Bombay H.C : The interest income represented interest received under s. 244A, net of interest paid under s. 220

High Court Of Bombay

Arthur Anderson & Co. vs. Assistant Commissioner Of Income Tax & Ors.

Section 147, proviso, 147, Expln. 1

Asst. Year 2003-04

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

Writ Petn. No. 2555 of 2009

19th March, 2010

Counsel Appeared :

Soli E. Dastur with Niraj Sheth & Atul K. Jasani, for the Petitioner : Vimal Gupta, for the Respondents

JUDGMENT

Dr. D.Y. CHANDRACHUD, J. :

A notice has been issued by the Asstt. CIT-11(2) on 4th Feb., 2009 by which the assessment for asst. yr. 2003-04 has been sought to be reopened. The assessee has moved these proceedings under Art. 226 of the Constitution inter alia to challenge the notice for reopening of the assessment and the consequential orders.

2. In respect of asst. yr. 2003-04 the petitioner filed a return of income on 1st Dec., 2003 by which it returned a total income of Rs. 6.14 crores. The return was accompanied by a copy of the audited accounts for the year ending 31st March, 2003 and a tax audit report under s. 44AB. In the income and expenditure account the petitioner disclosed an interest income of Rs. 4.91 crores. In the computation of income the petitioner reduced an interest amount of Rs. 50.14 lacs which was shown separately as income from other sources. In the notes to the computation of income the petitioner disclosed that the interest income represented interest received under s. 244A, net of interest paid under s. 220. During the course of the assessment proceedings a query was addressed by the AO on 20th Dec., 2004 by which inter alia an explanation was called with reference to the following :

“(b) Interest of Rs. 4,91,33,466 is credited to the income and expenditure account. Please furnish details of interest received, giving the names and address of the parties from whom interest has been received. Perusal of records indicate that in the preceding assessment year, you have disclosed Rs. 5,65,65,826. Kindly explain the reasons for shortfall in the current year with necessary cogent evidence.”

3. In reply to the query the petitioner addressed a communication on 28th Dec., 2004 inter alia furnishing details in respect of the interest income. A statement which is annexed to the reply contained a disclosure in Item 6 that the interest on tax refund (net of interest paid under s. 220) amounted to Rs. 50.14 lacs. An order of assessment was passed on 18th Feb., 2005. The AO in the course of the assessment order referred to his notice under s.143(2)/142(1) dt. 20th Dec., 2004 and to the reply of the assessee dt. 28th Jan., 2005. Subsequently a notice was issued under s. 154 by the AO on 15th Sept., 2006. The notice stated that on scrutiny of the details of interest income, it has been revealed that the amount included a sum of Rs. 50.14 lacs on account of interest on tax refund, net of interest under s. 220(2). The AO noted that in the note to the accounts it was submitted that the interest income represented interest received under s. 244A and net of interest under s. 220(2). According to the AO the entire interest received under s. 244A was required to be offered for taxation since under s. 40(ii) income-tax paid or payable did not constitute a deductible expenditure. On these grounds, the notice under s. 154 came to be issued.

By its reply dt. 26th Feb., 2007 the petitioner submitted that the total interest paid to it was Rs. 1.51 crores whereas its interest liability under s. 220(2) amounted to Rs. 1.01 crores. The petitioner submitted that the refund on which interest was credited to it was due partly in October, 1998 and partly in October, 1999, even before its liability to pay tax for asst. yr. 1998-99 arose in March, 2001. Eventually a notice was issued by the AO under s. 148 on 4th Feb., 2009. The reasons on the basis of which the assessment is sought to be reopened are stated in the AO’s communication dt. 2nd March, 2009 which is as follows : “It is seen from the records that during the year, assessee has credited interest amount of Rs. 4,91,33,466 to the income and expenditure account, which includes interest under s. 244A amounting to Rs. 50,14,633 on account of interest on tax refund, net of interest paid under s. 220 (2) of the IT Act amounting to Rs. 1,01,11,960. The assessee in the note to the computation of income has stated that the interest income represents interest received under s. 244A, net of interest paid under s. 220(2). As per the provisions of s. 40(ii) of the IT Act, any sum paid on account of any rate, or tax levied on the profits or gains of any business or profession are not deductible from the income of the assessee. Therefore, the interest charged under s. 220(2) amounting to Rs. 1,01,11,960 is not an admissible expenditure for deduction from the total income of the assessee. I have, therefore, reason to believe that the interest paid by the assessee under s. 220(2) amounting to Rs. 1,01,11,960 claimed as deduction chargeable to tax has escaped assessment.”

On behalf of the assessee the reopening of the assessment is questioned on the following grounds : (i) Admittedly the notice under s. 148 has been issued beyond the expiry of four years from the end of the relevant asst. yr. 2003- 04; (ii) The condition precedent to the exercise of the power to reopen an assessment beyond four years of the expiry of the relevant assessment year, where the assessment proceedings were completed under s. 143(3) is that there is a failure on the part of the assessee to fully and truly disclose all the material facts necessary for the assessment for that assessment year; (iii) In the present case, during the course of the assessment proceedings the assessee had fully disclosed that the interest component of Rs. 50.14 lacs represented interest received under s. 244A, net of interest paid under s. 220; (iv) The AO had specifically sought an explanation during the course of the assessment proceedings with reference to the interest of Rs. 4.91 crores credited to the income and expenditure account and in response thereto the assessee had in its disclosure referred to the interest on tax refunds (net of interest paid under s. 220) in the amount of Rs. 50.14 lacs. In these circumstances, it was submitted that there was no failure on the part of the assessee to fully and truly disclose all the material facts necessary for assessment and as a matter of fact there was a specific disclosure of the fact that the amount of Rs. 50.14 lacs represented interest on tax refund net of interest paid under s. 220.

On the other hand it was urged on behalf of the Revenue that the AO had not specifically noticed that the assessee had set off the amount received on account of interest under s. 244A with the amount payable on account of interest under s. 220 and that being the position it was open to the AO to exercise his jurisdiction under s. 148 even beyond the period of four years. Reliance in this regard was placed on the judgment of a Division Bench of this Court in Dr. Amin’s Pathology Laboratory vs. P.N. Prasad, Jt. CIT (2002) 172 CTR (Bom) 696 : (2001) 252 ITR 673 (Bom). Counsel appearing on behalf of the Revenue urged that in view of Expln. 1 to s. 147, the mere production before the AO of the books of accounts or other evidence from which material evidence could have been discovered with due diligence by the AO will not necessarily amount to a disclosure within the meaning of the proviso to s. 147.

The material on the record before the Court shows that in the statement of total income the assessee had disclosed an interest income of Rs. 50.14 lacs as income from other sources. In the note appended to the statement of computation, under the heading ‘Interest income’ the assessee stated that this represented interest received under s. 244A of the IT Act, 1961 net of interest paid under s. 220, based on the ratio of certain judgments to which it may not be necessary to refer at this stage. As noted earlier, during the course of the assessment proceedings the AO called the assessee by his letter dt. 20th Dec., 2004 to explain with details the interest of Rs. 4.91 crores which was credited to the income and expenditure account. Details of the interest received were sought together with an explanation for the shortfall in the current year as opposed to the earlier year. The assessee in its reply dt. 28th Dec., 2004 annexed a statement containing details of interest income earned during asst. yr. 2003-04. Serial No. 6 of the statement contained a disclosure of interest on tax refund which was described as being net of interest paid under s. 220. Thus, it is evident that during the course of the assessment proceedings not merely was there a full disclosure by the assessee of the material fact that the interest income of Rs. 50.14 lacs represented the difference between interest received under s. 244A and interest paid under s. 220 but, that in addition the attention of the AO was also specifically brought to bear on this aspect following the query which was raised on 20th Dec., 2004. In these circumstances, it cannot be stated that there was a failure on the part of the assessee to fully and truly disclose all the material facts relating to the assessment. Explanation 1 to s. 147 provides that the production before the AO of account books or other evidence from which material evidence could with due diligence have been discovered by the AO will not necessarily amount to a disclosure within the meaning of the proviso to s. 147. What Expln. 1 in essence ensures is that the duty which is cast upon the assessee to make a full and true disclosure of all material facts cannot be obviated merely by the production of account books or other evidence from which, by a line of enquiry, material evidence could be discovered by the AO. The essential and primary duty to make a full disclosure of material facts is that of the assessee and the burden to disclose is cast upon the assessee. The assessee cannot excuse his failure to make a full and true disclosure by positing that had the AO exercised his jurisdiction with due diligence, he could have discovered material evidence from the account books or other evidence which has been produced before him. This is, however, not a case where the assessee had merely produced its books of account or other evidence from which material evidence could have been gathered by the AO with due diligence.

In the reasons which have been disclosed by the AO, there is no statement to the effect that there was a failure by the assessee to disclose fully and truly all the material facts pertaining to the assessment. There was, as a matter of fact, a full disclosure by the assessee of all the material facts and as noted earlier the attention of the AO was specifically brought to bear on the fact that the interest income of Rs. 50.14 lacs constituted the net difference between interest received under s. 244A and interest paid under s. 220(2). Hence, the condition precedent to the exercise of the jurisdiction to reopen the assessment beyond a period of four years, when an assessment has been completed under s. 143(3) has not been fulfilled. The condition precedent as spelt out in the proviso to s. 147 is that the income must have escaped assessment by the failure of the assessee to fully and truly disclose all material facts necessary for assessment for that assessment year. Absent compliance with the statutory condition precedent, the reopening of the assessment cannot be sustained. The judgment of the Division Bench in the case of Dr. Amin’s Pathology Laboratory (supra) is distinguishable. In that case, the assessee had been following the accrual system of accounting for all items of expenditure except for all collections which were on cash basis. The Division Bench observed that a reading of the assessment order showed that the AO failed to notice an important item viz. an amount of Rs. 6.70 lacs which represented unpaid purchases. It was in this context that the Division Bench observed that the mere production of the balance sheet, P&L a/c or account books would not necessarily amount to a disclosure within the meaning of the proviso. The facts in that case showed that the AO had inadvertently overlooked an entry representing unpaid purchases in respect of which he had wrongly granted a reduction and at the time when he passed the original order of assessment, he could not be said to have opined on that item. These were the distinguishing facts in that case.

Apart from the fact that there has been no failure on the part of the assessee to make a full and true disclosure of all material facts, it will be necessary to advert to the decision of the Supreme Court in Harshad Shantilal Mehta vs. Custodian & Ors. (1998) 231 ITR 871 (SC). The Supreme Court, in the course of its judgment observed that under the IT Act, 1961 the definition of tax under s. 2(43) does not include penalty or interest and that the concepts of tax, penalty and interest are different concepts under the Act. Justice Sujata Manohar speaking for a Bench of three learned Judges of the Supreme Court observed thus : “We are concerned in the present case with penalty and interest under the IT Act. Tax, penalty and interest are different concepts under the IT Act. The definition of ‘tax’ under s. 2(43) does not include penalty or interest. Similarly, under s. 156, it is provided that when any tax, interest, penalty, fine or any of other sum is payable in consequence of any order passed under this Act, the AO shall serve upon the assessee a notice of demand as prescribed. The provisions for imposition of penalty and interest are distinct from the provisions for imposition of tax.”

The decision of the Supreme Court was delivered in an appeal which arose out of the Special Court (Trial of Offences Relating to Transaction in Securities) Act, 1992. The interpretation which has been placed on the provisions of s. 2(43) and the observations of the Supreme Court noted earlier, however, bind this Court as regards the ground on which the reopening of the assessment has been sought in this case.

In the circumstances, the rule is made absolute by setting aside the notice dt. 4th Feb., 2009. There shall be no order as to costs.

[Citation : 324 ITR 240]