Gujarat H.C : Where Assessing Officer was convinced that depreciation was wrongly claimed at full rate, reassessment notice could not be quashed merely on ground that she formed opinion on basis of audit objection

High Court Of Gujarat

N.K. Industries Ltd. vs. ITO (OSD)

Section : 32, 148

Akil Kureshi And Ms. Sonia Gokani, JJ.

Special Civil Application No. 24743 Of 2006

March  11, 2014

JUDGMENT

Akil Kureshi, J. – The petitioner has challenged a notice dated January 16, 2006, as annexed at annexure B to the petition, issued by the respondent-Assessing Officer under section 148 of the Income-tax Act, 1961 (“the Act” for short). Vide such notice, she proposed to reopen the assessment of the petitioner for the assessment year 2001-02. Such assessment was originally framed after scrutiny. At the request of the petitioner, the Assessing Officer supplied the reasons recorded for issuing such notice. Such reasons read as under :

“In this case, return of income for the assessment year 2001-02 was filed on October 31, 2001, declaring therein total loss of Rs. 32,36,408 which was finalised under section 143(3) on March 30, 2004, on a total loss of Rs. 26,12,838.

2. On a perusal of the audit report furnished along with the return of income it was noticed at Sl. 12B that ‘the company had given loan amounting to Rs. 660.62 lakhs and the same is considered doubtful and, therefore, interest was not charged’. As per the mercantile accounting system, accrued interest has to be considered as income. The interest worked out at the rate of 18 per cent. on Rs. 660.62 lakhs comes to Rs. 1,18,91,160. The company has failed to disclose the said income amounting to Rs. 1,18,91,160. This has resulted in under-assessment of Rs. 92,67,322 (Rs. 1,18,91,160 – Rs. 26,23,838 loss determined under section 143(3)).

3. It is seen from the profit and loss account for the financial year 2000-01 attached with the return that the company had paid interest to others of Rs. 2,10,876 and to bank and financial institution Rs. 7,14,237. After adjustment of interest received of Rs. 5,27,260 net interest paid on loan borrowed debited to the profit and loss account of Rs. 3,97,853. On the other hand, it had granted interest-free unsecured loan of Rs. 652.63 lakhs to the company under the same management. The loanee company’s net worth was negative and there was no stipulation of repayment. Since the company had obtained interest bearing loan and given interest-free loan to another company under the same management which cannot be said to have been used for business purpose of the assessee. Therefore, interest of Rs. 3,97,853 debited to the profit and loss account requires to be disallowed under section 36(1)(iii).

4. It is also noticed from the statement of income that allowable depreciation under section 32 of the Income-tax Act was Rs. 2,42,60,145. However, annexure I shows computation of depreciation pertaining to machinery as under :

Add : Addition after 1-10-2000  
Plant and machinery Rs. 2,00,629
Office equipment heater Rs. 1,500
  Rs. 4,26,080 at 12.5 per cent.
  = Rs. 53,260

The company has put to use plant and machinery and office equipment worth Rs. 2,02,129 after October 1, 2000, on which depreciation at the rate of 12.5 per cent. works out to be Rs. 25,266. The assessee-company has wrongly worked out depreciation on the written down value of Rs. 4,26,080 at the rate of 12.5 per cent. at Rs. 53,260 claiming excess depreciation of Rs. 27,994 which requires to be withdrawn.

5. Considering the above facts, I have reason to believe that there is an escapement of income within the meaning of section 147(c) of the Income-tax Act, 1961. Issue notice under section 148 of the Income-tax Act.”

2. The petitioner raised objection to the notice for reopening under communication dated February 27, 2006. Such objections were, however, rejected by the Assessing Officer by an order dated November 14, 2006. At that stage, the petitioner filed this petition.

3. In the present case, notice for reopening had been issued within a period of four years from the end of the relevant assessment year. Under such circumstances, the additional requirement arising out of the proviso to section 147 of the Act of the income escaping the assessment due to failure on the part of the assessee to disclose truly and fully all material facts would not arise. It is also not a case of the petitioner that any of the grounds on which the reopening is based was scrutinised in the original assessment and that, therefore, the Assessing Officer could be stated to have formed an opinion on any of these controversial issues. The main contention of the petitioner, however, was that the Assessing Officer had acted at the behest of the audit party and that the reopening of the assessment was not based on independent reason to believe held by the Assessing Officer. In this context, we had perused the original file presented by the learned counsel for the Revenue. It thus emerge that certain aspects of the matter were brought to the notice of the Assessing Officer by the audit party. It also appears that of the two objections raised by the audit party, the Assessing Officer had serious dispute. She, in fact, stated that such objections are not acceptable. She also recorded her reasons for stating so. This would be apparent from the internal communication in the form of a letter dated August 9, 2005, written by the Assessing Officer to the Commissioner of Income-tax. Relevant portion thereof reads as under :

“3. The Revenue audit party has raised the following audit objections :

(a)   It was noticed from the audit report that the company had given loan amounting to Rs. 660.62 lakhs and the same was considered doubtful, therefore, interest was not charged. As per the mercantile accounting system, accrued interest was to be considered as income. The interest worked out at the time of 18 per cent. comes to Rs. 1,18,91,160. This amount has not been reflected in the profit and loss account by the assessee-company and also this point was not considered at the time of assessment proceedings, which resulted in underassessment of income of Rs. 92,67,322 with short-levy of tax of Rs. 46,62,620 including interest of Rs. 14,19,058 under section 234B.

(b)   The assessee-company had debited to the profit and loss account net interest paid on borrowed loan to the extent of Rs. 3,97,853 on the other hand the assessee-company had granted interest-free unsecured loan of Rs. 952.63 lakhs to the companies under the same management. The loanee company’s net worth was negative and there was no stipulation of repayment. Since the assessee-company had obtained interest bearing loan and given interest-free loan to the company under the same management, which obviously was not used for business purpose. Therefore, interest of Rs. 3,97,853 debited to the profit and loss account requires to be disallowed under section 36(1)(iii) which resulted in short-levy of tax of Rs. 1,57,350.

(c)   The assessee-company has put plant and machinery and office equipment worth Rs. 2,02,129 after October 1, 2000, on which depreciation at 12.5 per cent. works out to Rs. 25,266. The assessee-company has worked out the depreciation on the written down value of Rs. 4,26,080 at 12.5 per cent. of Rs. 53,260. Claiming excess depreciation at Rs. 27,994 which resulted in short-levy of tax of Rs. 1,107.

4. The objection mentioned in paragraph 3(a) and 3(b) are not acceptable in the light of the judgment delivered by the hon’ble Supreme Court in the case of CIT v. Shoorji Vallabhdas & Co. [1962] 46 ITR 144 (SC) in which it was held that if income does not arise at all, there cannot be a tax, even though in books an entry is made about ‘hypothetical income’ which is not materialised. The issue which arose in the audit is fully covered by the findings of the apex court. Also in the case of Godhra Electricity Co. Ltd. v. CIT [1997] 225 ITR 746 the hon’ble Supreme Court has held that hypothetical income cannot be brought to tax unless it is accrued. 5. However, the following remedial actions are available in this case :

Sl. No. Remedial action Time limitation
1 Under section 263 31-3-2006
2 Under section 147 31-3-2006

Remedial action under section 154 is available only for the objection raised in paragraph 3(c) of the letter. However, this point can be considered at the time of action under section 263 or under section 147, as the case may be.”

4. With respect to the first of the two reasons recorded by the Assessing Officer, therefore, it clearly emerges that she was acting at the instance of the audit party, though she herself held a contrary belief that no income chargeable to tax has escaped assessment on these two counts. Had this been the sole reason for issuing notice for reopening, we would have perhaps allowed the petition and quashed the notice. In the present case, however, the Assessing Officer was convinced that on the third ground recorded in the reasons, income chargeable to tax had escaped assessment. It is true that such ground was also brought to her notice by the audit party and that by itself would not mean that she was acting at the instance of the audit party. As held by the Supreme Court in the case of CIT v. P. V. S. Beedies (P.) Ltd. [1999] 237 ITR 13/103 Taxman 294, if a particular issue is brought to the notice of the Assessing Officer by the audit party and the Assessing Officer of his/her application of mind finds that the ground is valid, reopening of assessment cannot be quashed merely because such ground was brought to the notice of the Assessing Officer by the audit party. In this context, even the counsel for the petitioner was unable to dispute that the question of depreciation requires re-examination since the question whether the asset for which the depreciation was claimed was put to use before 30th September of the year under consideration, and, therefore, whether full depreciation at the specified rate during the year under consideration was allowable.

5. On this ground, we are not inclined to quash the notice. The petition is, therefore, dismissed. Rule is discharged. Interim relief, if any, stands vacated.

[Citation : 362 ITR 502]

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