for reopening an already concluded assessment. It has been categorically stated that in the reasons so recorded, prior to the issuance of notice under section 148, nowhere has it been stated that the method of accounting adopted by the assessee for the assessment 9 year 2009-10 was not correct, and on the contrary, the only reason given is that the payment received in assessment year 2009-10, under the said accounting method, was deferred for the next financial year i.e. assessment year 2010-11, and the said amount that was so deferred, was not offered to tax by the assessee in the next assessment year 2010-11. It was concluded by the Assessing Officer that therefore the same amounted to an escapement of income, which according to the learned counsel for the appellant was totally incorrect, in as much as in the assessment year 2009-10, the assessee had nowhere stated that the amount of consideration received for the obligation to render the extended warranty services was deferred to the next assessment year, but it was categorically stated that it was deferred to the period when the services for the amount received were to be rendered in the subsequent assessment years. It has also been submitted that if the Assessing Officer had concluded that the amount of Rs.216.89 crores was deferred for payment of tax in the assessment year 2010-11, the same could not have been a ground for reopening, merely because it was 10 not offered for tax in the said assessment year and, if at all, the same could have been an amount which could be subjected to tax in the assessment year 2010-11. It was lastly submitted that there was no mistake found by the Assessing Officer in the method of accounting of the assessee for the assessment year 2009-10, and when the disclosure made by the assessee with regard to the deferred amount was actually considered and accepted by the Assessing Officer, while passing the assessment order for the assessment year 2009-10, then, the question of there being an oversight or a mistake having been committed by the Assessing Officer, would not arise, as it was a conscious decision taken by the Assessing Officer to accept the deferred amount disclosed by the assessee to be subjected to tax in subsequent years, when the amount was to be utilised. 9 Per contra, Sri K V Aravind, learned counsel for the respondent/Revenue has submitted that excessive relief of Rs.216.89 crores had been granted by the Assessing Officer while passing the assessment order for the assessment 11 year 2009-10, which ought to have been included as income for the said assessment year in question. It has been contended that the question of deferment of the said amount of Rs.216.89 crores, was not at all considered by the Assessing Officer in its assessment order for the assessment year 2009-10, and it was only the amount of deferred income with regard to Service Tax which was considered and specifically rejected by the Assessing Officer. According to the learned counsel, no opinion was expressed by the Assessing Officer with regard to the deferred amount of Rs.216.89 crores and the same had been accepted without assigning any reason, hence it would not be a case where the Assessing Officer had expressed his opinion on the same and, thus, the question of ‘change of opinion’ would not arise. It has, hence, been contended that when the method of accounting of “Smart Debit Deferred Revenue Account” was neither considered nor discussed by the Assessing Officer, acceptance of the same cannot be presumed, and thus it was not a case of ‘change of opinion’ of the Assessing Officer in reopening the assessment. 12 10 Learned counsel for the parties have relied on certain decisions of the Apex Court as well as some High Courts, which shall be dealt with at the time of considering their arguments. 11 The business of the assessee/appellant which is relevant for the purpose of the present case, and as understood by this Court, may be explained by way of an example. The assessee sells its products (being computer hardware) say, in the assessment year 2009-10, for a price of Rs.1,00,000/-, which covers the warranty for a period of one year. The customer takes an extended warranty for a further period of three years (beyond the standard warranty of one year), for which he pays an additional amount of Rs.30,000/- at the rate of Rs.10,000/- per year of warranty after the expiry of the standard warranty period. Meaning thereby that, besides Rs.1,00,000/- received by the assessee as sale price of the product sold, Rs.10,000/- per year (i.e., Rs.30,000/-) is the additional amount received by the assessee at the time of sale of the product for extended warranty, for which services would be 13 rendered by the assessee after the expiry of the standard warranty. The amount of Rs.30,000/-, though received by the assessee in the financial year 2009-10, is shown in the account books as a liability in the said financial year, as well as the next financial year 2010-11, as the standard warranty has not expired. Then, when the period of the extended warranty commences i.e., in the assessment year 2011-12, the pro-rata amount received towards extended warranty is shown as receipt/income for the said assessment year, i.e., Rs.10,000/- for assessment year 2011-12, and Rs.10,000/- each for next two assessment years. It is this method of accountancy, that the assessee claims to have followed for the assessment year 2009-10, which was considered and accepted by the Assessing Officer. 12 In this example, it may be clarified that the assessee receives a sum of Rs.1,30,000/- in the assessment year 2009-10, out of which Rs.1,00,000/- is shown as receipt of sale price (including standard warranty of one year) and accounted for in the said assessment year itself. The 14 balance amount of Rs.30,000/- is shown as a liability, to be adjusted on a pro rata basis in the years when the warranty becomes enforceable. If, in the assessment year 2011-12, out of Rs.10,000/- received as deferred amount, Rs.7,000/- is spent towards warranty expenses, then Rs.3,000/- would be the income of the assessee in such year, which would be accounted for in that year alone. Similar would be the position in the next two years of extended warranty period. 13 It is the case of the assessee that for all the previous years prior to the assessment year 2009-10, the same method of accountancy had been followed by the assessee, and had throughout been accepted by the Department. It is contended on behalf of assessee that in its return of income for the relevant assessment year 2009-10 (as well as previous years also), certain amounts have been shown as current year sales, which were deferred in the books of earlier years for future amortization, which have been accepted in the assessment year 2009-10 and also in all previous years. 15 14 In the light of the aforesaid facts and the submissions made by learned counsel for parties, the questions which are required to be answered, would be as under:
1. Whether there was reason to believe for the Assessing Officer that any income chargeable to tax had escaped assessment and thus to issue notice dated 27.3.2014 under section 148 of the Act?. 2 Whether the reasons assigned by the Assessing Officer, communicated to the assessee on 25.4.2014, would satisfy the criteria for reopening the concluded assessment under section 147 of the Act for the assessment year 2009-10?. 3 Whether the Assessing Officer was right in rejecting the objections of the assessee given to the reasons assigned for reopening by passing the order dated 24.2.2015?. 15 For the purpose of deciding this case, the relevant provisions of the Income Tax Act, 1961 would be Section 145 (Method of accounting), Section 145A (Method of accounting in certain cases), Section 147 (Income escaping assessment) and Section 148 (Issue of notice where income 16 has escaped assessment) For ready reference, the said Sections are reproduced below: S.145: Method of account (1) Income chargeable under the head ‘Profits and gains of business or profession’ or ‘Income from other sources’ shall, subject to the provisions of sub- section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. (2) The Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assesses or in respect of any class of income. (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144. S.145A: Method of accounting in certain cases Notwithstanding anything to the contrary contained in section 145 – (a) the valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head ‘profits and gains of business or profession’ shall be – (i) in accordance with the method of accounting regularly employed by the assessee; and 17 (ii) further adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation. Explanation – For the purposes of this section, any tax, duty cess or fee (by whatever name called) under any law for the time being in force, shall include all such payment notwithstanding any right arising as a consequence to such payment; (b) received by an assessee on compensation or on enhanced compensation, as the case may be, shall be deemed to be the income of the year in which it is received. S.147: Income escaping assessment interest to to income chargeable If the Assessing Officer has reason to believe that any tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other tax which has escaped income chargeable assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year) Provided that where an assessment under sub- section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to 18 for his assessment, for make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary that assessment year. Provided further that nothing contained in the first proviso shall apply in case where any income in relation to any asset (including financial interest in any entity) located outside India, chargeable to tax, has escaped assessment for any assessment year. Provided also that the Assessing Officer may assess or reassess such income, other than the income involving matters which are the subject matters of any appeal, reference or revision, which is chargeable to tax and has escaped assessment. Explanation 1 – Production before the Assessing Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of the foregoing proviso. 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) Where no return of income has been furnished by the assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded is not chargeable to income tax; (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 the maximum amount which 19 assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return; (ba) Where the assessee has failed to furnish a report in respect of any international transaction which he was so required under section 92E; (c) Where an assessment has been made, but – to tax has been income chargeable (i) underassessed; or (ii) such income has been assessed at too low a rate; or (iii) such income has been made the subject of excessive relief under this Act; or (iv) excessive loss or depreciation allowance or any other allowance under this Act has been computed; (d) Where a person is found to have any asset (including financial interest in any entity) located outside India. Explanation 3 – For the purpose of assessment or reassessment under this section, the Assessing Officer may assess or reassess the income in respect of any issue, which has escaped assessment, and such issue comes to his notice subsequently in the course of this section, notwithstanding that the reasons for such issue have not been included in the reasons recorded under sub-section (2) of section 148. Explanation 4 – For the removal of doubts, it is hereby clarified that the provisions of this section, as amended by the Finance Act, 2012, shall also be the proceedings under 20 applicable for any assessment year beginning on or before the 1st day of April, 2012. S.148: Issue of notice where income has escaped assessment. (1) Before making the assessment, reassessment or recomputation under section 147, the Assessing Officer shall serve on the assessee a notice requiring him to furnish within such period as may be specified in the notice, a return of his income or the income of any other person in respect of which he is assessable under this Act during the previous year corresponding to the relevant assessment year, in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed; and the provisions of this Act shall, so far as may be, apply accordingly as if such return were a return required to be furnished under section 139: Provided …….. Provided further ….. (emphasis supplied) 16 The communication dated 25.4.2014 of the Assessing Officer, by which the reasons for reopening were communicated to the assessee, is reproduced below: the ASSESSMENT YEAR200910 “During the course of assessment proceedings for the assessee company was requested to reconcile sales as per sales tax return and the sales declared in income tax return. It was submitted by the company on 22-2-2014. the reconciliation statement is placed on record. The sales as per sales return was register and sales tax 21 a and sum Rs.3185,47,04,713/- of Rs.81,26,94,037/- was further added as service income not included in VAT return. On this various adjustments were made to reach the net revenue of Rs.3110,85,96,000/-. One of the reduction was Rs.216,89,00,773/- as smart debits deferred revenue account. the schedule of other liabilities further breakup of smart debits deferred revenue account was given as under: In Rs.58,23,47,873 Deferred revenue account – Short term deferred revenue warranty- SnP deferred revenue ST- Short term deferred revenue- Rs.31,97,04,229/- Deferred revenue – Long term deferred revenue- Rs.90,75,75,789/- SnP deferred revenue LT – Long term deferred revenue- Rs.35,95,76,044/- All the deferred revenue accounts were totaling into Rs.216,92,03,935/-. The deferred revenue in the reconciliation statement and the deferred revenue in the balance sheet – other liabilities were more or less same. Such amount deferred in the ASSESSMENT YEAR200910 was not added while computing total income for the relevant assessment year on the ground that the company might have admitted the sale in the subsequent assessment year. The revenue deferred in the AY200910 yet (ought) to have been admitted in the AY201011. however, it was not offered to tax even in subsequent assessment year. While concluding the assessment proceedings for AY201011 similar reconciliation between sale of 22 goods as per sales tax return and sale of goods as per income tax return as been requested. Such reconciliation statement as been furnished by the assessee company and it is also analyzed and placed as annexure 1 & 2 to the assessment order passed for the AY201011. On the examination of the reconciliation statement it is noticed that the smart debits deferred revenue account of Rs.216,89,00,773/- deferred in the AY200910 was not admitted for sales in AY201011 also. Hence I have the reason to believe that income of Rs.216,89,00,773/- chargeable to tax as escaped the assessment for the AY200910 as per section 147 of the IT Act.” (emphasis supplied) 17 The order dated 24.2.2015 passed by the Assessing Officer, whereby the objections filed by the assessee to the reasons for reopening were rejected, is reproduced below: “Your letter contesting the reasons of re-opening which was communicated to you vide letter dated 25.4.2014 is dismissed for the following reasons:
1. It was seen that amount deferred in the AY200910 totaling Rs.216,89,00,773/- was not offered to tax in subsequent year i.e., AY2010 11. In your submission you have not been able to convincingly demonstrate that the above said 23 amount was offered to tax in AY201011. The table in the submission does not show it. 2 Re-opening u/s 148 in your case for the AY200910 is not based on a mere change of opinion but is based on the fact an amount of Rs.216,89,00,773/- which was deferred in AY200910 has not been offered in the subsequent assessment year. 3 Regarding deferment of revenue, the DRP in its order for AY201011 has upheld the stand taken by the Assessing Officer that such deferral may work against revenue not just because it is not permitted under the IT Act but also because TDS credit is claimed in full in the year in which revenue accrues. It is also possible as in the present case that the company may not offer such amount to tax. Therefore, your objection relating to re-opening u/s 148 for the AY200910 is hereby dismissed. You are requested to meet the undersigned on or before 2.3.2015 for reassessment proceedings for AY200910.” 18 From the reasons so recorded by the Assessing (emphasis supplied) Officer for reopening the assessment, what we notice is that it is not that the Assessing Officer, while passing the assessment order for the assessment year 2009-10, had not noticed the ‘Smart Debit Deferred Revenue Account’ method followed by the assessee, as in the reasons itself, it is mentioned that the reduction of Rs.216,89,00,773/- was 24 given on account of such accounting system maintained by the assessee. Thereafter, Assessing Officer proceeds to state that ‘such amount deferred in the assessment year 2009-10, was not added while computing total income for the relevant assessment year on the ground that the company might have admitted the sale in the subsequent assessment year’. From the above, it would be clear that the Assessing Officer, while passing the assessment order, was conscious of the accounting system followed by the assessee and had taken a decision that the deferred amount of Rs.216.89 crores was not to be added in the said assessment year but, according to the reasons provided for reopening the assessment, it was to be added in the subsequent assessment year i.e., 2010-11, which was not so added. 19 It was on such basis that the Assessing Officer, in his reasons, proceeds to state that ‘the revenue deferred in the assessment year 2009-10, ought to have been admitted in the assessment year 2010-11. However, it was not offered 25 to tax even in the subsequent assessment year’. On such basis, on finding that the accounts, as per Sales Tax return of the assessee did not reconcile with the accounts for sales as per the Income Tax return, it was concluded by the Assessing Officer that he had reason to believe that income assessable to tax had escaped assessment for the assessment year 2009-10. In the penultimate paragraph of the reasons recorded by the Assessing Officer, it has again been said that ‘the Smart Debit Deferred Revenue amount of Rs.216.89 crores which was deferred in the assessment year 2009-10, was not admitted for sales in the assessment year 2010-11 also’. 20 From the above, it is clear that firstly, while passing the assessment order for the assessment year 2009-10, the Assessing Officer had actually considered the accounting system maintained by the assessee; and secondly, the Assessing Officer had assumed that the deferred amount was to be subjected to tax in the subsequent assessment year i.e., 2010-11. 26 21 In the light of the same, we have to consider as to whether, even after having considering the accounting system as maintained by the assessee while passing the assessment order, when the Assessing Officer had given the benefit of deferred amount to be adjusted in subsequent year/s, would it or would it not amount to a ‘change of opinion’ of the Assessing Officer in issuing notice under section 148 of the Act by recording reasons to the effect that the same was not accounted for in the subsequent assessment year 2010-11; and also that in the order dated 24.2.2015 it has been stated that in the subsequent assessment year 2010-11, the Assessing Officer changed his opinion by rejecting/disallowing the deferment of revenue accounting system followed by the assessee. 22 What would amount to ‘change of opinion’ has to be primarily considered by this Court. Change of opinion is when the Assessing Officer has formed his opinion with regard to some issue or question while passing the assessment order and then, without any change of 27 circumstances or situation, he comes to a different conclusion or forms a different opinion with regard to the same issue or question. 23 From the assessment order for the assessment year 2009-10, what we notice is that in paragraph 9.1(2), the Assessing Officer has observed that “The assessee company was asked to reconcile the sales as per sales tax report and the sales as per the income tax report”. In the reconciliation statement a sum of Rs.216.89 crores was reduced on account of deferred revenue account and it was tallied with the deferred revenue break-up given under the head other liabilities”. 24 From the above, it is clear that the deferred revenue accounting system followed by the assessee was considered by the Assessing Officer for the assessment year 2009-10, and relief of deferring the amount received in the assessment year was consciously granted while passing the assessment order, meaning thereby, the ‘Smart Debit Deferred Revenue Account’ system maintained by the 28 assessee was considered and accepted for the assessment year 2009-10. 25 The submission of learned counsel for Revenue is that such observation was made by the Assessing Officer while considering the difference between Service Tax return and Income Tax return and hence, it cannot be presumed that the deferred revenue accounting system maintained by the assessee was accepted by the Assessing Officer with regard to the difference between Sales Tax return and Income Tax return also. It is his further contention that by rejecting the said system of accounting with regard to Service Tax return and Income Tax return, the presumption would be that the method of accounting maintained by the assessee was rejected by the Assessing Officer, as in the assessment order he has nowhere accepted such system of accounting in as many words. 26 Firstly, it would be wrong to say that the system of accounting of deferred revenue account maintained by the assessee was not considered by the Assessing Officer. It 29 was only after taking such accounting method into consideration that an amount of Rs.216.89 crores was deferred and reduced from the total sales amount of the assessee. Secondly, when the entire material had been placed by the assessee before the Assessing Officer at the time of the original assessment, the Assessing Officer applied his mind to that material and accepted the view canvassed by the assessee. Then, merely because he did not specifically state in the assessment order regarding acceptance of the accounting system of the assessee, that by itself, would not give a ground to conclude that such accounting system has been rejected, and therefore assessment needed to be reopened. 27 The Delhi High Court, in the case of Commissioner of Income Tax Vs Eicher Ltd – 2007 (294) ITR310(Delhi) [which has been affirmed by the Supreme Court in the case of Commissioner of Income Tax Vs Kelvinator of India Ltd – 2010 (320) ITR561(SC)]., has held that when the Assessing Officer accepts the accounting method maintained by the assessee, he is not to give reasons for 30 accepting the same. It is only when the Assessing Officer does not agree with the particular mode of accounting method followed by the assessee, that he has to give reasons for rejecting the same. 28 Section 145 of the Act also provide for an assessee to maintain ‘either cash or mercantile system of accounting regularly employed by the assessee’. The appellant/assessee followed the mercantile system of accounting, according to which ‘Smart Debit Deferred Revenue Account’ system is not only recognized, but was also always accepted method of accounting by the Assessing Officer up to assessment year 2009-10. For the assessment year 2010-11, the same was rejected by the Assessing Officer, which also is a subject matter of appeal, and such rejection has not become final. Even section 145-A of the Act permits an assessee to adopt such method of account which is regularly employed by the assessee. 29 For the assessment year in question, what we notice is that the accounts, as produced and maintained by the 31 assessee, as well as the method of accounting of the assessee, had been accepted by the Assessing Officer while passing the assessment order dated 31.1.2014 for assessment year 2009-10, and on accepting the same, the amount of Rs.216.89 crores which was treated as deferred amount, and thus excluded from the total sales, even though the same had been reflected in the return filed under the Sales Tax Act. The break-up given by the assessee with regard to the said amount was also accepted by the Assessing Officer while passing the assessment order. The ‘change of opinion’ was caused because of the assessment order passed for the assessment year 2010-11 where the ‘Smart Debit Deferred Revenue Account’ system followed by the assessee, had been rejected. The rejection of a system of accounting maintained by the assessee in a subsequent year cannot, in our view, be a reason for reopening an already concluded assessment. The same would be nothing but ‘change of opinion’ of the Assessing Officer, which cannot be a reason for reopening an already concluded assessment. 32 30 The second reason which has been assigned by the Assessing Officer for reopening the assessment is that the deferred amount ought to have been offered for tax in the subsequent assessment year 2010-11, and since the same was not done, the Assessing Officer states that he had reason to believe that income chargeable to tax, had escaped assessment. Firstly, if according to the Assessing Officer, deferred amount was to be subjected to tax in the subsequent assessment year 2010-11 and had not been so subjected by the assessee, Assessing Officer could then have added such amount in the subsequent assessment year 2010-11. The same would, however, not be a ground for reopening the assessment which had already been concluded. But, we have also to consider as to whether the assessee had at all offered, or anywhere stated, that the deferred amount would be subjected to tax in the very next assessment year. 31 The consistent case of the assessee has been that the deferred amount would be subjected to tax in such assessment year when the services have to be rendered by 33 the assessee against the warranty for such year. As we have already explained in the example given in paragraphs 11 and 12 hereinabove, the extended warranty would not necessarily be for the subsequent year itself but, in all probability, it would only be after the subsequent assessment year, as mostly the standard warranty itself would continue in the subsequent year. 32 Such accounting system having been followed by the assessee and accepted by the Revenue for the previous years also, what is to be seen is whether for the assessment year 2009-10, any such deferred amount from previous assessment years was subjected to tax or not. From the reconciliation of accounts which was filed by the assessee before the Assessing Officer on 18.12.2012 (Annexure C), deferred amount of Rs.114,86,96,273/- of the previous years has been added/included in the accounts for the assessment year 2009-10 under the head ‘current sales as deferred in books for future amortization’. This was the amount towards sales warranty which was deferred in the books of accounts of the assessee for earlier 34 years. The same has been accepted by the Assessing Officer. By accepting the same, the Revenue admits that some deferred amounts of the previous years had been included for the assessment year 2009-10 and thus, the amounts which were deferred in the assessment year 2009-10, would be adjusted in the subsequent years and not necessarily in the very next subsequent year 2010-11. 33 Now, we may revert back to the reasons assigned for reopening the assessment, which was communicated to the assessee on 25.4.2014, and the order passed by the Assessing Officer on 24.2.2015, which was after the assessee had given a detailed reply dated 9.5.2014. In the said reply, it was clearly stated that an amount of Rs.216.89 crores which had been invoiced in the current financial year or not included in the total sales amount, was on account of the actual system of accounting maintained by the assessee, which was recognized by the Revenue for previous years also. It was also categorically stated that an amount of Rs.114.86 crores was offered to tax in the assessment year 2009-10 from the deferred 35 amounts/receipts of previous assessment years, which was on the basis of the same accounting system. The accounting system maintained by the assessee was explained in the said reply in detail, and it was categorically stated that the reason for reopening of the assessment order was on account of ‘change of opinion’, as in the subsequent assessment year 2010-11, the accounting system of the assessee had been rejected by the Assessing Officer. In the objections filed by the assessee, the clear case was that the reason for reopening was merely because of such ‘change of opinion’, which could not be a valid reason for reopening the assessment. 34 By order passed by the Assessing Officer on 24.2.2015, rejecting the objections filed by the assessee, the objections of the assessee have not at all been considered. All that has been reiterated is that the amount of Rs.216.89 crores was not offered to tax in the subsequent assessment year 2010-11, without even considering that the assessee had never committed that the said amount would be subjected to tax in the 36 subsequent assessment year but had consistently maintained that the deferred amount would be subjected to tax in the year when the warranty was to be invoked. Such explanation was given in the reply filed by the assessee, but not considered. Though in the order it is mentioned that for the assessment year 2010-11 the Assessing Officer, as also the DRP, had rejected the accounting system as maintained by the assessee, yet the question of ‘change of opinion’, as had been raised by the assessee in its objections, was not considered at all but has been brushed aside by stating that ‘it is not based on a mere change of opinion but is based on the fact an amount of Rs.216,89,00,773/- which was deferred in assessment year 2009-10 has not been offered in the subsequent assessment year’. 35 In support of his submission that the accounting system, as maintained by the assessee, is a recognized system of accounting, learned counsel for the assessee/appellant has relied on the decision of the Punjab & Haryana High Court in the case of Commissioner of 37 Income Tax Vs Punjab Contractors Co-operative Multi- purpose Society Ltd – 1997 (234) ITR105wherein , while considering a case on similar facts, it has been held that ‘in a case of rendering of service, income would accrue at the time of such rendering’ and that receipt, by itself, would not be sufficient to attract tax and further that every receipt by the assessee is not necessarily income in his hands and that it bears the character of income at the time when it accrues in the hands of the assessee and becomes exigible to tax. While considering the same system of accounting as had been maintained by the assessee herein, the Punjab & Haryana High Court observed that the ‘assessee did not become the owner of the amount and could not appropriate it till service was rendered in lieu of which it was received in advance’. The view so taken by the Punjab & Haryana High Court has been affirmed by the Madras High Court in the case of Commissioner of Income Tax Vs Coral Electronics (P) Ltd – (2005) 142 Taxman 481. 38 36 It has, thus, been contended on behalf of the appellant that once an accounting system, duly recognized by two High Courts, was being followed by the assessee and had also been accepted by the Revenue in all previous years (and for the current assessment year also the same had been accepted by the Assessing Officer), then subsequent reopening of a concluded assessment order on such ground would be nothing but a ‘change of opinion’. Such submission of learned counsel for appellant, has force. 37 A Division Bench of this Court in the case of Commissioner of Income Tax Vs M/s Hewlett – Packard (ITA652014) decided on 14.8.2015 has considered the question of ‘change of opinion’ while reopening an assessment under Section 147/148 of the Act. It was observed that while passing the assessment order, ‘the Assessing Officer has gone into the question of excluding the sum of Rs.38,51,45,781/- from the export turn over on the ground that it was expenditure incurred in foreign exchange for providing technical services outside India’ and that the 39 plea of the assessee had been accepted by the Assessing Officer, then in such facts, it was held that ‘the reopening of the assessment was by change of opinion’ on the ground that ‘eligibility of the income derived from rendering technical services abroad to be eligible for deduction under Section 10A or not had already been considered by the Assessing Officer’. In the case at hand also, while passing the assessment order for the assessment year 2009-10, the Assessing Officer had considered the ‘Smart Debit Deferred Revenue Account’ method followed by the appellant/assessee and accepted the same, and hence reopening of the assessment on the ground that such method of accounting was not acceptable because the same has been rejected for the assessment year 2010-11, would be nothing but ‘change of opinion’, which cannot be a ground for reopening. 38 In the above decision of Hewlett-Packard (supra), while observing that “such ‘reason to believe’ cannot be based on a mere change of opinion”, the Division Bench 40 further held that “the Assessing Officer does not have jurisdiction to review his own order. The power of rectification of mistakes conferred on the Assessing Officer is circumscribed by the provisions of Section 154 of the Act”. As such, we are of the view that power to reassess under Section 147/148 is not the same as power to review or rectification of mistakes, which power can be exercised only under Section 154 of the Act. 39 Accordingly, in the facts of this case and for the reasons given hereinabove, we are of the opinion that there was neither ‘reason to believe’ for the Assessing Officer to issue notice under Section 148 of the Act for reopening the concluded assessment for the assessment year 2009-10, nor the reasons assigned by the Assessing Officer would satisfy the criteria for reopening the concluded assessment under Section 147 of the Act. We are also of the opinion that the Assessing Officer was not right in rejecting the objections of the assessee given to the reasons assigned for reopening, by passing the order dated 24.2.2015. 41 40 At this stage, Sri K V Aravind, learned counsel for the Revenue has submitted that when in the original assessment, income liable to tax has escaped assessment due to oversight and inadvertence or a mistake committed by the Assessing Officer, the Assessing Officer would have jurisdiction to reopen the original assessment, as has been held by another Division Bench of this Court in the case of Commissioner of Income Tax Vs Rinku Chakraborthy 2011 (242) CTR425 In the said case, it has been held that ‘where in the original assessment the income liable to tax has escaped assessment due to oversight and in advertence or a mistake committed by the ITO, the ITO has the jurisdiction to reopen the original assessment. It is not necessary that for such reopening of such assessment the information is to be derived from external source of any kind or disclosure of new and important matters subsequent to the original assessment. Even if the information is obtained from the record of the original assessment after a proper investigation from the materials on record or the facts disclosed thereby or from any enquiry or research into facts or law, reassessment is permissible. Income may escape 42 assessment as a result of lack of vigilance of the ITO or due to perfunctory performance of his duties without due care and caution. Even in a case where a return has been submitted to the ITO who erroneously fails to tax a part of the assessable income, it is a case of the said part of the income as having escaped assessment and the AO has jurisdiction under s.147 to reopen the assessment and bring to tax the income that has escaped assessment. A taxpayer cannot be allowed to take advantage of any of those lapses, as ultimately if such a advantage is allowed, it would be prejudicial to the interests of the Revenue and public interest’. 41 Learned counsel for the Revenue has thus submitted, that even if there was an oversight or mistake by the Assessing Officer, the same would be sufficient ‘reason to believe’ for the Assessing Officer to reopen the assessment, as no advantage can be taken by the assessee because of an oversight or mistake committed by the Assessing Officer. 43 42 This judgment of the Division Bench of this Court in the case of Rinku Chakraborty (supra) was passed after placing reliance on the judgment in the case of Kalyani Mavji & Co., Vs Commissioner of Income Tax – (1976) 102 ITR287wherein, the Apex Court, while dealing with a case under Section 34(1)(b) of the old Income Tax Act, 1922, had held that: “On a combined review of the decisions of this Court, the following tests and principles would apply to determine the applicability of Section 34(1)(b) to the following categories of cases:
1. ……… 2 Where in the original assessment the income liable to tax has escaped assessment due to oversight, inadvertence or a mistake committed by the ITO. This is obviously based on the principle that the taxpayer would not be allowed to take advantage of an oversight or mistake committed by the taxing authority; 3 …….. 4 …….. If these conditions are satisfied then the ITO would have complete jurisdiction to reopen 44 the original assessment. It is obvious that where the ITO gets no subsequent information, but merely proceeds to reopen the original assessment without any fresh facts or materials or without any enquiry into the materials which form part of the original assessment, s.34(1)(b) would have no application.” 43 It is noteworthy that the above aspect of law, as has been held in the case of Kalyanji Mavji (supra), is no longer good law because in a subsequent decision of the Supreme Court, in the case of Indian & Eastern Newspaper Society Vs Commissioner of Income Tax – 1979 (119) ITR996 the Apex Court has held as under: “Now, in the case before us, the ITO had, when he made the original assessment, considered the provisions of S.9 and 10. Any different view taken by him afterwards on the application of those provisions would amount to a change of opinion on material already considered by him. The revenue contends that it is open to him to do so, and on that basis to reopen the assessment under s.147(b). 45 Reliance is placed on Kalyanji Mavji & Co. V CIT (1976) 102 ITR287SC), where a Bench of two learned Judges of this court observed that a case where income had escaped assessment due to the “oversight, inadvertence or mistake” of the ITO must fall within S.34(1)(b) of the Indian I T Act, 1922. It appears to us, with respect that the proposition is stated too widely and travels farther than the statute warrants in so far as it can be said to lay down that if, on reappraising the material considered by him during the original assessment, the ITO discovers that he has committed an error in consequence of which income has escaped assessment, it is open to him to reopen the assessment. In our opinion, an error discovered on a reconsideration of the same material (and no more) does not give him that power. That was the view taken by this Court in Maharaj Kumar Kamal Singh V CIT (1959) 35 ITR1(SC), CIT V A Raman and Co. (1968) 67 ITR11(SC) and Bankipur Club Ltd V CIT (1971) 82 ITR831(SC) and we do not believe that the law has since taken a different course. Any observations in Kalyanji Mavji & Co. V CIT (1976) 102 ITR287(SC) suggesting the 44 46 contrary do not, we say with respect, lay down the correct law”. (emphasis supplied) In this regard, Sri Percy Pardiwalla, learned Senior counsel appearing for the appellant has submitted, that this Court in the recent case of Hewlett Packard (supra), has clearly held that ‘reason to believe’ cannot be based on mere ‘change of opinion’ and thus, the said judgment lays down the correct law; and that the present case would also be a case of ‘change of opinion’, which cannot form basis of reopening a concluded assessment. 45 What we notice is that neither in the case of Rinku Chakraborthy (supra) nor in the case of Hewlett Packard (supra), have the Division Benches of this Court considered the decision of the Supreme Court in the case of Indian & Eastern Newspaper Society (supra). In the later decision of Hewlett Packard (supra), even the Supreme Court’s decision in the case of Kalyanji Mavji (supra) or the earlier Division Bench decision in the case of Rinku Chakraborthy (supra), have also not been considered. 47 46 As we have already observed hereinabove, we are prima facie of the opinion that the case in hand would be a case of ‘change of opinion’. Even if it was a case where the Assessing Officer had, by mistake, oversight or consciously not included the amount of Rs.216.18 crores as taxable income in the assessment year in question, whereby the income chargeable to tax is now said to have escaped assessment, then too, in view of the decision in the case of Hewlett Packard (supra), the assessment could not be reopened under Sections 147/148 of the Act, but the mistake could only be rectified under Section 154 of the Act. However, since a different view has been taken by a co-ordinate Bench of this Court in the case of Rinku Chakraborthy (supra) and we are unable to persuade ourselves to follow the said opinion, judicial discipline would require that the question of law placed before us be referred to a larger Bench for its decision. 47 In the aforesaid facts, we have no option but to request the Hon’ble Chief Justice to refer this matter for 48 consideration of a larger Bench, on the following questions of law:
1. Whether the Division Bench judgment in the case of Commissioner of Income Tax Vs Rinku Chakraborthy (2011) 242 ITR425lays down good law?. 2 Whether the judgment in the Rinku Chakraborthy (supra) is per incurium in view of the fact that it relies upon the judgment of the Apex Court in the case of Kalyani Mavi & Co. Vs Commissioner of income Tax 1976 CTR85 which has been specifically overruled by the Apex Court in the case of Indian & Eastern Newspaper Society Vs Commissioner of Income Tax (1979) 110 ITR996 3 Whether ‘reason to believe’ in the context of Section 147 of the Income Tax Act can be based on mere ‘change of opinion’ of the Assessing Officer?. 49 Let the papers be placed before the Hon’ble Chief Justice for appropriate orders. Sd/- Judge Sd/- Judge An