The Delhi High Court has held that amounts receivable by a taxpayer company by way of reimbursement of provisions made for customer claims and warranty from its Associated Enterprise (AE) constitute an “asset” within the inclusive definition provided under Explanation 2 to the fourth proviso to Section 153A of the Income-tax Act.
For initiating reassessment beyond three years but up to ten years under Section 149(1)(b) read with the fourth proviso to Section 153A, the Court held that it is a mandatory jurisdictional pre-condition that the income escaping assessment must be represented in the form of an asset, and the Assessing Officer must demonstrate the fulfilment of this condition in the recorded reasons. An assessment cannot be reopened merely to verify the genuineness or allowability of expenses, as that would amount to an impermissible fishing or roving enquiry without tangible material showing escapement of income.
The Court clarified that even in cases of search where the Assessing Officer is in possession of material likely to be incriminating for more than one assessment year, the Assessing Officer must necessarily record reasons to reopen assessment qua each specific assessment year to establish the correlation between the material gathered and the particular assessment year.
Moreover, the Court ruled that under Section 142(2A) of the Income Tax Act, the Assessing Officer is empowered to direct a special audit based on the volume of the accounts and multiplicity of transactions, as the legislative amendment via the Finance Act, 2013 expanded the scope of the provision beyond the mere nature and complexity of the accounts.
The Division Bench comprising Justice V. Kameswar Rao and Justice Vinod Kumar observed that under Explanation 2 to Section 153A of the Income Tax Act, the definition of “asset” uses the words “shall include”, implying that the enumerated items are illustrations and not an exhaustive definition. Relying on the Conceptual Framework for Financial Reporting under Indian Accounting Standards (Ind AS) and general parlance, the Bench noted that an asset is a present economic resource or right that has the potential to produce economic benefits, even if the transfer of resources cannot be enforced until a future date.
The Bench found that by virtue of the Distribution Agreement, the petitioner acquired a right to be indemnified by the Associated Enterprise for expenses incurred on customer claims and warranty, and such receivables constitute an asset that must be shown in the accounts for the relevant years.
Regarding AY 2013-14, the Bench observed that the reasons recorded by the Assessing Officer merely doubted the genuineness and allowability of the provision for customer claims, terming it a contingent liability, without specifying how it amounted to income escaping assessment in the nature of an asset. The Bench noted that the Tribunal had already held the provision for customer claims for AY 2013-14 to be an ascertained liability, and an assessment cannot be reopened merely to verify the genuineness of expenses as that amounts to an impermissible fishing or roving enquiry.
Thus, the Bench rejected the Revenue’s attempt to rely on the reasons recorded for AY 2016-17 to justify the reopening for AY 2013-14, observing that even in cases of search, the Assessing Officer must necessarily identify and record reasons qua each assessment year to establish a correlation between the gathered material and the particular assessment year.
Regarding AY 2015-16, the Bench observed that the reasons recorded clearly revealed that the reassessment was initiated pursuant to evidence unearthed during the search suggesting that receivables in the nature of reimbursement for warranty provisions were not recorded in the books, thereby constituting escaped income in the nature of an asset. Consequently, the notice for AY 2015-16 met the requirements of Section 153A and Section 149(1) of the Act and was not barred by limitation.
Regarding the special audit under Section 142(2A) of the Act, the Bench observed that the Finance Act, 2013 introduced the words ‘volume of the accounts, doubts about the correctness of the accounts, multiplicity of transactions’ to expand the scope of the Assessing Officer’s powers beyond the restrictive meaning of ‘nature and complexity’. The Bench held that the voluminous nature of the ERP data and the multiplicity of transactions justified the special audit direction for AY 2015-16. However, since the reassessment notice for AY 2013-14 was set aside for want of jurisdiction, the corresponding special audit direction for AY 2013-14 served no purpose and could not survive.
Briefly, the petitioner, a company engaged in the business of assembly and trading of telecom network equipment, was subjected to a search and seizure operation under Section 132(1) of the Income-tax Act, pursuant to which, the respondents (AO) issued notices under Section 148 and Section 143(2) of the Act for Assessment Year (AY) 2013-14 and AY 2015-16. The respondents also issued notices under Section 142(2A) directing special audits of the petitioner’s accounts for AY 2013-14 and AY 2015-16, alleging that the ERP data dump provided during the search was voluminous, complex, and contained duplicate and missing entries.
Thereafter, the Revenue Department initiated reassessment beyond the three-year limitation period on the premise that income exceeding Rs. 50 lakhs had escaped assessment in the form of an ‘asset’, specifically ‘receivables’ on account of reimbursements due from the petitioner’s foreign Associated Enterprise (AE) for provisions made towards customer claims (AY 2013-14) and warranty expenses (AY 2015-16).
The petitioner challenged the reassessment notices on the ground that they were time-barred under Section 149(1)(a) and failed to satisfy the jurisdictional pre-condition under Section 149(1)(b) read with the fourth proviso to Section 153A, arguing that no income represented in the form of an ‘asset’ had escaped assessment and no contractual right to reimbursement existed.
Appearances:
Senior Advocates Arvind Datar and Tarun Gulati, along with Advocates Kishore Kunal, Ankita Prakash and Anuj Kumar, for the Petitioner/ Taxpayer
Advocates Indruj Singh Rai, Sanjeev Menon, Rahul Singh, Gaurav Kumar, and Siddharth Burman, for the Respondent/ Revenue
