1. The petitioner – Axis Bank, previously known as UTI Bank, has filed this petition challenging a notice dated 24.03.2010 issued by the respondent Assessing Officer under Section 148 of the Income Tax Act, 1961 (‘ the’ for short).

2. Brief facts are as under:

2.1 The petitioner is a banking company. For the assessment year 2005-06, the petitioner had filed the return of income on 26.10.2005. Such return was taken in scrutiny by the Assessing Officer. He passed an order of assessment under Section 143 of theon 30.11.2007. To reopen such assessment, he issued the impugned notice which as can be seen was done within a period of four years from the end of the relevant assessment year. The Assessing Officer had recorded the following reasons for issuing the notice :

“REASONS RECORDED FOR THE NOTICE U/S. 148 OF THE I.T. ACT

In this case, the assessee has filed return of income declaring total income at Rs.462,78,99,910/- on 26.10.2005. The assessment was finalized u/s. 143(3) on 30.11.2007 after making additions of Rs.200,71,08,029/-.

On perusal of the Annual Report of the assessee-company at page 11, it has been found that “other income” comprising trading profit, fee and miscellaneous income decreased by 23.02% from Rs.540.15 crores during 2003-04 to Rs.415.82 crores during 2004-2005. This decrease was largely a consequence of a lower trading profit on account of adverse market conditions and the booking of a one-time loss of Rs.114.53 crores by transferring government securities of Rs.3,983/- crores from the Available for Sale (AFS) category to the Held for Maturity (HTM) category, as permitted by RBI. The transfer was effected to protect the Bank’s earnings from the impact of rising interest rates on the SLR investments. Consequently, trading profit fell to Rs.37.39 crores from Rs.348.42 crores the previous year.... “The Bank has merely transferred government securities of Rs. 3983.29 crores from one category to another at a value of Rs.3,868.76 crores and booked a loss of Rs.114.53 crores. The transaction has been done by the assessee by itself and without any interaction with a third party. The Bank thus proposes to incur a loss of Rs.114.53 crores by transacting with itself and claiming the same as an allowable expenses.

This has led to underassessment of the total income of the assessee – company to the tune of Rs.114.53 crores.

In view of the above, I have reasons to believe that income chargeable to tax has escaped assessment as per the provisions of section 147 of the I.T. Act, 1961. Therefore, a notice u/s. 148 of the I.T. Act is being issued for re-assessment u/s. 147 of the I.T. Act.”

2.2 The assessee raised detailed objections to the notice of reopening under a communication dated 15.12.2010. Such objections were, however, rejected by the Assessing Officer by an order dated 15.12.2010. Hence, this petition.

3. From the reasons recorded, it can be seen that the sole ground for reopening the assessment was that according to the Assessing Officer, the assessee had booked a one time market loss of Rs.114.53 crores by merely transferring the government securities from the category of ‘Available for Sale’ to the category of ‘Held to Maturity’. According to the Assessing Officer, such loss was booked by the assessee without any transaction with any other party. The assessee had thus made mere entries and claimed a loss by way of allowable expenses.

4. In the objections before the Assessing Officer as well as in the present petition, the assessee had challenged the notice for reopening on various grounds including.

(i) That the assessee had made detailed disclosures about the said transaction. The Assessing Officer had notice of such details and documents during the scrutiny assessment. It was thereafter not open for him to reexamine the issue.

(ii) The category change took place as per the RBI guidelines which required the assessee to limit its risk exposure. In the process, the assessee had reduced the loss. In the past years also such category change resulted into enhanced profit. The assessee offered the same to tax.

(iii) In the earlier years, such transactions had been examined by the Assessing Officer and accepted after scrutiny.

(iv) It was also contended that the entire exercise was undertaken at the instance of the audit party. The Assessing Officer was also not convinced. He was of the belief that income chargeable to tax had not escaped assessment. Therefore also the notice for reopening was without authority of law.

5. During the course of arguments, we had delved at some length on all the issues raised by counsel for the petitioner. Eventually, the issue boiled down to the question, whether the notice for reopening was issued under the insistence of the audit party. In this context, the petitioner has made clear averments and assertions in the petition suggesting that the Assessing Officer was compelled by the audit party to reopen the assessment. Such assertions were made in the objections raised by the petitioner also. In the order passed by the Assessing Officer rejecting such objections, there has been no denial. In response to the petition, the affidavit filed only suggests that there was independent application of mind by the Assessing Officer and that the original audit file could not be traced. In the further affidavit, it is clarified that there was merely an internal audit and there was no objection by the audit party as commonly understood.

6. We are prepared to proceed on the basis that objections, if any, were raised by the internal audit party. Since the department was unable to produce the files, it was not possible for us to gather the exact sequence of correspondence between the Assessing Officer and his higher authorities. However, to put the entire issue beyond any controversy, learned counsel for the petitioner places on record certain documents along with the affidavit of the officer of the petitioner bank. These documents contain a letter dated 06.05.2008 written by the then Assessing Officer Shri. Anurag Sharma to the Commissioner of Income Tax. We may refer to the contents of this letter a while later.

7. From the record we gather that the internal audit party had raised certain objections concerning the petitioner assessee under letter dated 11.04.2008. On 17.04.2008, the Assessing Officer wrote to the petitioner Bank and sought clarification with respect to the loss of Rs. 114.53 crores on account of category change of the government securities. In response to this letter, the petitioner had sent a detailed explanation under letter dated 29.04.2008. It was summarized that the Bank was valuing its investment as per the guidelines issued by the RBI. The guidelines issued by the RBI was binding to the Bank. The loss was on account of following such directives of RBI. If the securities had not been shifted as required by the RBI guidelines, the bank would have suffered much greater loss.

8. After receiving the said communication dated 29.04.2008 from the petitioner, the Assessing Officer made a detailed presentation to the Commissioner of Income Tax under letter dated 06.05.2008 in which he offered his own comments to each of the audit objections raised in case of the petitioner with respect to the booking of loss. He stated as under:

“(iii) One time loss :

The assessee has booked a one time loss of Rs. 114.53 crores by transferring Govt. Securities of Rs. 3983.29 crs. from available for sale (AFS) category to hled to maturity (HTM) category, as permitted by the RBI. Since, the bank has merely transferred the Govt. securities from one head to another, the transaction has been done by the assessee with itself and without any interaction with a third party. The assessee thus proposes to incur a loss by transacting with itself and claim the same as allowable deduction. Such a transaction resulting a loss is not an acceptable transaction and the loss is not allowable.

Comments:

In this context, it is to be stated that the bank follows the directives, instruction, guidelines etc. of RBI in respect of the classification and valuation of investment and revenue recognition thereto. Moreover, as per the significant accounting policies followed by the bank for transfer of securities between various categories, the bank accounts for the investment at book / acquisition cost/ market value on the date of transfer, whichever is lower. In case there is a net loss on account of such transfer, it is provided for in the P & L A/c.

As per RBI directives, transfer of securities between categories of investments is required to be accounted strictly at the acquisition cost or book value or market value on the date of reclassification, whichever is lower, and the depreciation, if any, on such transfer has to be fully provided for in the profit and loss account. The one time loss of Rs. 114.53 claimed by the bank is in compliance with the mandate of RBI applicable in the context of change in classification of inventory from one segment to another.

Thus, as per the directive of the RBI the bank recognized and fully provided the loss by providing for the difference between cost and market value of securities on the date of re-classification of the assessee.

Now the question that remains to be answered is whether such a practice of accounting for the loss as a result of the revaluation based on market value is allowable under the Income Tax Act or not. In this context, the following judgements support the action : ...”

8.1 The Assessing Officer, thereafter, referred to several decisions of the Supreme Court and other High Courts and concluded as under:

“Thus, based on the above judicial decisions, it is seen that the loss incurred as a result of reclassification of securities, by marking the securities to the market value, is an allowable deduction. Therefore, the audit objection on this ground is not acceptable.”

8.2 He summed up his suggestions as under:

“Remedial action :

Summing up, the audit observation at point no. 2 only is acceptable and no other objections or observations are acceptable. But since the remedial action is to be taken, inspite of the nonacceptance of the audit objection, as per the instructions of the Board, remedial action is proposed in this case.

From the facts as mentioned above, in my view, the remedial actions appropriate on various issues are : ...”

9. From the materials on record, it can be seen that the Assessing Officer from the outset was not convinced about disallowing the sum of Rs. 114.53 crores claimed by the assessee by way of loss. He elaborated his reasons in his letter dated 06.05.2008 written to the Commissioner. Relevant portion of the letter we have reproduced in this order, perusal of which, leaves little doubt that the Assessing Officer firmly believed that the assessee’s stand on such claim of loss was correct and that the internal audit objection was invalid.

10. If this be the position, settled law would prevent the Revenue from reopening the assessment on this ground. It is well settled that Section 147 of therefers to the reason of the Assessing Officer to believe that income chargeable to tax has escaped assessment. The satisfaction of the Assessing Officer is of paramount consideration and cannot be substituted by any other agency or authority even if it happens to be a higher authority. The Income Tax Act contains revision in terms of Section 263 of theif an order of assessment is found to be erroneous or prejudicial to the interest of the Revenue. Reopening of an assessment, however, has vastly different repercussions and entirely different parameters would apply. It is in this context held by this court that reopening of assessment under the insistence of the audit party would not be valid. We are not oblivion to the decision of the Supreme Court in case of Commissioner of Income Tax vs. P.V.S Beedies Pvt. Ltd reported in 237 ITR 13 [LQ/SC/1997/1347 ;] ">237 ITR 13 [LQ/SC/1997/1347 ;] [LQ/SC/1997/1347 ;] taking a view that if the source of information at the hands of the Assessing Officer is an audit objection but the Assessing Officer himself is holding a belief that income chargeable to tax has escaped assessment, the same may still be permissible, if otherwise valid in law. The present case, however, is vastly different. The Assessing Officer was firmly of the belief that no income chargeable to tax had escaped assessment despite which apparently he was prevailed upon to issue notice of reopening. This was, therefore, not a case where the Assessing Officer formed a belief that income chargeable to tax had escaped assessment. May be in the present case, the directives did not come from the audit party but some internal audit mechanism referred to as internal audit party. This, however, would not be of any significance. As long as it can be gathered that the Assessing Officer was compelled to issue notice of reopening against his own belief that no income chargeable to tax had escaped assessment, the notice must fail.

11. In the result, the impugned notice dated 24.03.2010 is set aside. Petition is allowed and disposed of accordingly. Rule is made absolute.