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VODAFONE WEST LTD. V/S ASSTT. CIT, decided on Monday, March 11, 2013.
[ In the High Court of Gujarat at Ahmedabad, Special Civil Application No. 16455 of 2012. ] 11/03/2013
Judge(s) : The Honorable Justice Akil Abdul Hamid Kureshi and The Honorable Justice Sonia Gokani
Advocate(s) : B.S. Soparkar and Saurabh Soparkar and Paurami B. Sheth
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    Sonia Gokani J1. Challenge is made in this petition preferred under Article 226 of the Constitution of India to the notice of reopening issued under section 148 of the Income Tax Act 1961 (hereinafter referred to as the Act) seeking to reopen the assessment of the petitioner for the assessment year 2007-2008.2. Brief facts necessary for appreciating the issue involved in this petition are as under:2.1 Petitioner herein is a limited company which filed its return of income for the assessment year under question on 30-10-2007 declaring its total income as Nil. On scrutiny the assessment had been framed by the respondent under section 143(3) of the Act on 29.12.2009.2.2 It is also averred in the petition that the reopening is proposed on two grounds 1) Income reflected as on Advance Income (Prepaid) was in fact for the outright purchase of Recharge by Prepaid Connection Customers and the same was not an advance to be appropriated against the future use of services and 2) Non-amortization of royalty paid to the Wireless Planning Commission of Government of India by treating the same as capital expenditure. Instead entire expenditure charged to P&L Account was allowed as deduction resulting into under assessment of income.2.3 It is the say of the petitioner that on issuance of notice under section 148 of the Act dated 7-3-2012 for reopening the assessment of the assessment year 2007-2008 the assessment is sought to be reopened on the very grounds which were already earlier scrutinized by the assessing officer as specific queries were raised under section 142(1) of the Act alongwith detailed questionnaires & therefore this notice is nothing but a change of opinion.2.4 On petitioners request reasons recorded for such reopening of assessment vide communication dated 02-5-2012 have been provided which are as follows:1. Section 145 of the Income Tax Act 1961 provide that the income chargeable under the head Profit and gains of business or profession shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.Assessee was a cellular service provider in the state of Gujarat. It followed mercantile system of accounting. Schedule 10: Current Liabilities of the Balance Sheet reflected an amount of Rs. 103 82 20 000 with narration Advance Income (Prepaid). The business of providing cellular service caters to mainly two category of customer i.e. Post paid customers and prepaid customers. Post paid customers were billed periodically. In Schedule 19: Significant Accounting Polices it was disclosed that where as per billing plan customers were billed in subsequent period income was offered on accrual basis. However as far as Prepaid Service was concerned customer in this category were required to pay for the service in advance by purchase of Recharges. The advance so paid was non-refundable even if the service could not be ultimately utilized by the customer. Even where such customer opts to cancel using assessees service the unutilized balance was not refundable. Thus the amount paid for prepaid service was for outright purchase of Recharge 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 Prepaid Service crystallizes as soon as customers make payment. The right to received the income vests with the assessee as soon as the Recharges are purchased by customers. The Honble S.C. held in CIT v. Ashokbhai Chimanbhai (56 ITR 42) that income accrues when assessee acquire right to receive it. Since assessee employed mercantile system of accounting income accrues with receipt and it cannot be considered as advance income. Accordingly the amount of Rs. 1038220000 treated by it as Advance Income (Prepaid) was liable to IT in current assessment year 2007-08 itself. Under assessment of income of Rs. 103 8220000 involves I.T. Tax effect of Rs. 4647.88 lakhs.2. Section 35ABB of the Income Tax Act 1961 provides for amortization of license fee paid to operate telecommunication services.The assessee company was engaged in the business of providing mobile telecom services in the state of Gujarat.In para 7 of the Assessment order the assessing officer disallowed the claim for deduction of Rs. 98 29 17 915 which was charged to the Profit & Loss account but considered the same for amortization by invoking the provisions of Section 35ABB. Accordingly one-eleventh of Rs. 982917915 was allowed as deduction.It was seen from Annexure 7 of assessees submission dated April 15 2009 under the heading Break up of Access & regulatory Charges that the assessee had charged Rs. 583898027 to the Profit & Loss account being royalty paid to Wireless Planning Commission of Govt. of India. This expenditure as stated by the assessee was in the nature of fee paid to Wireless Planning Commission as percentage of Revenue.It was further seen from Annexure 6 of assessees submission dated November 11 2009 (i.e. copy of agreement between telecom operators and Department of Telecommunication- para 19.3 Radio spectrum Charges) that in addition to license fee payable to the DOT the cellular licensees pay spectrum charges on revenue share basis of 2% of Adjusted Cost Revenue (AGR) towards WPC charges covering royalty payment for the use of cellular spectrum and License fee for Cellular Mobile handsets & Cellular Mobile Base Stations and also for possession of wireless telegraphy equipment as per the details prescribed by Wireless Planning & Coordination wing (WPC). Any additional band width if allotted subject to availability and justification shall attract additional License fee as revenue share.It was observed that although the license fee paid to the Department of telecommunication was disallowed and amortized and accordingly the deduction was limited to one-eleventh of the total expenditure the royalty charges (which includes license fee also) paid to WPC was not considered for amortization. Instead the entire expenditure of Rs. 583898027 as charged to the Profit & Loss account was allowed as deduction.This resulted in under assessment of income of Rs. 530816388 with impact on revenue to the extent of Rs. 23 76 34 818.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.2.5 Objections were raised against such notice of reopening which includes the ground that only on objection raised by the audit department such exercise is undertaken and assessing officer disposed of such objections vide order dated 16.11.20125 in toto and therefore the present petition.2.6 Affidavit-in-reply on due service of notice has been filed by the respondent inter-alia contending that challenge to the notice under section 148 of the Act must not fail in as much as reopening is sought beyond a period of four years when the assessing officer had reason to believe that income has escaped the assessment as the petitioner did not disclose fully and truly the material necessary for assessment. It is further contended in the said affidavit that it was not sufficient on the part of the assessee to produce the evidences it ought to have brought to the notice of the assessing officer uncovering embedded material. It is the say of the respondents that rejection of the objections raised by the petitioner was after proper verification and justification and reassessment proceedings are not initiated on the basis of change of opinion.3. Affidavit-in-rejoinder on behalf of the petitioner has also been filed contending therein that there is no failure on the part of the petitioner in disclosing all material facts fully and truly. According to the petitioner the reassessment proceedings are only on account of change of opinion based on audit objection and therefore completely without jurisdiction. It is further the say of the petitioner that the assessee is not required to assist the assessing officer in drawing legal inferences from the factual details. The assessing officer ought to have reasonably drawn the conclusion on the basis of facts presented before him.4. Learned Senior counsel Mr. Saurabh Soparkar appearing with learned counsel Mr. Bandish Soparkar for the petitioner-company has urged that it is a well settled law that if the assessing officer has not acted independently nor had a reason to believe that any income had escaped assessment and instead had acted on the basis of the audit objection exclusively such notice for reopening cannot be allowed to be proceeded with. He further urged that the grounds on which notice under section 148 of the Act has been issued were scrutinized by the assessing officer on petitioner having furnished the materials and after scrutinizing assessment under section 143(3) of the Act and therefore also this is nothing but a change of opinion on the part of the assessing officer. He relied on the decision of the Calcutta Discount Co. Ltd. v. ITO (1961) 41 ITR 191 (SC) and urged that the assessee is under no obligation to assist the assessing officer in drawing legal inferences. Cumulatively it was argued that this is nothing but a change of the opinion on the part of the assessing officer.5. Learned counsel Ms. Paurami Sheth for the revenue-department has urged this Court that this is not a mere change of opinion and reopening is valid as income has escaped the assessment on account of the act of the petitioner assessee who failed to disclose fully and truly the material facts. By a detailed discussion while rejecting objections to such reopening when the revenue has denied to entertain objections raised in this petition this petition requires no entertainment.6. Upon thus hearing both the sides before adverting to the facts of the instant case law on the subject requires some discussion at this stage.6.1 In case of CIT v. Lucas T.V.S. Ltd. =(2001) 249 ITR 306 (SC) notice of reopening was quashed in absence of any independent material except the information from the audit party.6.2 The Division Bench of this Court in case of Agricultural Produce Market Committee v. ITO (2012) 204 Taxman 22 (Guj.) quashed the notice for reopening when the only basis for such notice was audit objection.6.3 In case of Adani Exports v. Dy. CIT (1999) 240 ITR 224 (Guj.) the assessing officer did not hold the belief that income had escaped the assessment. His recording in a office note that he had reason to believe was found to be a mere pretension to give validity to the exercise of powers under section 147 of the Act. It was only on the basis of audit objections that the information was passed on to him that the income has escaped the assessment. This Court on the basis of the decision of the Supreme Court held that the audit objection may serve as information on the basis of which Income-tax Officer can act however ultimately his action must depend directly and solely on forming of his own belief that the income has escaped the assessment.6.4 This Court in case of Cadila Healthcare Ltd. v. Asstt. CIT (Special Civil Appeal No. 15566 of 2011 dated 14-12-2011) also reiterated this principle by holding thus:Under the circumstances it clearly emerges from the record that the assessing officer was of the opinion that no part of the income of the assessee has escaped assessment. In fact after the audit party brought the relevant aspects to the notice of the assessing officer she held correspondence with the assessee. Taking into account the assessees explanation regarding non-requirement of TDS collection and ultimately accepted the explanation concluding that in view of the Boards circular tax was not required to be deducted at source. No income had therefore escaped assessment. Despite such opinion of the assessing officer when ultimately the impugned notice came to be issued the only conclusion we can reach is that the assessing officer had acted at the behest of and on the insistence of the audit party. It is well settled that it is only the assessing officer whose opinion with respect to the income escaping assessment would be relevant for the purpose of reopening of closed assessment. It is of course true as held by the decisions of the Apex Court in the case of P.V.S. Beedies Pvt. Ltd. (supra) and Indian & Eastern Newspaper Society (supra) if the audit party brings certain aspects to the notice of the assessing officer and thereupon the assessing officer forms his own belief it may still be a valid basis for reopening assessment. However in the other line of judgment noted by us it has clearly been held that mere opinion of the Audit Party cannot form the basis for the assessing officer to reopen the closed assessment that too beyond four years from the end of relevant assessment year.6.5 Also in case of Jagat Jayantilal Parikh v. Dy. CIT (2013) 215 Taxman 444 (Guj.) this Court following the decision of the Cadila Healthcare Ltd. (supra) held notice of reopening invalid where independent application of mind of the assessing officer was found lacking in issuing notice of reopening. It was held as under:6. As is more than apparent assessment was completed on scrutiny. In post assessment period audit party raised the objection and assessing officer had strongly objected to such objections by communicating internally as mentioned hereinabove.7. In such background reasons for reopening if are noted they are almost identically worded as that of audit report. No material worth the name emerges to indicate any independent application of mind. Facts are quite glaring on the contrary & they clearly establish absence of subjective satisfaction of assessing officer. Thus the ground raised by the petitioner that such notice of reopening is invalid for the assessing officer having not formed his independent belief requires to be sustained.7. Therefore the moot question requiring consideration is as to whether the issuance of impugned notice is based on objection raised by audit party or it simply provided information leading to formation of belief by the assessing officer that the income assessable to tax has escaped the assessment on petitioner not having disclosed fully and truly all material facts.8. To verify this vital aspect the original file was called for from the department & it can be noted pertinently that the revenue had raised audit objections in respect of both the grounds proposed to be reopened. The gist of audit objections is reproduced hereinafter for better grasping of the issue:1. Section 145 of the Income Tax Act 1961 provide that the income chargeable under the head Profit and gains of business or profession shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.Assessee was a cellular service provider in the state of Gujarat. It followed mercantile system of accounting. Schedule 10: Current Liabilities of the Balance Sheet reflected an amount of Rs. 103 82 20 000 with narration Advance Income (Prepaid). The business of providing cellular service caters to mainly two category of customer i.e. Post paid customers and prepaid customers. Post paid customers were billed periodically. In Schedule 19: Significant Accounting Polices it was disclosed that where as per billing plan customers were billed in subsequent period income was offered on accrual basis. However as far as Prepaid Service was concerned customer in this category were required to pay for the service in advance by purchase of Recharges. The advance so paid was non-refundable even if the service could not be ultimately utilized by the customer. Even where such customer opts to cancel using assessees service the unutilized balance was not refundable. Thus the amount paid for prepaid service was for outright purchase of Recharge 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 Prepaid Service crystallizes as soon as customers make payment. The right to received the income vests with the assessee as soon as the Recharges are purchased by customers. The Honble S.C. held in CIT v. Ashokbhai Chimanbhai (56 ITR 42) that income accrues when assessee acquire right to receive it. Since assessee employed mercantile system of accounting income accrues with receipt and it cannot be considered as advance income. Accordingly the amount of Rs. 1038220000 treated by it as Advance Income (Prepaid) was liable to IT in current assessment year 2007-08 itself. Under assessment of income of Rs. 103 8220000 involves IT. Tax effect of Rs. 4647.88 lakhs.2. Section 35ABB of the Income Tax Act 1961 provides for amortization of license fee paid to operate telecommunication services.The assessee company was engaged in the business of providing mobile telecom services in the state of Gujarat.In para 7 of the Assessment order the assessing officer disallowed the claim for deduction of Rs. 98 29 17 915 which was charged to the Profit & Loss account but considered the same for amortization by invoking the provisions of Section 35ABB. Accordingly one-eleventh of Rs. 982917915 was allowed as deduction.It was seen from Annexure 7 of assessees submission dated 15-4-2009 under the heading Break up of Access & regulatory Charges that the assessee had charged Rs. 58 38 98 027 to the Profit & Loss account being royalty paid to Wireless Planning Commission of Govt. of India. This expenditure as stated by the assessee was in the nature of fee paid to Wireless Planning Commission as percentage of Revenue.It was further seen from Annexure 6 of assessees submission dated 11-11-2009 (i.e. copy of agreement between telecom operators and Department of Telecommunication- para 19.3 Radio spectrum Charges) that in addition to license fee payable to the DOT the cellular licensees pay spectrum charges on revenue share basis of 2% of Adjusted Cost Revenue (AGR) towards WPC charges covering royalty payment for the use of cellular spectrum and License fee for Cellular Mobile handsets & Cellular Mobile Base Stations and also for possession of wireless telegraphy equipment as per the details prescribed by Wireless Planning & Coordination wing (WPC). Any additional band width if allotted subject to availability and justification shall attract additional License fee as revenue share.It was observed that although the license fee paid to the Department of telecommunication was disallowed and amortized and accordingly the deduction was limited to one-eleventh of the total expenditure the royalty charges (which includes license fee also) paid to WPC was not considered for amortization. Instead the entire expenditure of Rs. 58 38 98 027 as charged to the Profit & Loss account was allowed as deduction.This resulted in under assessment of income of Rs. 53 08 16 388 with impact on revenue to the extent of Rs. 23 76 34 818.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.9. It can be further noted that Asstt. Commissioner of Income-tax Circle-8 while addressing a letter to the Commissioner of Income-tax Ahmedabad-4 dated 27-7-2011 noted that the assessment for the assessment year 2006-2007 in case of the assessee was completed where a request was also made for necessary direction from the office of CIT-IV as for assessment year 2006-2007. Similar objections were raised and they were dealt with on such guidance. On the issue of amortization of license fees paid to operate telecommunication services it is contended that identical objections when raised the audit had accepted the departments stand and on the very same ground inconsistent and whimsical stand is taken by audit for assessment year 2007-2008 for which verification needs to be sought from the audit. It is further contended that though objections were not acceptable in view of Boards instruction no. 9/2006 however the remedial actions were needed to be undertaken.10. It is thus apparent that not only the assessing officer had no reason to believe that the income had escaped assessment he was on the contrary of the opinion that there was inconsistent stand adopted by the audit as for the assessment year 2008-2009 it had accepted the say of the assessing officer that the income had not escaped the tax & yet identical grounds were raised for the assessment year 2007-2008 & assessing officer chose to go ahead with reopening proceedings only at the instance of audit party objection despite his unwillingness.11. We need to note at this stage that Section 147 of the Act permits initiation of reassessment proceedings only when the assessing officer has a reason to believe that income has escaped the assessment. Whenever the audit party raises objections it may provide information however eventually it is the assessing officer who should be satisfied himself & form a belief of his own that taxable income escaped the assessment. He cannot abdicate his decision making power by choosing to solely rely on the audit objection or follow such direction without his subjective satisfaction. In the instant case therefore the petitioner has succeeded on this ground alone and notice of reopening does need to be quashed.12. At this stage we must hold that both these grounds raised by the respondent in the impugned notice have been duly scrutinized & we are backed by the record placed before us.12.1 The amount paid for prepaid service was contended to be the outright purchase of Recharge by Prepaid Connection Customers and not an advance to be appropriated against the future use of services. The petitioner followed mercantile system of accounting and yet recognized the revenue only when the services were rendered to the prepaid customers.12.2 It was the stand of the petitioner that as long as no services were rendered by the assessee to the customers income cannot be recognized by the assessee. It is only at the time of actual use made of the network of the assessee by the customers that he would be required to render the services. Such issue was threadbare examined by the assessing officer and therefore also it cannot be said that the assessee failed to disclose fully and truly all material facts.12.3 As far as the second question was concerned Section 35ABB provides for amortization of license fees paid for operating telecommunication services. Petitioners claim for the assessment year 2008-2009 was disallowed to the extent of Rs. 98 29 17 915 charged to P & L account but one eleventh (1/11 th) of which was allowed as deduction for considering the same for amortization. It is the stand of the petitioner that the royalty paid to the Wireless Planning Commission of Government of India is not paid for obtaining the license & this being revenue expenditure & not capital expenditure for obtaining license is not amortizable under section 35ABB. The respondent-assessing officer thus already had raised the said issue of amortization of royalty paid to the Wireless Planning Commission of Government of India while framing the assessment under section 143(3) of the Act.13. Heavy reliance is placed on the decision in case of CIT v. Kelvinator India Ltd. (2010) 320 ITR 561 (SC) by the petitioner to insist that the assessing officer has no right to reopen on changing his mind. Not only there is absence of element of non-disclosure of relevant materials fully and truly necessary for assessment but both the grounds appear to have been on scrutiny finalized.14. In view of above discussion the impugned notice of reopening dated 07.03.2012 fails with all consequential reliefs. Other grounds on merit therefore deserve no further elaboration.Resultantly petition stands disposed of in the above terms.