Bombay H.C : The AO not allowable as a deduction in computing long-term capital gains under s. 148

High Court Of Bombay

Aventis Pharma Ltd. vs. Assistant Commissioner Of Income Tax & Ors.

Section 147

Asst. Year 2004-05

Dr. D.Y. Chandrachud & J.P. Devadhar, JJ.

Writ Petn. No. 139 of 2010

8th March, 2010

Counsel Appeared :

J.D. Mistry with R. Murlidhar & B.D. Damodar i/b Kanga & Co., for the Petitioner : Ms. Suchitra Kamble i/b Suresh Kamble, for the Respondents

JUDGMENT

DR. D.Y. CHANDRACHUD, J. :

Rule, by consent made returnable forthwith. Counsel for the respondents waives service. With the consent of counsel, the petition is taken up for final hearing. By a notice dt. 16th March, 2009, issued under s. 148 of the IT Act, 1961, an assessment for asst. yr. 2004-05 is sought to be reopened on the ground that income chargeable to tax has escaped assessment within the meaning of s. 147. The reasons for reopening the assessment are two. Firstly, according to the Addl. CIT, the assessee had written off a long-term capital loss of Rs. 11.14 crores from the sale of certain land at Mulund. The AO after discarding the value adopted by the assessee worked out long-term capital gains at Rs. 10.66 crores. The AO allowed a deduction of Rs. 2.89 crores on account of an amount paid as “tank land liability”. This amount is according to the AO not allowable as a deduction in computing long-term capital gains under s. 148 (sic—48). Secondly, the AO added back, after disallowing an amount of Rs. 64.62 lakhs on account of depreciation on obsolete assets which was worked out @ 20 per cent. The correct depreciation to be disallowed is claimed to be 25 per cent and there is alleged to be an under-assessment of an amount of Rs. 16.15 lakhs on this count. These are the only two reasons which weighed with the AO. The assessee lodged its objections to the reopening of the assessment on 11th Dec., 2009. The objections were disposed of and rejected by an order of the same date.

The submission which has been urged on behalf of the assessee is that a full disclosure was made in the return of income. Pursuant thereto, the AO passed an order of assessment under s. 143(3). It was urged that the AO applied his mind specifically to both the aspects of the case noted earlier and to the explanation furnished by the assessee during the course of assessment proceedings. It has been urged that there was no tangible material before the AO on the basis of which he could have formed a reason to believe that income chargeable to tax had escaped assessment. Consequently, it has been urged that the assessment is sought to be reopened on a mere change of opinion, which is not permissible. During the course of submission, counsel appearing on behalf of the assessee assisted the Court in perusing the entire record before the Court, including in particular the disclosures which were made during the course of the assessment. In order to obviate a repetition it would be proper to refer to the relevant aspects of the record while dealing with the submissions which have been urged on behalf of the assessee. An affidavit-in-reply has been filed in these proceedings on behalf of the Revenue, with which it would be necessary to deal at the relevant stage. Each of the two reasons which weighed with the AO in seeking to reopen the assessment would have to be considered separately. A. Deduction of Rs. 2.89 crores on account of “tank land liability” in computing long-term capital gains.

In the return of income filed by the assessee for asst. yr. 2004-05, certain disclosures were made in respect of the transfer of development rights in respect of the land at Mulund. The assessee disclosed that it had entered into an MoU on 31st March, 2000 with Nirmal Lifestyle (P) Ltd. for granting development rights in respect of the land, which admeasures 1,15,050 sq. mtrs., for a total consideration of Rs. 35.82 crores. The consideration was stated to have been received in three phases for different branches of land. The computation appended to the return included a statement of the profits on the sale of fixed assets. The sale proceeds received from the purchaser for Phase III during the course of the previous year relevant to the assessment year in question were disclosed as Rs. 10.62 crores. A deduction was claimed in respect of the expenses incurred on the transfer of the property. Amongst those deductions were towards (i) Consultancy fees in the amount of Rs. 27.50 lakhs and (ii) An amount of Rs. 2.89 crores obtained to have been paid towards meeting the dues of the Government of Maharashtra. In the statement of long-term capital gains, a deduction was claimed in respect of the consultancy fees and in respect of the amount which was paid to the purchaser towards the demand of unearned increment raised by the Governmentof Maharashtra. Those were claimed as selling expenses and/or as adjustment of sale consideration. During the course of the assessment proceedings, the AO raised a query as to why the transaction for sale of the land at Mulund under a development agreement should not be treated as a business transaction for computing business income, instead of treating the transaction on capital account, in turn giving a rise to capital gains, as claimed by the assessee. The assessee furnished an explanation to the AO on 22nd Sept., 2006. Subsequently, on 30th Nov., 2006 the assessee furnished a further explanation in pursuance of a hearing that took place before the AO, on the question as to whether s. 50C would be attracted.

The AO passed an order of assessment under s. 143(3). Para 15 of the order is titled “Computation of long-term capital gains”. The computation of the assessee furnished with the return of income in which a deduction was sought in respect of consultancy fees of Rs. 27.50 lakhs and of Rs. 2.89 crores paid to the purchaser towards meeting the demand of the State Government towards unearned increment was accepted. The AO considered the question of fair market value in paras 15.2 and 15.3 of the order and the application of s. 50C in para 15.5. In para

15.15, the AO recomputed the capital gains. While doing so, the AO amalgamated the amount of Rs. 2.89 crores which represented the deduction sought towards meeting the claim of the State Government towards unearned increment and the amount of Rs. 27.50 lakhs towards consultancy fees which together were shown to amount to Rs. 3,16,50,000. On this foundation, the principal objection which was raised by the assessee before the AO to the reopening of the assessment and which has been reiterated in this proceedings is that there was full disclosure by the assessee in the return of income, of the amount claimed towards deduction on account of consultancy fees and what is described as “tank land liability”. The material before the Court would show that there was a full disclosure in the return. The AO considered the question as to whether the assessee would be entitled to a deduction in respect of the two items. The computation of capital gains was reworked after accepting the total deduction claimed in the amount of Rs. 3.16 crores in respect of the aforesaid two items. There is merit in the submission which has been urged on behalf of the assessee that there was no tangible material before the AO on the basis of which the assessment could have been reopened and what is sought to be done is to propose a reassessment on the basis of a mere change of opinion. This, in view of the settled position of law is impermissible. No tangible material is shown on the basis of which the assessment is sought to be reopened. In the absence of tangible material, what the AO has done while reopening the assessment is only to change the opinion which was formed earlier on the allowability of the deduction. The power to reopen an assessment is conditional on the formation of a reason to believe that income chargeable to tax has escaped assessment. The power is not akin to a review. The existence of tangible material is necessary to ensure against an arbitrary exercise of power. There is no tangible material in the present case. B. Disallowance of depreciation on obsolete assets

The assessee submitted a tax audit report under s. 44AB. Under Item 17(a) of the report, the amount debited to the P&L a/c is shown to include expenditure of a capital nature, being a loss on obsolete assets of Rs. 21.98 lakhs. This amount was added back in the computation of income for asst. yr. 2004-05. In the assessee’s letter dt. 22nd Sept., 2006 a working of depreciation on obsolete assets was enclosed, without prejudice to contention of the assessee that depreciation on the WDV of obsolete assets has to be allowed. A without prejudice working of depreciation on obsolete assets to be disallowed was furnished to the AO. In that statement, depreciation to be disallowed on obsolete assets for financial year 2003-04 was calculated at 20 per cent and computed at Rs. 64.62 lakhs. In another letter dt. 29th Sept., 2006, reliance was sought to placed on the decision of the Mumbai Bench of the Tribunal in Asstt. CIT vs. Jagdish C. Sheth (2007) 106 TTJ (Mumbai) 911 : (2006) 101 ITD 360 (Mumbai). The assessee set out its case, supported by the decision, that even if an asset is discarded or becomes defunct, it would still form part of the block of assets. Consequently, in the submission of the assessee, depreciation could not have been disallowed on the WDV which includes the WDV of obsolete assets. The AO, in the course of the assessment order noted that the assessee had written off certain assets as obsolete, but depreciation thereon had been claimed. The AO noted that the assessee had added back the amount written off in the computation of its total income. The AO however observed that on similar facts, right from asst. yrs. 1999-2000 and 2003-04 depreciation had not been allowed on obsolete assets. The AO noted that the assessee was called upon to show cause as to why depreciation should not be disallowed in respect of obsolete assets which have been written off to which the assessee responded. On the ground that a similar submission was not accepted in the earlier assessment years, the AO disallowed depreciation claimed on the WDV of obsolete assets @ 20 per cent. The disallowance of Rs. 64.62 lakhs made by the AO was in terms of the without prejudice statement that was submitted by the assessee, as noted earlier.

The AO now proposes to reopen the assessment by contending that the correct depreciation to be disallowed would be @ 25 per cent instead of 20 per cent. This it has been submitted on behalf of the assessee, would constitute a mere change of opinion without any tangible material. We may note that in the affidavit-in-reply filed in this proceeding, the Asstt. CIT has stated that the rate of depreciation was taken at 20 per cent in the original assessment against 25 per cent provided in cl. III(1) to Part A to Appendix I of r. 5(1) of the IT Rules, 1962. There is merit in the submission which has been urged on behalf of the assessee that under the aforesaid rules, the reference is to the rate at which depreciation is liable to be allowed on plant and machinery; whereas, in the present case, the issue relates to the disallowance which was to be effected in respect of the depreciation which was claimed on obsolete assets which had been written off. Consequently, the basis which has been suggested in the affidavit-in-reply is lacking in substance, apart from the fact that the reasons that have been furnished by the AO while reopening the assessment do not even advert thereto. The view which we have taken of the provisions of s. 147 is consistent with the law laid down by the Supreme Court in CIT vs. Kelvinator of India Ltd. (2010) 228 CTR (SC) 488 : (2010) 34 DTR (SC) 49 : (2010) 320 ITR 561 (SC). The Supreme Court has held that : “…Therefore, post-1st April, 1989, power to reopen is much wider. However, one needs to give a schematic interpretation to the words ‘reason to believe’ failing which we are afraid s. 147 would give arbitrary powers to the AO to reopen assessments on the basis of ‘mere change of opinion’, which cannot be per se reason to reopen. We must also keep in mind the conceptual difference between power to review and power to reassess. The AO has no power to review; he has the power to reassess. But reassessment has to be based on fulfillment of certain precondition and if the concept of ‘change of opinion’ is removed, as contended on behalf of the Department, then, in the garb of reopening the assessment, review would take place. One must treat the concept of ‘change of opinion’ as an in- built test to check abuse of power by the AO. Hence, after 1st April, 1989, AO has power to reopen, provided there is ‘tangible material’ to come to the conclusion that there is escapement of income from assessment. Reasons must have a link with the formation of the belief.”

Before concluding, it would be necessary to record two further submissions which have been urged on behalf of the assessee. The first submission is based on the proviso to s. 147 which provides that the AO may assess or reassess such income which is chargeable to tax and has escaped assessment, other than income involving matters which are the subject-matter of any appeal, reference or revision. Counsel for the assessee submitted that against the order of assessment, the assessee had filed an appeal before the CIT(A). The grounds in the appeal specifically include a challenge to the order of assessment on the ground that the AO, erred in disallowing depreciation of Rs. 64.62 lakhs by holding that the same represented depreciation on obsolete assets which are not used in business and included in the WDV of the block of assets. Similarly, another point in the appeal is that the AO erred in determining long-term capital gains arising on the sale of Phase III land at Mulund to the extent of Rs. 10.66 crores. The contention is that in view of the proviso to s. 147, the AO is precluded from reopening the assessment on an issue which is the subject-matter of a pending appeal. The second submission was based on s. 120 of the Act and it was urged that since the original order of assessment was passed by the Addl. CIT, Range 8(1), Mumbai, it was not within the jurisdiction of the Asstt. CIT, who is a subordinate authority, to reopen the assessment. For the reasons already indicated, on the question as to whether the AO had reason to believe that income had escaped assessment within the meaning of s. 147, we have come to the conclusion that there was no tangible material before the AO to hold so and that the reasons recorded for reopening the assessment constitute a mere change of opinion. In the circumstances, it is not necessary to decide upon the additional submissions which have been urged on behalf of the assessee as noted earlier. For these reasons, the petition is allowed. Rule is made absolute by quashing and setting aside the notice dt. 16th March, 2009 issued by the first respondent. In the circumstances of the case, there shall be no order as to costs.

[Citation : 323 ITR 570]