Gujarat H.C : Where Assessing Officer sought to reopen assessment on ground that even though assessee-company had come into existence from 30-8-2003, yet it claimed depreciation for whole year resulting in excess claim of depreciation, in view of fact that prior to formation of company, assessee was operating as a partnership firm and, it had not claimed depreciation in relevant year in said capacity, impugned reassessment proceedings deserved to be set aside

High Court Of Gujarat

Anupam Rasayan India Ltd. Vs. ITO

Section 32, 147

Assessment year 2004-05

Akil Kureshi And A.J. Shastri, JJ.

Special Civil Application No. 13822 Of 2010

October  3, 2016

JUDGMENT

Akil Kureshi, J. – The petitioner has challenged a notice dated 28.08.2009 issued by the respondent No. 1 Assessing Officer under Section 148 of the Income Tax Act, 1961 (‘the Act’ for short) for reopening the petitioner’s assessment for the assessment year 2004-2005. The brief facts are as under :-

2. The petitioner is a company registered under the Companies Act and was incorporated with effect from 30.08.2003 from a erstwhile partnership firm. For the Assessment Year 2004- 2005, the petitioner filed the return of income on 01.11.2004 which was taken by the assessing officer in scrutiny. The assessing officer passed an order of assessment under Section 143(3) of the Act on 28.12.2007 in which he computed the petitioner’s total income as nil and allowed the company to carry forward the unabsorbed depreciation of Rs. 3.81 Lakhs.

3. The Assessing Officer issued the impugned notice on 28.08.2009 seeking to reassess the petitioner’s income for the said assessment year 2004-2005. This notice was thus issued beyond a period of four years from the end of the relevant assessment year. In order to do so, the assessing officer had recorded the following reasons :—

“The return of income for the year under consideration, declaring a total income of Nil was filed on 01.11.04. Assessment in the case was completed u/s. 143(3) r.w.s. 147 of the Act on 28.12.07, determining the total income of the assessee at Nil.

2. The assessee company is engaged in the business of manufacturing of chemicals. On going through the office records, it is seen that the assessee company had claimed deduction of an amount of Rs. 89,92,832/- on account of depreciation, for the year under consideration. The assessee has acquired the status of company by undergoing registration under the Companies Act, 1956 w.e.f. 31.08.03. Prior to acquiring the status of company the assessee was a partnership firm viz M/s. Anupam Rasayan. According to the fifth proviso to section 32(1) of the Act, whenever there is a succession as per clause (xiii) and clause (xiv) of 47 of section 170 of the Act, depreciation is allowable on the assets to the predecessor and the successor. The said proviso also stipulates that the depreciation shall be apportioned between the predecessor and the successor in the ratio of the number of days for which the assets were used by them. The amount of Rs. 89,92,832/- claimed by the assessee company as depreciation is for the whole year i.e. 365 days, which is in contravention of the provisions of the fifth proviso to section 32(1) of the Act. The amount of depreciation claimed by the assessee in respect of the assets extracted by it from the firm on acquiring the status of company is Rs. 78,30,983/-. As per the provisions cited supra, the assessee company is eligible to claim depreciation for only 214 days (from 31.08.03 to 31.03.04) in respect of the assets of Rs. 3,47,40,825/- extracted from the firm – M/s. Anupam Rasayan, which works out to Rs. 45,91,305/-, the working of which is given below :

Sr no Assets WDV of assets extracted from firm (Rs.) Rate of depre. (%) Amount of depre. Claimed assets at col. B (Rs.) Amount allowable to the assessee for 214 days (Rs.) Excess dep. Claimed by the assessee (Rs.)
A B C D E F G
1 Building 5995961 10 599596 351543 248053
2 Plant & Machinery 27298507 25 6824627 4001279 2823348
3 Motor car 855644 20 171129 100333 70796
4 Furniture & fixtures 263993 15 39599 23217 16382
5 Computer 326720 60 196032 114934 81098
TOTAL 7830983 4591305 3239678

Thus, the assessee company has claimed depreciation in excess of Rs. 32,39,678/- which is not allowable. Thus, income to the extent of Rs. 32,39,678/- has escaped assessment within the meaning of section 147 of the Act.

3. It is seen from the office records that the assessee was issued a bill of Rs. 35,000/- dtd. 01.02.04 by M/s. E Mecklai towards subscription charges for comprehensive forex information for the period from 01.03.04 to 28.02.05, which is debited by the assessee company on 15.03.04, under the head ‘Consultancy charges’ in the P & L account. It is apparent that the above expense is for 12 months, out of which, 11 months pertain to the subsequent year. Thus, out of the above expense, only an amount of Rs. 2917/- (35000+12) pertain to the year under consideration. However, the assessee has debited the entire amount to its P&L account, which is incorrect. As such, the remaining amount of Rs. 32,083/- pertain to the accounting period relevant to A.Y. 2005-06. Since these expenses do not pertain to the year under consideration, the same is not allowable. Thus, the assessee has claimed excess expense to the extent of Rs. 32,083/- during the year under consideration, which has resulted in suppression of its income to that extent. Thus, income to the extent of Rs. 32,083/- has escaped assessment within the meaning of section 147 of the Act.

4. It is also seen from the office records that the assessee was issued a debit note no. DTCPL/06/001, dtd. 30.06.02 of Rs. 3,53,624/- by M/s. Deviyani Tex Chem Ltd. towards interest charges @ 21% on late payments made by the assessee company. Though these expenses do not pertain to the year under consideration, the same has been debited by the assessee under the head ‘Interest ‘expenses’ on 31.12.03, with a narration ‘late payment interest’ (entry no. PRO 31122003). The same is finally debited to the P&L account for the year as an expense under the head “Financial expenses”. Since these expenses do not pertain to the year under consideration, the same is not allowable. Thus, the assessee has claimed excess expense to the extent of Rs. 3,53,624/- during the year under consideration, which has resulted in suppression of its income to that extent. Thus, income to the extent of Rs. 3,53,624/- has escaped assessment within the meaning of section 147 of the Act.

5. It is further seen from the office record that the assessee has debited interest expenses on unsecured loan as follows, which pertains to the period prior to the registration of the assessee as a company under the Companies Act.

Name of lender Amount (Rs).
Shri Niraj Patel 15207
Shri Vatsal 67842
Smt. Manjudevi 12500
Shri Mahavir 218606
TOTAL 314155

Since the above interest expenses do not pertain to the period of the business activity of the assessee as a company, the same is not allowable in the hands of the assessee company. Thus, the assessee has claimed excess expense to the extent of Rs. 3,14,155/- during the year under consideration, which has resulted in suppression of its income to that extent. Thus, income to the extent of Rs. 3,14,155/- has escaped assessment within the meaning of section 147 of the Act.

6. It is also seen from the office records that the assessee has debited an amount of Rs. 1,10,920/- under the head “Legal & License Fees”, towards penalty to DGFT in respect of licence no. 1520, as is evident from the narration appearing against the said entry in the aforesaid account. This fact has also been reported by the auditor in the audit report furnished in form no. 3CD. Any expense in the nature of penalty is not allowable as per the provisions of section 37(1) of the Act. As such, the assessee itself should have disallowed the said expense and added the same to its total income. However, the assessee company has claimed a deduction in respect of the above expense, which is incorrect. As such, the assessee has claimed excess expense to the extent of Rs. 1,10,920/- during the year under consideration, which has resulted in suppression of its income to that extent. Thus, income to the extent of Rs. 1,10,920/- has escaped assessment within the meaning of section 147 of the Act.

7. The above facts reveal that income of the assessee, at least to the extent of Rs. 40,50,460/-, as follows has escaped assessment, for the accounting period relevant to A.Y. 2004-05, within the meaning of section 147 of the Act;

Head Amount(Rs)
Excess claim of depreciation 32,39,678
Excess claim of consultancy charges 32,083
Excess claim of interest – Deviyani 3,53,624
Excess claim of interest – unsecured loans 3,14,155
Penalty expense not allowable 1,10,920
40,50,460

4. In view of the above facts, the undersigned has a reason to believe that at least an income of Rs. 40,50,460/- has escaped assessment in the hands of the assessee company for the year under consideration, within the meaning of section 147 of the Act and the undersigned is satisfied that this case is a fit case for issue of notice u/s. 148 of the Act.”

4. Upon being served with the reasons so recorded by the assessing officer, the petitioner raised objections to the notice of reopening under letter dated 26.02.2010. Such objections were rejected by the Assessing Officer by an order dated 17.09.2010. The petitioner has therefore, filed this petition challenging the authority of the assessing officer to reopen the assessment.

5. Appearing for the petitioner, learned Counsel Shri. R.K. Patel took us through the voluminous documents on record and contended that there was no failure on part of the assessee to disclose fully and truly all material facts. In the reasons recorded itself, the assessing officer has referred to documents on record to form a belief that income chargeable to tax has escaped assessment. Notice of reopening which was issued beyond a period of four years is therefore not valid. Counsel further submitted that all the grounds on which the notice of reopening is based were scrutinized by the assessing officer during the original scrutiny assessment.

6. Counsel relied on the following decisions :—

In the case of Parashuram Pottery Works Co. Ltd. v. ITO [1977] 106 ITR 1 (SC) in which it was observed that :—

“It has been said that the taxes are the price we pay for civilization. If so, it is essential that those who are entrusted with the task of calculating and realising that price should familarise themselves with the relevant provisions and become well-versed with the law on the subject. Any remissness on their part can only be at the cost of the national exchequer and must necessarily result in loss of revenue. At the same time, we have to bear in mind that the policy of law is that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce repose in and set at rest judicial and quasi-judicial controversies as it must in other spheres of human activity. So far as the income-tax assessment orders are concerned, they cannot be reopened on the score of income escaping assessment under section 147 of the Act of 1961 after the expiry of four years from the end of the assessment year unless there be omission of failure on part of the assessee to disclose fully and truly all material facts necessary for the assessment.”

Reliance is also placed on the decision of the Division Bench of this Court in the case of Cadila Healthcare Ltd. v. Dy. CIT [2011] 334 ITR 420 in which it was observed as under :—

“It is well settled as held by the Supreme Court in a catena of decisions which have been referred to in the memo of petition that the duty which is cast upon the assessee is to make a true and full disclosure of the primary facts at the time of the original assessment. Production before the Assessing Officer of the account books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not necessarily amount to disclosure contemplated by law. The duty of the assessee in any case does not extend beyond making a true and full disclosure of primary facts. Once he has done that his duty ends. It is for the Assessing Officer to draw the correct inference from the primary facts. It is no responsibility of the assessee to advise the Assessing Officer with regard to the inference which he should draw from the primary facts.

If an Assessing Officer draws an inference which appears subsequently to be erroneous, mere change of opinion with regard to that inference would not justify initiation of action for reopening assessment. The grounds or reasons which lead to the formation of the belief contemplated by the proviso to Section 147 of the Act must have a material bearing on the question of escapement of income of the assessee from assessment because of his failure or omission to disclose fully and truly all material facts.”

7. On the other hand, learned Counsel Shri. Sudhir Mehta appearing for the Department has contended that the assessee had raised false claims of depreciation and further claims which were relatable to the period during which the business was being carried by the firm and the assessee company was not even in existence. Mere fact that in the books of accounts such depreciation was mentioned without any further clarification would not absolve the assessee from the liability to make true and full disclosures. Referring to the explanation to Section 147 of the Act, learned Counsel submitted that the mere fact that with due diligence, the assessing officer could have deduced a certain claim would not necessarily mean that the assessee had disclosed full facts. In this context, learned Counsel has relied on the decision of the Bombay High Court in the case of Indian Hume Pipe Co. Ltd. v. Asstt. CIT [2012] 348 ITR 439/204 Taxman 347/[2011] 16 taxmann.com 190 in which it was observed as under :—

“The basic principle which has been laid down by the Supreme Court in CIT v. Bhanji Lavji [1971] 79 ITR 582 (SC) is whether the assessee has disclosed the primary facts which are necessary for assessment fully and truly. If the assessee has done so, the Assessing Officer is not entitled on a mere change of opinion to commence proceedings for reassessment. If the Assessing Officer has been apprised of all the primary facts necessary for assessment he may well have raised a wrong legal inference from the facts disclosed. On that count he would not be justified in reopening the assessment. Essentially, therefore, in each case the court has to determine as to whether there was a full and true disclosure of primary facts by the assessee. The full and true disclosure which the statute contemplates must be judged in the context of Explanation 1 to section 147. The assessee cannot merely rely upon the fact that if the Assessing Officer had followed an enquiry with due diligence on the basis of the account books or other evidence produced by the assessee, he could have discovered material evidence. The mere production of accounts books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer does not necessarily amount to a disclosure within the meaning of the first proviso to section 147. The nature of the material produced and the circumstances in which it was produced assumes some significance.”

8. Having heard learned Counsel for the parties, we may deal with the rival submissions. Before referring to each individual reasons recorded by the assessing officer and nature of disclosures and the scrutiny during the previous assessment, we may recall that while citing five different reasons for exercising the power of reassessment, the assessing officer in each case had started with a preamble “on going through the office record it is seen that —” or something similar to that effect. In essence therefore, all the grounds for reopening emerge from the materials on record. In other words, the assessing officer did not have any documents or material outside of the assessment proceedings on the basis of which he could form a belief that income chargeable to tax in case of the assessee had escaped assessment. The notice of reopening which has been issued beyond a period of four years from the end of relevant assessment year would therefore have to be judged on such basis.

9. Quite apart from the foundation of the assessing officer to form a belief that income chargeable had escaped the assessment being material already on record, we would also examine whether in the background of the documents on record and the scrutiny previously undertaken by the assessing officer, the assessee can be blamed for non disclosure of true and full facts under the explanation to Section 147 of the Act.

10. With this short preamble, we may refer to different reasons separately. The first reason can be summarised thus. According to the assessing officer, the petitioner had claimed deduction of Rs. 89.92 Lakhs (rounded off) by way of depreciation for the year under consideration. This amount of deduction related to the entire previous year at the specified rates. However, the assessee company had come into existence only with effect from 30.08.2003 and therefore, proportionately the deduction for the period prior to 30.08.2003 which comes to Rs. 32.39 Lakhs (round off) had to be disallowed. Though the assessing officer had not said so, according to him such a deduction could have been claimed only by the partnership.

11. In this context, the defence of the petitioner all along has been that by recording brief reasons in the return and accompanying documents, the assessee company had claimed full deduction for the entire year and correspondingly, the partnership in turn for the same period did not claim any depreciation. In this context in the statement of income alongwith return the assessee had stated as under :—

“(8) Company has undergone Chapter IX registration under the Companies Act, 1956 and “Anupam Rasayan” continues to be unit of the assessee company w.e.f. 31.8.2003. TDS certificates bearing “Anupam Rasayan” pertains to company and income against the TD Certificates after 31.8.2003 are accounted as income in the company. Certain portion of TDS pertaining to period 1.4.03 to 30.8.03 have been claimed as TDS certificates are not separate. There has been no duplicate claim.”

12. This declaration had two features :—

(i) That the assessee had claimed depreciation for the full year and the reasons for such a claim was set forth and;

(ii) That the partnership firm did not claim depreciation for the corresponding period.

13. Apart from this, the assessing officer in the original order of assessment dated 28.12.2007 had after scrutinizing the return allowed depreciation of Rs. 89.92 Lakhs. Thus, this issue was accepted by the Assessing Officer during the original assessment proceedings, may be without specific queries and recording of reasons for accepting the full claim. Nevertheless, in view of the full disclosure by the assessee and the declaration made in the return itself, it cannot be said that the assessee had failed to disclose true and full material facts.

14. Reason no. 2 recorded by the assessing officer in brief was that a claim of Rs. 35,000/= towards subscription charges was made. The period for the expenditure was for 12 months, 11 months out of which pertained to subsequent year. According to him therefore, such expenditure could not have been claimed during the year under consideration in its entirety. Proportionately, therefore expenditure of Rs. 32,083/= had to be disallowed.

15. In this respect, the assessee had in the return itself claimed such sum of Rs. 35,000/= by pointing out that the same was towards subscription charges for the period between 01.03.2004 to 28.02.2005. Here also thus, there was full disclosure on part of the assessee. If the assessing officer was of the opinion that a part of the claim did not fall within the relevant period; during the original assessment, he could have disallowed the same. Not having done so, reopening beyond a period of four years would not be permissible.

16. The third reason was that one – Deviyani Tex Chem had issued a debit note towards interest on late payment by the assessee company. These charges did not pertain to relevant period and therefore could not have been claimed in the present assessment year.

17. In this context, the assessee had pointed out that alongwith the return of income, the assessee did produce a debit note. It was from this very note that the assessing officer was drawing an inference that the claim of expenditure which did not pertain to the year under consideration was made and there was clearly no failure on part of the assessee to disclose true and full facts.

18. Reason no. 4 pertains to interest expenses of Rs. 3.14 Lakhs (rounded off) claimed by the assessee which according to the assessing officer did not fall during the year under consideration and was therefore, not allowable. In this case also, the assessee had not only shown full figures in the account, such issue was also examined by the assessing officer during the original assessment. Thus can be seen from the letter dated 05.01.2007 written by the assessing officer to the assessee under which he called for multiple details, one of them being the following :—

“20. In Schedule-16, you had shown a sum of Rs. 70,96,710/- under the head “Financial Charges”. Out of this, a sum of Rs. 33,29,285/- had been claimed as an expenditure under the head ‘Other interest’. You are requested to kindly justify that the borrowed funds were exclusively utilized for business purpose.”

It can thus be seen that not only had the assessee disclosed full facts, the claim was also examined by the assessing officer during the original assessment and he made no disallowances in the order of assessment. The fact that he did not assign any reason for the same would be of no consequence.

19. Coming to the last ground recorded by the assessing officer, the same pertains to a claim of Rs. 1.10 Lakhs (rounded off) towards the legal and license fees charges. It pertains to an amount which the assessee had paid to the Director General of Foreign Trade by way of penalty. According to the assessing officer, any expenditure in the form of penalty would not be allowable deduction under Section 37(1) of the Act. In this context also the assessee had made necessary disclosures in the return. The fact that such sum of Rs. 1.10 Lakhs was made by way of penalty to Director General of Foreign Trade was thus nothing new to the Assessing Officer. Additionally, the assessing officer also examined such a claim during the original assessment. In a letter dated 05.01.2007 he had raised various queries where he had asked the assessee to supply the following :—

’18. In Schedule-14 you had shown a sum of Rs. 56,11,179/- under the head “Administrative & other expenses”. Please furnish copy of ledger account and also produce supporting evidences in respect of following expenses :

(1) Insurance expenses – Others (2) Postage & telephone exps. (3) Vehicle exps. (4) Travelling & conveyance (5) License fees & consultancy charges (6) Legal & Professional charges.’

20. In response to such a query, the assessee had submitted ledger extract of legal and license fees which contained the details of payment of Rs. 1.10 Lakhs towards penalty for the license. Thus, the claim was processed by the assessing officer during the original assessment.

21. In the circumstances, the reopening of the assessment would not be permissible even with the aid of the explanation to Section 147 of the Act. The impugned notice is therefore set aside. The petition is allowed and disposed of.

 

[Citation : 397 ITR 406 ]

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