Akil Abdul Hamid Kureshi, J
1. Heard learned counsel for final disposal of the petition. The petitioner has challenged the notice dated October 17, 2011, issued by the Assessing Officer for reopening the assessment for the assessment year 2008-09. Such notice was thus issued within a period of four years from the end of the relevant assessment year. The petitioner was supplied reasons recorded for issuing such a notice. Such reasons read as under :
Assessment year 2008-09.
Reasons recorded for issue of notice under section 148.
Section 145 of the Income-tax Act, 1961, provided that the income chargeable under the head 'Profits and gains of business or profession' shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.
The assessee-company, a cellular service provider in the State of Gujarat, filed its return of income for the assessment year 2008-09 on August 29, 2008, declaring a total income of Rs. 5,155 and book profit of Rs. 6,28,89,90,200 under section 115JB of the Income-tax Act. The income was assessed at Rs. 8,99,14,61,917 under the normal provisions of the Act and Rs. 6,31,71,70,249 under the special provisions (section 115JB) under section 143(3) of the Income-tax Act on December 30, 2010.
The assessee-company followed the mercantile system of accounting. Schedule 11, current liabilities of the balance-sheet, reflected an amount of Rs. 123,96,00,000 as "advance income". The business of cellular service caters to mainly two category of customers, i.e., post-paid customers and pre-paid customers. Post-paid customers were billed periodically. However, as far as the pre-paid services was concerned, customers in this category were required to pay for the service in advance by purchase of 'recharges'. The advance paid was nonrefundable even if the service could not be ultimately utilized by the customer. Even where such customer opts to cancel using the assessee's service, the unutilized balance was not refundable. Thus, the amount paid for pre-paid service was for outright purchase of 'recharges' and not an advance to be appropriated against future use of the service. The customer derives the absolute right to utilize the service. Thus, the income from 'pre-paid services' crystallizes as soon as the customer makes payment. The right to receive the income vests with the assessee as soon as the 'recharges' are purchased by the customers. The hon'ble Supreme Court in the case of CIT v. Askok-bhai Chimanbhai  56 ITR 42 (SC) held that the income accrues when the assessee acquire right to receive it since followed the mercantile system of accounting, income accrues with receipt as the same is not refundable and it cannot be considered as advance income.
It was further noticed that from paragraph 5 of the assessment order that the Assessing Officer has disallowed corresponding expenses incurred for earning the advance income. The disallowance of expen
Please Login To View The Full Judgment!
iture worked out to Rs. 1,08,00,000 on proportionate basis (cost of goods + marketing, sales and distribution expenses x advance income, total sales).Since the assessee received money in advance income towards prepaid charges which is not refundable, such receipts are required to be treated as income and not advance income. This has resulted in underassessment of income to the extent of Rs. 122,88,00,000 (123.96 crores less Rs. 1.08 crores) on which short levy of tax worked to Rs. 55,54,99,929 (tax Rs. 41,76,69,120 + interest of Rs. 13,78,30,809) under section 234B of the Income-tax Act. In view of the above, I have reasons to believe that income chargeable to tax has escaped assessment within the meaning of section 147 of the Act.2. The petitioner raised detailed objections to the reopening of the assessment under communication dated May 14, 2012. In such objections, basing heavy reliance on the decision of the apex court in case of CIT v. Kelvinator of India Ltd. reported in  320 ITR 561 (SC), the petitioner contended that the original assessment having been framed after the scrutiny in which the claim in question having been examined by the Assessing Officer, any reopening at this stage would only amount to change of opinion.3. The respondent-Assessing Officer, however, rejected such objections vide his order dated November 16, 2012. The petitioner has, therefore, filed this petition challenging the notice for reopening the assessment.3.1 Since the assessment sought to be reopened within a period of four years from the end of the relevant assessment year, the crucial question is whether in the original assessment, such claim was examined by the Assessing Officer and that, therefore, any reconsideration of such an issue would only amount to permitting the Assessing Officer to change his opinion. We may record that the counsel for the petitioner did not argue that even the reason recorded lack validity. A short inquiry of the court, therefore, has been whether in the original assessment, the claim on the basis of which notice for reopening has been issued, was examined.4. Before taking note of the materials that came on record perusing the original assessment proceedings, we may analyse the reasons recorded by the Assessing Officer for reopening the assessment. Such reasons suggest that the petitioner, who is in the business of providing cellular services, caters to two categories of customers one of them being pre-paid service recipients. Such customers make advance payment while purchasing recharge. Such advance is non-refundable; even if the service is not ultimately utilized by the customer, if the customer opts to cancel the service, the balance would not be refundable. Thus, the amount paid for such prepaid service at the time of purchase of recharge is not an advance which could be appropriated against future use of service but the income crystallized as soon as the payment was made by the customer. On such basis, the Assessing Officer formed a belief that the income chargeable to tax has escaped assessment.5. During the assessment, the Assessing Officer raised certain queries to the assessee on December 15, 2010. He, on the office-note, recorded as under:Shri Diren Shah, authorised representative of the assessee from S. R Batliboi and Co., appeared. He is asked to furnish the details of advance income (as shown in the balance-sheet) and the corresponding expenditure incurred upon it. Case discussed.6. In response to such a query, the petitioner supplied a detailed explanation under communication dated October 24, 2010, the relevant portion of which reads as under :We refer to the ongoing scrutiny assessment proceedings for the subject assessment year and our time to time discussions in this regard.During the course of the assessment proceedings your goodself required us to show cause why expenses incurred in relation to the advance income should not be disallowed while finalizing the assessment proceedings.In connection with the above, on behalf of and under the instructions of our above named client, we wish to submit as under :1. The assessee is engaged in the business of providing cellular telecommunication services in the State of Gujarat. In accordance with the mercantile system of accounting, based on the generally accepted Companies Act, 1956, and the provisions of section 145 of the Act, the basis of actual usage of its network by the customer. Thus, revenue is recognized only when the customer actually uses the network of the company and services are actually rendered to the customers. Hence, incomes received in respect of which services are not rendered during the year are accounted for in the balance-sheet as advance income.2. Under the accounting parlance, there are generally two types of expenses, viz., fixed and variable which are incurred. Fixed costs are not linked to revenue and would be incurred whether or not a person undertakes any sale or renders any service. Examples of fixed costs could be depreciation, insurance, salaries, employee expenses, etc., Thus, fixed expenses are incurred irrespective of rendering of any services. On the other hand, variable expenses are directly linked to the level of activities, i.e., expenses with the increase of activity and vice versa. Examples of variable costs could be like IUC charges, license fees, etc.Thus, in the given case, fixed expenses are incurred irrespective of telecommunication services rendered to the customers. While variable expenses like licence fees, IUC charges, roaming expenses are directly linked with rendering of services and may be at variance with the increase/decrease with rendering of actual services. It is submitted that the expenses in respect of licence fees, IUC charges, roaming expenses and WPC charges are accounted for on a matching concept basis with rendering of services and, hence, nothing has been accrued and accounted for the income received in advance as no services are rendered to the customers. In view of the same no disallowing is required to be made while finalizing the assessment proceedings....Thus, based on the above classification, majority of expenses incurred by the assessee are fixed in nature and are not dependent on the rendering of services. Further, variable expenses are directly rentable to rendering of telecommunication services are not incurred unless telecommunication services are actually provided by the assessee and, hence, not charged to the profit and loss account. Thus, the company follows the matching principles and the generally accepted accounting principles.In view of the above, it is humbly submitted that VEGL has not incurred any expenditure towards advance income and, hence, no adjustment is required to be made while finalizing the assessment proceedings for the year under consideration.7. The Assessing Officer passed his order of assessment on December 30, 2010. It is a detailed order discussing various issues arising out of the return filed by the petitioner. With respect to the expenditure relating to advance income, the Assessing Officer opined as under :5.4 Disallowance of expenditure with respect to advance income :5.5 Upon going through the details furnished by the assessee it was noticed that an amount of Rs. 123.96 crores was shown as advance income that had been shown as a current liability. The consumers buy the recharge coupons in the month of March of the year. It happens, and it usually does, that the entire amount of recharge coupon is not utilized during the month. The amount not utilized during the month is, therefore, carried over to the succeeding months. The assessee in its books recognizes these as current liabilities, as the corresponding services are to be offered in the next financial year. These question that now arises for determination is whether the corresponding expenditure incurred upon the advance income is required to be allocated to the different years or not. As per the accounting standards and the position of law, there has to be a matching concept in so far as the income and expenditure are concerned. Only that amount of expenditure is required to be allowed as is relatable to the income of the assessee. The expenditure not relatable to the earning of the income naturally has to be allowed in the year in which the corresponding income is offered to tax.5.6 The heads with respect to the expenditure attributable to advance income are mainly the 'cost of goods sold' and 'marketing, selling and distribution expenses'. The assessee was accordingly asked to show cause as to why the corresponding expenditure relatable to the advance income, shown in the books as a current liability and likely to be offered to tax in the next year, should not be disallowed. The assessee, vide letter dated December 24, 2010, has furnished its reply. The reply is reproduced below for ready reference :These are expenses incurred in relation to purchase of preprinted sim cards and recharge coupons. Sim cards are charged off to the revenue as and when the same has been activated by the customers and the same is not linked with rendering of services....Marketing, sales and distribution expenses. These expenses include expenses towards marketing, business and sales promotion and other selling and distribution expenses. These expenses are incurred for generating sales and (are) not variance with the services rendered ....5.7 The reply of the assessee has been considered. As far as the issue of sim card is concerned the same is not found acceptable. The sim cards cannot be activated in a vacuum. For the usage of sim card, recharge is required. Without any balance in the sim, the consumer cannot avail of the facility of the services provided by the assessee. Therefore, the contention of the assessee that the same is not related to the rendering of the services cannot be accepted. The same principle and in fact with more vigour, would be applicable to the recharge coupons. Similarly, in the case of marketing, sales and distribution expenses, there has to be a proper allocation of expenditure spread over in the years in which the revenue is recognized. It cannot be that although the expenditure has been claimed in this year, the revenue earned from it is offered to tax in the next years. Similarly if the revenue is recognized in the current year, the corresponding expenditure only, and not some other expenditure, has to be claimed. Reliance in this regard can be placed upon the decision of the hon'ble Bombay High Court in the case of Taparia Tools Ltd. v. Joint CIT  260 ITR 102 (Bom) wherein the hon'ble High Court has explained the concept in the following words (page 116) :Under this matching concept, the revenue and income earned during an accounting period, irrespective of actual cash in-flow, is required to be compared with expenses incurred during the same period, irrespective of actual out-flow of cash. In this case, the assessee is following the mercantile system of accounting. This matching concept is very relevant to compute the taxable income.5.8 The allocation in the absence of any specific details furnished by the assessee would have to be done upon a proportionate basis, i.e., the amount of advance income shown as a percentage of the income from operations. The working of the proportionate disallowance is worked out as under.Cost of goods sold (in crores).... 6.69(123.96/1875.99)=44 croresMarketing, sales and distribution expenses (in crores)-(3.75+ 6.08)(123.96/1875.99) = 64 crores5.9 A disallowance of Rs. 1,08,00,000 is, therefore, made out of the expenditure claimed on cost of goods sold and marketing, sales and distribution expenditure. Disallowance of Rs. 1,08,00,000.As the assessee has furnished inaccurate particulars of income penalty proceedings under section 271(1)(c) is being initiated separately.8. This being a case of reopening within a period of four years from the end of the relevant assessment year, it would be useful to take note of some of the judicial pronouncements touching on the aspect of power of the Assessing Officer to do so.8.1 In the case of CIT v. Kelvinator of India Ltd. reported in  320 ITR 561 (SC), the apex court held and observed as under (page 564) :On going through the changes, quoted above, made to section 147 of the Act, we find that, prior 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 1st April, 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 1st April, 1989, power to reopen is much wider. However, one needs to give a schematic interpretation to the words 'reasons 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. 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 preconditions 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. 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 1st April, 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 'reasons 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 'reasons 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.9. The question, under which circumstances, the Assessing Officer can be stated to have formed a opinion in the original assessment came up for consideration before the Division Bench in the case of Gujarat Power Corporation Ltd. v. Asst. CIT reported in  350 ITR 266 (Guj). Various issues were examined. Whatever is relevant for our purpose is that the Revenue had contended that if in the original assessment proceedings, the Assessing Officer raised certain queries, thereafter if he did not to make any disallowances or additions on such issue without assigning any reason in the assessment order, the Assessing Officer cannot be stated to have formed an opinion which he cannot later on change within four years from the end of the relevant assessment year. Such contention was not accepted. The court observed as under (pages 293, 295) :Coming to the second question, as recorded, contention of the petitioner is that as in the present case, once the Assessing Officer examines a certain claim of the assessee in the original assessment proceedings, raises queries, receives replies, but thereafter makes no additions or disallowances, without giving reasons, it would not be permissible to reopen the assessment even within four years on very same grounds. The contention of the Revenue is that in absence of any direct discussion in the assessment order, the Assessing Officer cannot be stated to have formed any opinion and that therefore, reopening within a period of four years of such an assessment would be permissible....Bearing in mind these conflicting interests, if we revert back to central issue in debate, it can hardly be disputed that once the Assessing Officer notices a certain claim made by the assessee in the return filed, has some doubt about eligibility of such a claim and, therefore, raises queries, extracts response from the assessee, thereafter in what manner such claim should be treated in the final order of assessment, is an issue on which the assessee would have no control whatsoever. Whether the Assessing Officer allows such a claim, rejects such a claim or partially allows and partially rejects the claim, are all options available with the Assessing Officer, over which the assessee beyond trying to persuade the Assessing Officer, would have no control whatsoever. Therefore, while framing the assessment, allowing the claim fully or partially, in what manner the assessment order should be framed, is totally beyond the control of the assessee. If the Assessing Officer, therefore, after scrutinizing the claim minutely during the assessment proceedings, does not reject such a claim, but chooses not to give any reasons for such a course of action that he adopts, it can hardly be stated that he did not form an opinion on such a claim. It is not unknown that assessments of larger corporations in the modern day, involve large number of complex claims, voluminous material, numerous exemptions and deductions. If the Assessing Officer is burdened with the responsibility of giving reasons for several claims so made and accepted by him, it would even otherwise cast an unreasonable expectation which within the short frame of time available under law would be too much to expect him to carry. Irrespective of this, in a given case, if the Assessing Officer on his own for reasons best known to him, chooses not to assign reasons for not rejecting the claim of an assessee after thorough scrutiny, it can hardly be stated by the Revenue that the Assessing Officer can not be seen to have formed any opinion on such a claim. Such a contention, in our opinion, would be devoid of merits. If a claim made by the assessee in the return is not rejected, it stands allowed. If such a claim is scrutinized by the Assessing Officer during assessment, it means he was convinced about the validity of the claim. His formation of opinion is thus complete. Merely because he chooses not to assign his reasons in the assessment order would not alter this position. It may be a non-reasoned order but not of acceptance of a claim without formation of opinion. Any other view would give arbitrary powers to the Assessing Officer.We are, therefore, of the opinion that in a situation where the Assessing Officer during scrutiny assessment, notices a claim of exemption, deduction or such like made by the assessee, having some prima facie doubt raises queries, asking the assessee to satisfy him with respect to such a claim and thereafter, does not make any addition in the final order of assessment, he can be stated to have formed an opinion whether or not in the final order he gives his reasons for not making the addition.9.1 It was of course also held that merely because certain materials which is otherwise tangible and enable the Assessing Officer to form a belief that income chargeable to tax has escaped assessment, form part of the original assessment record, per se would not bar the Assessing Officer from reopening the assessment on the basis of such material. The expression, "tangible material" does not mean material alien to the original record.10. Very similar conclusions were recorded by the Full Bench of the Delhi High Court in the case of CIT v. Usha International Ltd. reported in  348 ITR 485 (Delhi) [FB]. In the majority judgment, it was held and observed as under (page 496) :It is, therefore, clear from the aforesaid position that :(1) Reassessment proceedings can be validly initiated in case return of income is processed under section 143(1) and no scrutiny assessment is under taken. In such case there is no change of opinion.(2) Reassessment proceedings will be invalid in case of assessment order itself records that the issue was raised and is decided in favour of the assessee. Reassessment proceedings in the said cases will be hit by the principle of 'change of opinion'.(3) Reassessment proceedings will be invalid in case an issue or query is raised and answered by the assessee in original assessment proceedings but thereafter the Assessing Officer does not make any addition in the assessment order. In such situation it should be accepted that the issue was examined but the Assessing Officer did not find any ground or reason to make addition or reject the stand of the assessee. He forms an opinion. The reassessment will be invalid because the Assessing Officer had formed an opinion in the original assessment, though he had not recorded his reasons.11. Yet again, a Division Bench of the Bombay High Court in the case of Export Credit Guarantee Corporation of India Ltd. v. Addl. CIT reported in  350 ITR 651 (Bom), it was observed as under (page 658) :To hold that the Assessing Officer must be deemed to have accepted what he has plainly overlooked or ignored in the assessment order would be to stretch the interpretation of section 147 to a point where the provisions would cease to have meaning and content. Such an exercise of excision by judicial interpretation is impermissible. When an assessment is sought to be reopened within a period of four years of the end of the relevant assessment year, the test to be applied is whether there is tangible material to do so. What is tangible is something which is not illusory, hypothetical or a matter of conjecture. Something which is tangible need not be something which is new. An Assessing Officer who has plainly ignored relevant material in arriving at an assessment act contrary to law. It there is an escapement of income in consequence, the jurisdictional requirement of section 147 would be fulfilled on the formation of a reason to believe that income has escaped assessment. The reopening of the assessment within a period of four years is in these circumstances within jurisdiction.12. Bearing in mind the above principles, we may examine the facts more closely. In the original assessment the Assessing Officer asked the assessee to furnish details of advance income and the corresponding expenditure incurred. This query led to a detailed reply from the petitioner. The petitioner pointed out that the company is engaged in the business of providing cellular telecommunication services. It follows the mercantile system of accounting. According to such principles regularly followed by the petitioner, revenue is recognized only when the customer actually uses the network of the company and services are actually rendered to the customers. It was, therefore, clarified that the incomes received in respect of which services are not rendered during the year are accounted for in the balance-sheet as advance income. The assessee, thereafter, proceeded to explain that the expenditure relatable to such incomes would be available deduction during the year itself. We are not on the issue of validity of the petitioner's claim of not accounting income during the year in which payments were made. We are equally not on the validity of the Assessing Officer's finding in the assessment order that the expenditure for such income must be deferred and cannot be claimed in the year itself. What we, however, find is that the entire issue and the manner in which the assessee received the payment towards recharges and the treatment that the petitioner accords to such receipts was at large before the Assessing Officer. If the Assessing Officer was of the opinion that the accounting practice adopted by the petitioner to defer such receipts for treating it as its income only at the point of time when such talk time is utilized by the customers, it was certainly open for the Assessing Officer to do so, if the law otherwise permitted. In the assessment order that the Assessing Officer framed, no such attempt was made. In fact, the Assessing Officer addressed the issue from another angle. He, in his detailed reasoned order of assessment, gave reasons for disallowing expenditure relatable to such advance income. He concluded that the assessee in the books recognizes this expenditure as current liabilities but the corresponding services are to be offered in the next financial year. He, therefore held that, "the expenditure not relatable to the earning of income naturally has to be allowed in the year in which the corresponding income is offered to tax". He thus proceeded on the basis that the income in question would be taxed in the future years and that, therefore, expenditure relatable to such income cannot be a valid deduction in the current year.13. It was precisely in this background that for the reasons recorded, the Assessing Officer after disclosing his prima facie belief that the payments towards recharges would not be an advance but an accrued income, proceeded to state that in the assessment order corresponding the expenditure was disallowed which came to Rs. 1.08 crores on proportionate basis. He further stated that, "... Since the assessee received money in advance income towards pre-paid charges which is not refundable, such receipts are required to be treated as income and not advance income. This has resulted in underassessment of income to the extent of Rs. 122,88,00,000 (123.95 crores less Rs. 1.08 crores) on which short levy of tax worked to Rs. 55,54,99,929 (tax Rs. 41,76,69,120 + interest of Rs. 13,78,30,809 under section 234B of the Income-tax Act)."14. To our mind, the Assessing Officer having examined the nature of receipts and the corresponding expenditure in the original assessment, now cannot be permitted to change his view with respect to the nature of treatment such receipts must receive. To put it differently, the Assessing Officer made no additions on the count that the payments towards recharges were not advance but accrued income and made disallowances of the expenditure pro rata relatable to such income deferred by the assessee to be accounted for in the future years. In the reasons recorded, the Assessing Officer proposed to take exactly the reverse stand. He now contends that the payments towards recharges are not advance but accrued income and the disallowances of the expenditure was not justifiable and should be made available to the assessee. In light of the judgments noted above and the ratio laid down therein, bearing in mind the facts on record, we are of the opinion that the reopening of the assessment; even within four years in the present case, would not be permissible. In the result, the impugned notice is quashed. The petition is allowed.
"2013 (354) ITR 572" == "2013 (215) TAXMAN 412"