Gujarat H.C : the assessee claimed interest and finance charges incurred by the company as “business expenditure”

High Court Of Gujarat

Micro Inks (P.) Ltd. vs. Assistant Commissioner of Income-tax

Section 37(1), 147

Assessment year 2009-10

M.R. Shah And B.N. Karia, JJ.

Special Civil Application No. 21687 Of 2016

January 31, 2017

JUDGMENT

M.R. Shah, J. – Rule. Shri Sudhir M. Mehta, learned counsel waives service of notice of rule for and on behalf of the respondent-Revenue. In the facts and circumstances of the case, the present petition is taken up for final hearing today.

2. By way of this petition, preferred under Article 226 of the Constitution of India, the petitioner-assessee has prayed for issuance of writ or order to quash and set- aside the impugned Notice dated 31st March 2016, by which in exercise of power under Section 148 of the Income-tax Act, 1961 [hereinafter referred to as, “the I.T Act”], the Assessing Officer has sought to reopen the assessment for Assessment Year 2009-2010 on the ground that the income chargeable to tax has escaped the assessment during the year under consideration.

3. Facts leading to the present Special Civil Application are as under :

3.1 That, the petitioner-assessee filed return of income for A.Y 2009-2010. That thereafter, a notice was issued by the Assessing Officer who framed the scrutiny assessment under Section 143 [3] of the Act. It appears that in the original assessment, the assessee debited an amount of Rs. 2,36,18,612/= under the head “Interest & Finance charges” on account of loan of Rs. 488.10 million. The assessee submitted that in order to expand business in U.S.A., the company has established a step-down subsidiary in the U.S.A., and therefore, the assessee claimed interest and finance charges incurred by the company as “business expenditure”.

3.2 The Assessing Officer, while framing the scrutiny assessment, accepted the claim of the assessee and treated the aforesaid expenditure towards interest and finance charges as “business expenditure”. That thereafter, beyond the period of four years from the relevant assessment year, the Assessing Officer has issued the impugned notice under Section 148 of the Act, which has been served upon the petitioner, by which the Assessing Officer has sought to reopen the assessment for A.Y 2009-2010 on the ground that income chargeable to tax has escaped assessment during the year under consideration. That, at the request of the assessee, the Assessing Officer has served/furnished the reasons recorded to reopen the assessment, which reads as under :

“On observation of the assessment records, para 8 [B] of the assessment order revealed that the assessee debited an amount of Rs. 2,36,18,612/= under the head interest and finance charges on account of loan of Rs. 488.10 million. The assessee submitted that in order to expand the business in USA, the company had established a step down subsidiary in USA. Hence, interest and other finance charges incurred by the company had been claimed as business expenditure.

As the expenditure was incurred to establish a subsidiary in USA, therefore, the expenditure was covered under Section 35D [1](ii) of the I.T Act and only 1/5th of the expenditure i.e., Rs. 47,23,722/= was required to be allowed.

I have reason to believe within the meaning of Section 147 of the Act that income to the extent of Rs. 1,88,94,890/= has escaped the assessment.”

3.3 On receipt of the reasons recorded to reopen the assessment for A.Y 2009-2010, the petitioner-assessee raised objections. It was mainly contended on behalf of the assessee that there was no failure on the part of the assessee in not disclosing the true and correct facts necessary for the assessment. It is submitted that the claim made by the assessee was as such considered by the Assessing Officer and only thereafter, the amount of expenditure incurred by the assessee towards interest and finance charges on account of loan of Rs. 488.10 million was treated as business expenditure and was accordingly allowed by the Assessing Officer. Therefore, it was submitted that as there was no failure on the part of the assessee in not disclosing true and correct facts, the assumption of jurisdiction by the Assessing Officer to reopen the assessment under Section 147 of the Act and that too, beyond the period of four years, is bad in law.

3.4 That, by communication dated 23rd December 2016, the Assessing Officer has not agreed with the objections raised by the assessee and has disposed of the said objections. Hence, the petitioner has preferred the present writ petition under Article 226 of the Constitution of India with the aforestated relief.

4. Shri R.K Patel, learned counsel appearing on behalf of the petitioner-assessee has vehemently submitted that in the facts and circumstances of the case, the impugned notice under Section 148 of the Act for reopening the assessment for A.Y 2009-2010 is bad in law and against the provisions of Section 147 of the Act. It is submitted that in the facts and circumstances of the case, the Assessing Officer has materially erred in assuming the jurisdiction to reopen the assessment for A.Y 2009-2010, and that too beyond the period of four years from the end of relevant assessment year. It is vehemently submitted by Shri Patel, learned advocate appearing on behalf of the petitioner that in the present case, the assessment is sought to be reopened beyond the period of four years, and therefore, unless and until the conditions precedent for reopening assessment beyond the period of four years, as mentioned in proviso to Section 147 of the Act are satisfied, the Assessing Officer is not justified in reopening the assessment beyond the period of four years. It is submitted by learned advocate Shri Patel that in the present case, even in the reasons recorded, there is no allegation that there was any failure on the part of the assessee in not disclosing true and correct facts. It is submitted that whatever the claim was made by the assessee, while filing the return of income, the same was duly considered by the Assessing Officer while framing the scrutiny assessment. It is submitted that therefore merely because the subsequent Assessing Officer is of the opinion that his predecessor has wrongly granted the claim, that by itself cannot be a ground to reopen the assessment beyond the period of four years.

4.1 Making the above submissions and relying upon a decision of Division Bench of this Court in the case of Navkar Share and Stock Brokers (P.) Ltd. v. Asstt. CIT [2017] 77 taxmann.com 152, it is requested to allow the present petition and to quash and set-aside the impugned notice/reopening of the assessment proceedings.

5. Shri Sudhir Mehta, learned counsel appearing on behalf of the Revenue has tried to oppose the present petition by submitting that in the present case, as it was found that considering Section 35D [1] (ii) of the Income-tax Act, the assessee was entitled to only 1/5th of the expenditure ie., Rs. 47,23,722/= the Assessing Officer has deducted/debited the entire amount claimed by the assessee ie., Rs. 2,36,18,612/= and thereby, the income to the extent of Rs. 1,88,94,890/= had escaped assessment, the Assessing Officer is justified in reopening the assessment. Making above submissions, it is requested to dismiss the present petition.

6. Heard learned advocates appearing on behalf of the respective parties at length.

7. At the outset, it is required to be noted that in the present case, the Assessing Officer has sought to reopen the assessment for A.Y 2009-2010 beyond the period of four years. Therefore, unless and until the condition precedent to reopen the assessment beyond the period of four years as mentioned in proviso to Section 147 of the I.T Act are satisfied, the Assessing Officer is not justified in initiating the re-assessment proceedings. As per the proviso to Section 147 of the Act, if it is found that there was any failure on the part of the assessing in not disclosing the true and correct facts, which has resulted into escapement of the income, the Assessing Officer is not justified in reopening the assessment.

7.1 Considering the reasons recorded, there is no allegation that there was any failure on the part of the assessee in not disclosing the true and correct facts due to which, there is escapement of income from the assessment.

7.2 Moreover, from the reasons recorded, it appears that according to the Assessing Officer, the expenditure was incurred to establish a subsidiary in USA, and therefore, such expenditure was covered under Section 35D [1] (ii) of the I.T Act, and therefore, only 1/5th of the expenditure ie., Rs. 47,23,722/= was required to be allowed. Instead, the entire amount claimed by the assessee ie., Rs. 2,36,18,612/= is allowed to be debited. Therefore, according to the Assessing Officer, his predecessor has wrongly allowed the entire amount of Rs. 2,36,18,612/= to be debited under the head “Interest and Finance charges”. In the reasons recorded, it is specifically observed by the Assessing Officer that, “..On observation of the assessment records, …. ..” meaning thereby, while issuing notice, the subsequent Assessing Officer did consider the material which was already on the record, which was considered by the Assessing Officer, while framing the scrutiny assessment under Section 143 of the Act.

8. As observed hereinabove, even there is no allegation in the reasons recorded that there was any failure on the part of the assessee in not disclosing true and correct facts necessary for the assessment. Under the circumstances, the Assessing Officer has materially erred in assuming the jurisdiction to reopen the assessment for Assessment Year 2009-2010 and that too beyond the period of four years, as the condition precedent to assume the jurisdiction to reopen the assessment beyond the period of four years is not satisfied.

9. On the aforesaid ground alone, the impugned notice dated 31st March 2016 under Section 148 of the Income-tax Act, 1961 and re-assessment proceedings deserves to be quashed and set-aside.

10. In view of the above and for the reasons aforestated, the present petition succeeds. The impugned Notice of reopening of the assessment for Assessment Year 2009-2010 dated 31st March 2016, which is beyond the period of four years, is hereby quashed and set-aside. Rule nisi made absolute accordingly. However, there shall be no order as to costs.

[Citation : 393 ITR 366]

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