Allahabad H.C : Whether for the purpose of computing the period of limitation envisaged under sub-section (2) of section 263 of the Income-tax Act, 1961 (for short “the Act”), the date of order of assessment or that of the reassessment, is to be taken into consideration

High Court Of Allahabad

L.G. Electronics India (P.) Ltd. vs. Pr. CIT

Section : 263

Assessment Year 2007-08

Sudhir Agarwal And Dr. Kaushal Jayendra Thaker, JJ.

Writ Tax No. 575 Of 2016

August 3, 2016

JUDGMENT

1. Heard Sri Rupesh Jain, advocate assisted by Sri Gaurav Jain and Sri Suyash Agarwal, advocates for petitioner and Sri Gaurav Mahajan, learned counsel for respondents.

2. This writ petition under article 226 of the Constitution has been filed by LG Electronics India Pvt. Ltd. (hereinafter referred to as the “petitioner”) aggrieved by notice dated June 8, 2016, issued by the Principal Commissioner of Income-tax, NOIDA, Gautambudh Nagar (hereinafter referred to as the “PCIT”) in exercise of power under section 263 of the Income-tax Act, 1961 (hereinafter referred to as the “Act, 1961”) in respect of the assessment year 2007-08.

3. It is contended that notice itself is barred by limitation hence it is void ab initio and without jurisdiction.

4. Return for the assessment year 2007-08 was filed by the petitioner on October 31, 2007 declaring income of Rs. 2,68,82,20,341. It was selected for scrutiny and after verification/examination draft assessment order under section 143(3)/144C(1) of Act, 1961 was passed on December 27, 2010 proposing some disallowances and addition of income of Rs. 61,00,79,579 being subsidy by way of sales tax incentive received under the scheme formulated by the Government of Uttar Pradesh. The Assessing Officer (hereinafter referred to as the “AO”) suggested that it is “revenue receipt” and not “capital receipt” as claimed by the petitioner though in Maharashtra a similar incentive was treated as “capital receipt”.

5. Aggrieved by draft assessment order dated December 27, 2010 petitioner filed objection before dispute resolution panel (hereinafter referred to as the “DRP”), whereupon direction under section 144C(5) was issued on September 27, 2011 to the Assessing Officer to pass final order. The Assessing Officer thereafter made final assessment on October 31, 2011 assessing total income to Rs. 5,83,91,17,785 after making addition of Rs. 61,00,79,579 on account of sales tax incentive treating it as revenue receipt.

6. The petitioner preferred appeal being I. T. A. No. 5140/Del/2011 before the Income-tax Appellate Tribunal, New Delhi under section 253(1)(d) of Act, 1961. The Tribunal allowed the appeal partly vide order dated December 8, 2014. It confirmed addition of Rs. 61,00,79,579 towards sales tax subsidy treating it as “revenue receipt”. Against this order the petitioner filed further appeal before this court, i.e., I. T. A. No. 89 of 2015 which is pending.

7. The Assessing Officer reopened the assessment under section 147 and issued notice dated March 21, 2014 under section 148 alleging that in the assessment year in question there is a escaped assessment on account of failure to disallow expenditure on purchases from overseas in terms of section 40(a)(i) of Act, 1961 for non deduction of tax at source from such payment. Reassessment order was passed on March 26, 2015 after making disallowance of purchase of Rs. 13,89,59,995. Aggrieved thereto the petitioner has filed appeal before the Commissioner of Income-tax (Appeals) (hereinafter referred to as the “CIT(A)”) under section 246A(1)(b), which is pending.

8. Now the respondent-Principal Commissioner of Income-tax has issued impugned notice dated June 8, 2016 under section 263 on the ground that assessment order dated March 26, 2015 passed under section 143(3) was erroneous and prejudicial to the interests of the Revenue inasmuch as sales tax subsidy of Rs. 20,58,34,234 accruing to the petitioner under the scheme of the Government of Maharashtra had not been brought to tax as “revenue receipt”. It is contended that the aforesaid notice dated June 8, 2016 is barred by limitation under section 263 of Act.

9. The only issue raised and pressed before this court is, “whether the impugned notice is barred by limitation prescribed under section 263(2) of the Act, or not”.

10. Section 263 of the Act reads as under :

“263. (1) The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment.

Explanation.-For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,-

(a) an order passed on or before or after the 1st day of June, 1988, by the Assessing Officer shall include-

(i) an order of assessment made by the Assistant Commissioner or Deputy Commissioner or the Income-tax Officer on the basis of the directions issued by the Joint Commissioner under section 144A ;

(ii) an order made by the Joint Commissioner in exercise of the powers or in the performance of the functions of an Assessing Officer conferred on, or assigned to, him under the orders or directions issued by the Board or by the Chief Commissioner or Director General or Commissioner authorised by the Board in this behalf under section 120 ;

(b) “record” shall include and shall be deemed always to have included all records relating to any proceeding under this Act available at the time of examination by the Commissioner ;

(c) where any order referred to in this sub-section and passed by the Assessing Officer had been the subject-matter of any appeal filed on or before or after the 1st day of June, 1988, the powers of the Commissioner under this sub-section shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal.

(2) No order shall be made under sub-section (1) after the expiry of two years from the end of the financial year in which the order sought to be revised was passed.

(3) Notwithstanding anything contained in sub-section (2), an order in revision under this section may be passed at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or direction contained in an order of the Appellate Tribunal, National Tax Tribunal, the High Court or the Supreme Court.

Explanation.-In computing the period of limitation for the purposes of sub-section (2), the time taken in giving an opportunity to the assessee to be reheard under the proviso to section 129 and any period during which any proceeding under this section is stayed by an order or injunction of any court shall be excluded.” (emphasis added)

11. The limitation prescribed under section 263(2) for exercise of power under sub-section (1) thereof is two years from the end of the financial year in which the order sought to be revised was passed.

12. Learned counsel for the petitioner submitted that for the purpose of section 263(1) the limitation will commence from the end of the financial year when the order dated October 31, 2011 was passed and that comes to March 31, 2012 and two years period would elapse on March 31, 2014.

13. Learned standing counsel appearing for the respondent, on the contrary, submitted that the period of limitation would run from the date of reassessment order dated March 26, 2015 and, therefore, impugned notice is within limitation.

14. Sri Jain, learned counsel for the petitioner, argued that the original assessment order accepted sales tax subsidy by way of refund of value added tax received under the Maharashtra State Government as “capital receipt” and not chargeable to tax. Accepting the same, the Assessing Officer passed assessment order dated October 31, 2011 after due inquiry. The reassessment order did not refer to the aforesaid aspect of the matter and instead reassessment proceedings have been initiated on the ground of “escaped assessment” due to certain purchases made from outside India since no tax was deducted at source in respect thereto. He submitted that notice under section 263 has been issued raising an issue which relates to not the reassessment order but the original assessment order dated October 31, 2011 and, therefore, it is barred by limitation. Reliance is placed on CIT v. Alagendran Finance Ltd. [2007] 293 ITR 1/162 Taxman 465 (SC) ; CIT v. Bharti Airtel Ltd. [2013] 37 taxmann.com 218/218 Taxman 112 (Mag. – Delhi) ; CIT v. Shriram Engineering Construction Co. Ltd. [2011] 330 ITR 568/11 taxmann.com 151 (Mad) ; Ashoka Buildcon Ltd. v. Asst. CIT [2010] 325 ITR 574/191 Taxman 29 (Bom.) ; CIT v. Lark Chemicals Ltd. [2014] 368 ITR 655/[2015] 230 Taxman 305/55 taxmann.com 446 (Bom.) and CIT v. ICICI Bank Ltd. [2012] 343 ITR 74/19 taxmann.com 142/[2013] 212 Taxman 130 (Bom.).

15. Per contra, learned standing counsel submitted that sections 2(8) and 2(40) of the Act, defines terms “assessment” and “regular assessment”. Assessment includes reassessment. Assessment made under section 143 or 144 is termed as “regular assessment”, therefore, it does not include reassessment made under section 147. The meaning of “assessment”, therefore, has to be seen in this context.

16. It is submitted that for the purpose of section 263 the period of two years is from the date of “assessment” and if read with section 2(8) it would be the date of “reassessment” and not “original assessment”. It is contended that any other view would vitiate the plain and unambiguous language of section 263(2).

17. Facts are not in dispute hence we proceed to consider, “whether here is a case where limitation under section 263(2) would commence from regular assessment order dated October 31, 2011 or reassessment order dated March 26, 2015”.

18. The assessment order dated October 31, 2011 is on record as annexure B to the writ petition. In computation of income the Assessing Officer has made the following additions :

“Additions as discussed above (Rs.)

1. Sales tax subsidy 61,00,79,579

2. Provision for service warranty 7,79,04,573

3. Royalty 81,98,02,800

4. International transaction 2,26,61,73,676″

19. Assessing Officer also allowed the following deductions :

“Less : Deductions : (Rs.)

1. Depreciation as claimed 81,44,24,056

2. Gain on fixed assets 1,27,10,222

3. Weighted deduction under section 35(2AB) 13,77,25,422

5. Deduction under section 35D 2,10,272

6. Incentive from Maharashtra VAT as claimed 20,58,34,234

7. Expenses under section 43B as claimed 8,68,12,113

8. Sums disallowed under section 40(a)(ia) in assessment year 2006-07 now claimed 6,76,72,351

9. Provision of expenses written off in assessment year 2007-08 but not allowed as deduction in the assessment year 2006-07 4,90,76,047

10. Sales tax receipt claimed in revised return as exempt is disallowed para No. 2. 61,00,79,579

20. The proceedings for “reassessment” were initiated vide notice dated June 19, 2014 issued under section 147 and the same is on record as annexure D to the writ petition. The Assessing Officer has given reasons for initiating “reassessment” proceedings stating that the petitioner is a permanent establishment of LG Electronics, Korea and its other associated enterprises. Its business connection and income is taxable as per sections 4, 5 and 9 of the Act, and articles 5 and 7 of the Indo Korea Double Taxation Avoidance Agreement (DTAA). The petitioner had made certain remittances during the financial year 2006-07 (assessment year 2007-08) to its parent company Korea and other associated enterprises on which no tax was deducted at source. Such expenses are disallowable under section 40(a)(ia) of the Act. Details of remittances are given in a chart which totalled to Rs. 18,08,65,60,127.

21. After considering reply of the assessee and examining the matter in detail, the Assessing Officer made addition of Rs. 13,89,59,995 under section 40(a)(ia) of the Act, 1961 bringing total assessed income to Rs. 5,97,80,77,790. Thus “reassessment” order was not for review or reassessment of entire case but only in respect of a particular item, i.e., transactions outside India on which no tax was deducted at source, hence were disallowable under section 40(a)(ia). In all other respect, original assessment order was maintained, and addition made by the reassessment order dated March 26, 2015 was added in the income assessed in “original assessment” order and that is how it comes to Rs. 5,97,80,77,790. This is also evident from operative part of “reassessment” order of the Assessing Officer, which reads as under :

“After due verification of available facts and records and examination of the assessee’s submissions, income of the assessee is computed as under :

Income as per order under section 143(3),144C dated October 31, 2011 Rs. 583,91,17,790

Addition as per para. 2 above Rs. 13,89,59,995

Assessed income Rs. 597,80,77,785

Or say Rs. 597,80,77,790″

22. Now the notice under section 263(1) shows that the respondent, though has referred to the “reassessment order” showing total taxable income determined therein but in fact has referred to the discrepancy in the “assessment order”, i.e., regular assessment order dated October 31, 2011, wherein incentive of the value added tax from the Maharashtra Government received by the petitioner was allowed to be deducted. This incentive has no concern with “reassessment” proceedings result in order dated March 26, 2015.

23. We have discussed the items on which reassessment proceedings were initiated by the Assessing Officer. Notice under section 263(1) has been issued with reference to reassessment, apparently to cover up the bar of limitation. The reason obvious is that judicial precedents have made out a difference in a case where the entire assessment is reopened and a fresh reassessment order is passed and in a case where one or two items of assessment order are reassessed and reconsidered and in other respect, initial assessment order is maintained. In a case where except one or a few items, original assessment order is maintained, it has been held that assessment order continue to remain subject to addition or modification by reassessment order and if a notice under section 263(1) has been issued with reference to an item of assessment order and not reassessment order, for the purpose of limitation it has to be seen whether it involves an issue of escaped assessment under the original assessment order or reassessment order.

24. Learned counsel appearing for the respondent when confronted with this factual background, did not and could not, dispute that notice under section 263(1) has been issued with reference to a discrepancy occurred in the assessment order dated October 31, 2011 and it has nothing to do with the reassessment order dated March 26, 2015.

25. Now in the light of the above facts we may examine the judicial authorities, whether limitation in such a case, for the purpose of notice under section 263(1), will commence from original “assessment order”, discrepancy whereof is the foundation for notice under section 263(1), or “reassessment order” which is on a different subject.

26. We find that this issue is clinched by a Supreme Court judgment in Alagendran Finance Ltd. (supra). The question formulated by court in the above case reads as under (page 3 of 293 ITR) :

“Whether for the purpose of computing the period of limitation envisaged under sub-section (2) of section 263 of the Income-tax Act, 1961 (for short “the Act”), the date of order of assessment or that of the reassessment, is to be taken into consideration ?” (emphasis added)

27. Therein also for the assessment years 1994-95, 1995-96 and 1996-97, assessment was completed on February 27, 1997 ; March 12, 1997 ; and March 30, 1998, respectively. In all the assessment years, the assessee’s return under the head “Lease equalisation fund” was accepted. The Assessing Officer initiated reassessment proceedings under section 148 in respect of the following three items :

“(i) the expenses claimed for share issue,

(ii) bad and doubtful debts and

(iii) excess depreciation on gas cylinders and goods containers.”

28. Reassessment has nothing to do on items relating to “lease equalization fund”. The Commissioner of Income-tax invoked revisional jurisdiction under section 263(3) vide notice dated March 29, 2004 stating that depreciation of leased assets claimed as goods depreciation and disallowed in computation income was not correct and order of the Assessing Officer is prejudicial to the interests of the Revenue as the lease rentals had not been properly brought to tax. The assessee contended that the said order of the Commissioner under section 263 was barred by limitation, and in appeal, preferred before the Tribunal, he succeeded. The Tribunal held that error pointed out in the revisional order under section 263 was in the order of the assessing authority passed in regular assessment and not reassessment, therefore, barred by limitation under section 263(2). Appeal preferred by the Revenue also failed before the Madras High Court, who following its decision in CWT v. A. K. Thanga Pillai [2001] 252 ITR 260/[2002] 125 Taxman 708, dismissed the appeal. Before the Supreme Court, the Revenue sought to argue that the order of assessment would merge with the order of reassessment and, therefore, for the purpose of notice under section 263, limitation would commence from the date when “reassessment order” was passed. After referring to section 263, the court held (page 7 of 293 ITR) :

“A bare perusal of the order passed by the Commissioner of Income-tax would clearly demonstrate that only that part of the order of assessment which related to lease equalization fund was found to be prejudicial to the interests of the Revenue. The proceedings for reassessment have nothing to do with the said head of income. Doctrine of merger, therefore, would not apply in a case of this nature.” (emphasis added)

29. The court referred to section 263(1), Explanation (C) providing that the doctrine of merger would apply only in respect of such items which were subject matter of appeal and not which were not to fortify its view.

30. Distinction in the words “assess” and “reassess” was considered in CIT v. Sun Engineering Works (P.) Ltd. [1992] 198 ITR 297/64 Taxman 442 (SC). Therein issue was raised by the assessee contending that once jurisdiction under section 147 is invoked, whole assessment proceedings become reopened. It was negatived by the court holding as under (page 310) :

“Thus, under section 147, the Assessing Officer has been vested with the power to ‘assess or reassess’ the escaped income of an assessee. The use of the expression ‘assess or reassess such income or recompute the loss or depreciation allowance’ in section 147 after the conditions for reassessment are satisfied, is only relatable to the preceding expression in clauses (a) and (b), viz., ‘escaped assessment’. The term ‘escaped assessment’ includes both ‘non-assessment’ as well as ‘under assessment’. Income is said to have ‘escaped assessment’ within the meaning of this section when it has not been charged in the hands of an assessee in the relevant year of assessment. The expression ‘assess’ refers to a situation where the assessment of the assessee for a particular year is, for the first time, made by resorting to the provisions of section 147 because the assessment had not been made in the regular manner under the Act. The expression ‘reassess’ refers to a situation where an assessment has already been made but the Income-tax Officer has, on the basis of information in his possession, reason to believe that there has been under assessment on account of the existence of any of the grounds contemplated by the provisions of section 147(b) read with Explanation (1) thereto.” (emphasis added)

31. Referring to above exposition of law, court in Alagendran Finance Ltd. (supra) further held (page 9 of 293 ITR) :

“There may not be any doubt or dispute that once an order of assessment is reopened, the previous underassessment will be held to be set aside and the whole proceedings would start afresh but the same would not mean that even when the subject matter of reassessment is distinct and different, the entire proceeding of assessment would be deemed to have been reopened…….

We may at this juncture also take note of the fact that even the Tribunal found that all the subsequent events were in respect of the matters other than the allowance of ‘lease equalization fund’. The said finding of fact is binding on us. Doctrine of merger, therefore, in the fact situation obtaining herein cannot be said to have any application whatsoever. It is not a case where the subject matter of reassessment and subject matter of assessment were the same. They were not.” (emphasis added)

32. The court also upheld the judgment of the Madras High Court in A. K. Thanga Pillai (supra) and pointed out that same view was taken by the Calcutta High Court in CIT v. Kanubhai Engineers (P.) Ltd. [2000] 241 ITR 665/[2001] 118 Taxman 745. Operative part of judgment in Alagendran Finance Ltd. (supra) reads as under (page 12 of 293 ITR):

“We, therefore, are clearly of the opinion that keeping in view the facts and circumstances of this case and, in particular, having regard to the fact that the Commissioner of Income-tax exercising its revisional jurisdiction reopened the order of assessment only in relation to lease equalization fund which being not the subject of the reassessment proceedings, the period of limitation provided for under sub-section (2) of section 263 of the Act would begin to run from the date of the order of assessment and not from the order of reassessment. The revisional jurisdiction having, thus, been invoked by the Commissioner of Income-tax beyond the period of limitation, it was wholly without jurisdiction rendering the entire proceeding a nullity.” (emphasis added)

33. This decision in Alagendran Finance Ltd. (supra) has been followed by the Delhi High Court in Bharti Airtel Ltd. (supra) wherein also reassessment order dealt with the issue of non deduction of tax at source on payment of interest to ABN Amro Bank, Stockholm Branch. Second addition was made on account of ESOP expenses. Subsequently Commissioner of Income-tax issued order under section 263 for failure to deduct tax at source under section 194H on three air time provided to distributors and under section 194J on roaming charges paid to other network operators. These issues were different from the subject matter of reassessment order. The Delhi High Court held that the subject matter is different since the Commissioner has found error in regular assessment order, hence limitation shall commence for regular assessment order.

34. To the same effect is the Division Bench judgment of the Bombay High Court in Ashoka Buildcon Ltd. (supra) delivered by Dr. D. Y. Chandrachud, J., (as his Lordship then was). Therein, the Commissioner of Income-tax issued notice dated April 30, 2009 under section 263. The assessment order was passed on December 27, 2006 under section 143(3) for the assessment year 2004-05. It was sought to be reopened on March 6, 2007 in regard to benefit of section 72A which deals with carry forward and set off of accumulated losses and unabsorbed depreciation allowances in cases, inter alia, of amalgamation and merger was wrongly allowed. The Commissioner of Income-tax issued notice dated April 30, 2009 under section 263 though referring to reassessment order but in effect pointing out an error in regular assessment order dated December 27, 2006. Relying on Alagendran Finance Ltd. (supra), Bombay High Court said as under (578 of 325 ITR) :

“Section 263 empowers the Commissioner to call for and examine the record of any proceedings under the Act and to pass such orders as the circumstances of the case justify, including an order enhancing, modifying or cancelling the assessment and directing a fresh assessment, if he considers that any order passed by the Assessing Officer is erroneous in so far as it is prejudicial to the interest of the Revenue. Sub-section (2) of section 263 stipulates that no order shall be made under sub-section (1) after the expiry of two years from the end of the financial year in which the order sought to be revised was passed.

That period of two years from the end of the financial year in which the original order of assessment dated December 27, 2006 was passed, has expired on March 31, 2009. Hence the exercise of the revisional jurisdiction in respect of the original order of reassessment is barred by limitation……..

The substantive part of section 147 as well as Explanation 3 enables the Assessing Officer to assess or reassess income chargeable to tax which he has reason to believe had escaped assessment and other income which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under the section. There is nothing on the record of the present case to indicate that there was any other income which had come to the notice of the Assessing Officer as having escaped assessment in the course of the proceedings under section 147 and when he passed the order of reassessment. The Commissioner, when he exercised his jurisdiction under section 263, in the facts of the present case, was under a bar of limitation since limitation would begin to run from the date on which the original order of assessment was passed. We must however clarify that the bar of limitation in this case arises because the revisional jurisdiction under section 263 is sought to be exercised in respect of issues which did not form the subject matter of the reassessment proceedings under section 143(3) read with 147. In respect of those issues, limitation would commence with reference to the original order of assessment. If the exercise of the revisional jurisdiction under section 263 was to be in respect of issues which formed the subject matter of the reassessment, after the original assessment was reopened, the commencement of limitation would be with reference to the order of reassessment. The present case does not fall in that category.” (emphasis added)

35. The judgments in Shriram Engineering Construction Co. Ltd. (supra); Lark Chemicals Ltd. (supra) and ICICI Bank Ltd. (supra) are also in the same line.

36. In these facts and circumstances and considering the fact that impugned notice dated June 8, 2016 issued by the Principal Commissioner of Income-tax, NOIDA, Gautambudh Nagar is in reference to some discrepancy in original assessment order dated October 31, 2011 and not reassessment order dated March 26, 2015, therefore, limitation would run from the date of regular order of assessment and in that view of the matter, impugned notice, evidently is barred by limitation prescribed under section 263(2) of Act, 1961.

37. In the result, writ petition is allowed. Impugned notice dated June 8, 2016 is hereby quashed. The petitioner shall also be entitled to costs, which we quantify to Rs. 20,000.

[Citation : 388 ITR 135]