High Court Of Bombay
Caprihans India Ltd. vs. Tarun Seem, DCIT
Sections 147, 148
Asst. Year 1997-98
S.H. Kapadia & J.P. Devadhar, JJ.
Writ Petn. No. 829 of 2003
24th July, 2003
Counsel Appeared
P.J. Pardiwala, for the Petitioner : R.V. Desai, P.S. Jetly & Mrs. S.V. Bharucha, for the Respondent
JUDGMENT
S.H. Kapadia, J. :
Rule. Respondents waive service.
By consent, writ petition is taken up for final hearing.
Heard learned counsel on both sides. In this case, arguments were heard by us on 24th July, 2003. After hearing the arguments, the following order was passed :
Accordingly, we propose to give reasons for allowing the petition. “For the reasons to be given subsequently rule is made absolute in terms of prayer cl. (a) with no order as to costs.” Reasons
5. By this petition under Art. 226 of the Constitution, petitioner seeks to challenge impugned notice dt. 22nd Jan., 2003 issued under s. 148 of the IT Act, 1961 for accounting year ending 31st March, 1997, corresponding to the relevant asst. yr. 1997-98. Facts
6. Petitioner is engaged in the business of manufacture of PVC sheets and industrial laminates. The petitioner filed its return of income for the asst. yr. 1997-98. This was on 28th Nov., 1997. The return was initially processed under s. 143(1)(a). This was on 17th Dec., 1997, accepting the returned loss. Thereafter, the AO issued notice under s. 143(2) calling upon the petitioner to give certain details. Thereafter, he completed the assessment vide Order dt. 31st Jan., 2000 made under s. 143(3) of the Act and assessed the petitioner to a total loss of Rs. 6.39 lacs. Subsequently, by the impugned notice dt. 22nd Jan., 2003, issued under s. 148, the AO stated that he had reason to believe that the petitioner’s income chargeable to tax for the asst. yr. 1997-98 had escaped assessment and the AO called upon the petitioner to file its return of income within 30 days. By letter dt. 14th Feb., 2003, the petitioner- assessee called upon the AO to furnish copy of reasons in order to enable the assessee to furnish return of income. These reasons were not furnished, inter alia, on the ground that the petitioner had failed to file its return of income after receipt of the impugned notice. In the circumstances, the present petition came to be filed on 6th March, 2003. Since reasons were not given, the petitioner assumed the alleged reasons for issuing impugned notice. However, the Department has not filed its affidavit dt. 15th July, 2003 disclosing reasons for reopening assessment under s. 147 of the Act. As per the said reasons, it is stated that on the AO going through the case records, he had observed escapement of income amounting to Rs. 34.92 lacs. According to the AO, as per the case records, an amount of Rs. 194 lacs had been shown by the petitioner as capital work-in-progress and also interest payment on account of borrowed funds. According to the AO, proportionate interest expenditure relating to capital workin- progress should have been capitalized to the cost of assets and the said expenditure should have been disallowed. That, since it was not disallowed, there has been an escapement of income amounting to Rs. 34.92 lacs on this count. Secondly, according to the AO, on his going through the balance sheet, it was detected that the assessee had received a subsidy of Rs. 20 lacs during the accounting year ending 31st March, 1997 relevant to the assessment year in question which amount has not been used to reduce the cost of assets and, therefore, the said amount should have been taxed as revenue receipts. Thirdly, on going through the case records, the AO found that an amount of Rs. 3.42 lacs pertaining to provident fund, which amount was disallowed during the earlier asst. yr. 1996-97, had been allowed during the assessment year in question and, therefore, according to the AO, this issue was also required to be looked into. At this stage, it may be noted that if one goes through the reasons annexed to the affidavit, there is no clear prima facie finding that the petitioner had failed to make true and full disclosure of the material facts. The AO merely states that certain issues need to be looked into. This aspect is important because we are concerned with asst. yr. 1997-98 and the reopening is sought to be made beyond a period of four years from the end of the asst. yr. 1997-98. Arguments
7. Mr. Pardiwala, learned counsel for the petitioner contended that, in this case, the AO seeks to reopen the assessment after a period of four years from the end of the assessment year and in view of the judgment of this Court in the case of IPCA Laboratories Ltd. vs. Gajanand Meena, Dy. CIT (2001) 170 CTR (Bom) 582 : (2001) 251 ITR 416 (Bom), the AO cannot act in the matter of reopening of assessment beyond four years, unless he has reason to believe that income has escaped assessment by reason of the failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. He submitted that a bare reading of the reasons show that reopening is sought to be effected only on the basis of the case records. He submitted that on two out of three points mentioned in the reasons, the AO merely states “that the issue needs to be looked into”. That, on those two issues regarding subsidy and provident fund being disallowed, the AO does not even say that there is escapement of income from assessment. He therefore submits that the proviso to s. 147 is not attracted. That, on the said two points, there is nothing to indicate escapement of income. That, on the said two points, there is nothing to indicate failure on the part of the assessee to disclose fully and truly all material facts. That, on these two points, there is nothing to show as to on what basis the AO has formed his belief regarding escapement of income from assessment. Mr. Pardiwala submits that on the face of the given reasons, there is total non-application of mind on the part of the AO. In this connection, he pointed out that the AO has sought to reopen the assessment by stating that the assessee has received cash subsidy of Rs. 20 lacs which should have gone to reduce the cost of assets and since it has not been used to reduce the cost of the assets, it should be taxed as revenue receipts. However, it is pointed out that the amount of Rs. 20 lacs was received in the earlier accounting year ending 31st March, 1996 and not in the accounting year ending 31st March, 1997, relevant to the assessment year in question (see p. 41 of the paper-book under the caption “Reserves and Surplus”). This point is important in view of certain contentions which have been raised by the Department which has placed heavy reliance on the judgment of the Supreme Court in the case of GKN Driveshafts (India) Ltd. vs. ITO (2003) 179 CTR (SC) 11 : (2003) 259 ITR 19 (SC). Even on the question of allowance, in respect of provident fund paid by the petitioner-assessee, it was pointed out by the learned counsel for the petitioner that no reasons have been given as to why the provident fund paid by the assessee amounting to Rs. 3.42 lacs should be disallowed. In this connection, he pointed out that in the accounts of the assessee a provision was made for provident fund dues for March, 1996 but the payment was made on 20th April, 1996 and, therefore, the then AO had disallowed the payment under s. 43B on the ground that the payment was not made during the accounting year ending 31st March, 1996 corresponding to asst. yr. 1996-97. However, payment was made during the accounting year commencing after 1st April, 1996 corresponding to asst. yr. 1997-98 which is in the assessment year in question and, therefore, the said amount of Rs. 3.42 lacs has been allowed as deduction in the assessment year in question. Hence, he contended that there was no reason for reopening the assessment on this count. Mr. Pardiwala next contended that one of the reasons for reopening the assessment given by the AO was that an amount of Rs. 34.92 lacs had escaped assessment as it represented interest expenditure (financial cost) relating to capital work-inprogress and, therefore, it should have been capitalized to the cost of assets. He contended that this alleged ground was on pure assumption that the borrowings had financed the capital work-in- progress, He submitted that, in this case, on facts, the borrowings did not finance the capital workin-progress. In this connection, he invited our attention to the Schedule attached to the balance sheet (at p. 44 of the paper-book) which indicates absence of any addition to the capital work-inprogress. He contended that if the borrowings had funded the capital work-in-progress than the net book value as on 31st March, 1997, would have increased above Rs. 433.92 lacs (representing cost as on 31st March, 1996, corresponding to the asst. yr. 1996-97) whereas, in fact, the net book value during the assessment year in question has fallen from Rs. 433.92 lacs to Rs. 194.02 lacs which indicates that the borrowings did not finance the capital work-in-progress and, therefore, the assumption of the AO was erroneous. In the alternative, Mr. Pardiwala contended that even assuming for the sake of argument that the AO was right in his conclusion that the borrowings had financed the capital work-in-progress even then the assessee was entitled to claim deduction under s. 36(1)(iii) because for the purposes of applicability of s. 36(1)(iii) (as it stood at the material time), the nature of expenditure, whether capital or revenue, was not relevant. Mr. Pardiwala further pointed out that in the accounts of the assessee, interest was capitalized and although the assessee, for tax purposes, could have claimed deduction under s. 36(1)(iii), in fact, assessee has not even claimed deduction for the interest which has been capitalized. Hence, question of disallowance of the proportionate interest expenditure did not arise. He further pointed out that under the accounting policy of the petitioner-assessee, all costs including financial cost till commencement of commercial production were capitalized. However, the borrowings were used only for working capital requirement and not for capital work-in-progress. Lastly, it is submitted on behalf of the petitioner that all these facts were put on record and deductions have been given in the original order of assessment. That, even the reopening is sought to be done only on the basis of the case records and, therefore, there is nothing to indicate as to on what basis the AO has concluded escapement of income from assessment. That, in any event, there is failure on the part of the petitioner-assessee to disclose fully and truly all material facts necessary for the assessment in respect of the accounting year ending 31st March, 1997.
8. Mr. R.V. Desai, learned senior counsel appearing on behalf of the Department, on the other hand, contended that the petition is premature and no interference is called for at this stage. He contended that when a notice under s. 148 is issued, the proper course of action for the notice is to file the return if he seeks reasons and on receipt of reasons the noticee is entitled to file objections to the issuance of notice and, thereafter, the AO has to dispose of those objections by passing a speaking order. He contended that, in this case, on receiving the impugned notice, the petitioner failed to file the return. Hence, no interference is called for under Art. 226 of the Constitution. In this connection, Mr. Desai has placed reliance on the judgment of the Supreme Court in GKN Driveshafts (India) Ltd. (supra). Mr. Desai contended that the Petitioner should be directed to file the return and to seek reasons and, thereafter, the petitioner-assessee should be directed to file objections which objections would be disposed of by the AO by passing a speaking order and it is only thereafter in the event of any adverse order being passed then the writ petition may lie. He contended that in view of the judgment of the Supreme Court in GKN Driveshafts (India) Ltd. (supra), this writ petition should be dismissed in limine. He contended that, at this stage, all the arguments on merits advanced on behalf of the petitioner were not required to be considered. That, the issues raised by the petitioner, on merits, would be gone into by the AO after the petitioner files the return and after the petitioner files its objections to the issuance of notice. He contended that in view of the judgment of the Supreme Court in GKN Driveshafts (India) Ltd. (supra), there is no question of this Court, at this stage, going into the merits as the petition is premature. Findings
9. In the case of GKN Driveshafts (India) Ltd. (supra), the facts were as follows: A notice under s. 148 was issued to the assessee r/w s. 143(2) of the IT Act, 1961 calling upon the assessee to give certain details in connection with the return of income filed by the assessee. In that case, notice under s. 143(2) was issued as the Department wanted further information and, therefore, the Delhi High Court took the view that the petition was premature [GKN Driveshafts (India) Ltd vs. ITO & Ors. (2003) 179 CTR (Del) 13 : (2002) 257 ITR 702 (Del)]. Being aggrieved, the assessee went in appeal. In appeal, the Supreme Court stated that there is no reason to interfere with the order under challenge. However, the apex Court added a clarification to the effect that when a notice under s. 148 is issued, the proper course of action for the noticee was to file a return and seek reasons and the AO was thereafter bound to furnish reasons within reasonable time. That, on receipt of reasons, the noticee has to file objections to the issuance of notice and thereupon the AO has to dispose of the same by passing a speaking order. It is true that the assessee should have filed its returns pursuant to the noticee under s. 148 and, on that basis, the assessee should have sought reasons for issuing such notices as laid down by the Supreme Court in the above judgment in GKN Driveshafts (India) Ltd. (supra). That was not done. We would have rejected the petition on this ground. However, in the peculiar facts and circumstances of this case, we are not inclined to dismiss the petition in limine because the reasons now disclosed by the AO, on the face of it, show that there is nothing in the reasons to indicate failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. In the case of IPCA Laboratories Ltd. (supra), this Court has held that in view of proviso to s. 147 of the IT Act, no action for reopening after four years could be taken unless the AO has reason to believe that income has escaped assessment by reason of failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. Admittedly, the period of four years has expired. Hence, we are not inclined to dismiss the petition in limine. Further, as stated above, even the reasons do not disclose a finding viz. that the petitioner had failed to disclose fully and truly all material facts necessary for assessment. In fact, the reasons show that from the case record itself certain conclusions are sought to be drawn. Hence, we are not inclined to dismiss the petition in limine. We may clarify that this judgment should not be read to mean that the assessees are entitled to reasons without filing a return pursuant to notice under s. 148. However, in this case, the Court finds ex facie that AO has sought to reopen the assessment on certain erroneous assumptions. As stated hereinabove, the assessee has not even received cash subsidy of Rs. 20 lacs during the accounting year ending 31st March, 1997 relevant to the assessment year in question and, therefore, there was no question of utilising the said amount to reduce the cost of the assets as suggested by the AO in his reasons. Similarly, as stated above, the assessee had paid provident fund for March, 1996 in April, 1996 and, therefore, it was disallowed as an item of deduction for asst. yr. 1996-97 but it was allowed under s. 43B in the assessment year in question as the provident fund was paid in April, 1996. Therefore, there was no question of escapement of income from the assessment. Lastly, with regard to capitalization of interest expenditure, the AO has come to the conclusion that a sum of Rs. 34.92 lacs had escaped assessment as the said amount should have been capitalized to the cost of the assets. However, this reason is also based on an assumption that the assessee had utilized the borrowings for capital work-in-progress. Further, the petitioner had not claimed any deduction under s. 36(1)(iii) during the assessment year in question for the interest which was capitalized and, therefore, the question of disallowance did not arise. In the circumstances, we are not inclined to dismiss the petition.
10. For the reasons given hereinabove, rule is made absolute in terms of prayer cl. (a) with no order as to costs.
[Citation : 266 ITR 566]
