Gujarat H.C : Where Assessing Officer completed scrutiny assessment after examining every aspect of assessee’s case in detail, in view of proviso to section 147, he could not initiate reassessment proceedings after expiry of four years from end of relevant assessment year merely at behest of audit party

High Court Of Gujarat

Fag Bearings India Ltd. VS. DCIT

Assessment year : 1996-97

Section 147, 143

Akil Kureshi And Ms. Harsha Devani, JJ.

Special Civil Application No. 16204 Of 2003

September 15, 2012


Akil Kureshi, J. – The petitioner, a public Ltd. company has challenged a notice dated 27.12.2002 issued by respondent Deputy Commissioner of Income-tax under section 148 of the Income-tax Act(“the Act” for short). The petitioner has also challenged subsequent notice under section 142(1) of the Act issued on 7.11.2003.

2. For the assessment year 1996-1997, the petitioner filed the return of income on 30.11.1996. Such return was initially accepted without scrutiny under section 143(1) of the Act. Later on however, a scrutiny assessment was undertaken. During such scrutiny assessment, wide range of issues were examined by the Assessing Officer. Series of queries were raised and replies were filed by the petitioner. Ultimately, the assessment was framed on 9.3.1999 making certain additions and disallowances in the return filed by the petitioner.

3. After such scrutiny assessment was completed, the Assessing Officer issued a letter dated 19.8.1999 and called upon the petitioner to explain the following points :

“1.Excise Duty relatable to closing stock of finished goods

In para D of schedule 16 it is written that excise duty on closing stock of finished goods has not been included in its value and the same has not been debited in the P & L A/c. Here it is to bring to your notice that excise is leviable on manufacturing of goods and since the finished goods have been manufactured, liability for excise has accrued. Moreover, in view of the Hon’ble Supreme Court’s decision in the case of Mc. Dowell, it is held that excise is part of turnover, therefore since the excise duty has not been provided during the year, the same cannot be allowed u/s.43 B however the value of closing stock must include the component of excise duty.

2. Patterns and dies claimed as revenue expenses:

Accordingly to Schedule 14 stores, spares & tools, consumed, amounting to Rs.871.06 lakhs have been written off. Out of the above, tools etc, closing below Rs.750 amounting to Rs.11.28 lakhs as per para 10 of the schedule 17 has been added back in the computation of income. It is not clear from the details of fixed assets including additions during the year whether there is a separate heads for patterns or dies and moulds which are used for manufacturing various types of bearings. Here it may be pointed out that expenses relating to patterns and dies, if any, cannot be debited to P & L A/c. as they are in the nature of capital expenses. However, depreciation @25%, may be allowed on the same.

3. Deduction u/s.890:

A disallowance u/s.143(1)(a) was made towards the claim of deduction u/s.80-0. The same was allowed by Hon’ble CIT (A) on the grounds that the same was a debatable issue. In his order CIT(A) had directed to allow deduction u/s.80-0 on the relevant net income computed after deducting expenses incurred for earning such income in view of the conditions laid down by the C.C.I.T. in his approval.

You have furnished the details of expenditure of Rs.29.61 lakhs for your M.F. Division in which you have earned consultancy income. The said expenditure has been proportionately allocated as per Annexure BP of the letter dated 05.03.99.

It appears that direct expenses and indirect expenses have not been allocated proportionately for netting out qualifying receipts u/s. 80-0. Few of such expenses are Directors’ remuneration, Auditors’ remuneration and other expenses of head office. You have allocated only Rs.1000/- towards bank charges which appears to be improbable keeping in view of the huge receipts.

4. Deduction u/s.80HHC:

Vide your letter dated 24/02/99, you have allocated Rs.5,58,640/- being indirect expenses, relatable to export trading activity. As in the matter of deduction u/s.80-0, it appears that all the head office expenses have not been proportionately allocated being indirect cost as per provision to Sec.80HHC(3) Explanation (e) which reads as under :

“Indirect cost means costs, not being direct costs allocated in the ratio of the export turnover in respect of trading goods to the total turnover.”

There is no allocation out of directors’ remuneration Auditors’ remuneration, legal & professional fees, bank charges, clearing expenses. etc. Entire head office expense has to be proportionately allocated before allowing deduction u/s.80HHC on profit of export trading activity.

You are requested to offer your explanation and clarification on above issues and explain why remedial action should not be taken to revise the assessment order to bring to tax any income having escaped assessment in view of above observation.”

4. On 30.3.2001, the Assessing Officer issued a notice for reopening of the assessment. The reason recorded by the AO contained only one ground namely, “on verification of assessment records it is noticed that provision for retirement benefits of the employees included an amount of Rs.41.83 lakhs pertaining to earlier years. Since you are following mercantile system of accounting the above amount is required to be disallowed for the year under consideration.

5. We are not concerned with this process of reopening, we may however, notice that subsequently yet another notice for reopening came to be issued on 27.12.2002. Since the reasons for reopening recorded by the Assessing Officer were not supplied to the petitioner, the petitioner approached this Court without such reasons. This Court therefore, directed the respondent to supply such reasons and permitted the petitioner to raise objections. The Assessing Officer however, by his order dated 29.10.2004 rejected the objections of the petitioner.

6. From the said order, we find the reasons for reopening on the basis of which impugned notice was issued. Such reasons read as under :

“In the instant case, assessment u/s.143(3) was made on 9.3.99 on a total income of Rs.18,03,97,553/- as against the total income declared by the assessee at Rs.16,31,44,875/-. The total income of the assessee was revised at Rs.16,20,66,693/- in the order u/s.250 dated 30.5.02. In this case, it is also seen that the reassessment u/s.143(3) r.w.s. 147 was made on 26.3.02 on a total income of Rs.16,62,46,580/-.

It is noticed from Para D of Schedule 16 of the Balance sheet, it is written that excise duty on finished goods has not been included in its value and the same has not been debited to the P & L Account.

It is also noticed that the assessee has written off consumed stores, spares tools, etc. amounting to Rs.871 lakh. It is not clear whether patterns and dies required for manufacturing of bearings are included in the above expenses written off. Expenses relating to patterns and dies can not be debited to P & L account as they are in the nature of capital expenses.

While computing the allowable deduction u/s.80-0 indirect expenses like director’s remuneration, auditors’ remuneration and other expenses of the head office should have been proportionately allocated.

While computing the deduction u/s.80 HHC indirect expenses like director’s remuneration, auditor’s remuneration etc., should be proportionately allocated.”

7. Having heard learned counsel for the parties, we find that in the present case, notice for reopening was issued beyond a period of four years from the end of relevant assessment year. Therefore, for the Assessing Officer to assume jurisdiction for reopening the assessment, both the conditions of his belief that income chargeable to tax has escaped assessment and the same was for the reason of the assessee failing to disclose truly and fully all material facts, must be satisfied.

8. The petitioner has strongly urged that all four questions were threadbare examined by the Assessing Officer during the course of original assessment. There was no failure on part of the assessee to disclose any of the material facts. It is also the case of the assessee that Assessing Officer issued notice only at the behest of the audit party.

9. In the petition, the assessee has pointed out disclosures during the original assessment in the following manner :

“4. Particularly with reference to four issues which are now sought to be raised by the respondent in the course of reassessment proceedings they were gone into in detail in the course of original assessment and considered by the respondent and decision was taken thereon by him. Hereinbelow is set out with reference to the said four items, the correspondence and the decision taken by the respondent in the course of original assessment.

I. Reg. Inclusion of excise duty in the valuation of closing stock.

In this regard, in the course of assessment, the petitioner by its letter dated 24-2-99 stated in para 5 of its letter as follows :—

As regarding excise duty payable on production, we have to state that as per the provision of Excise Rule, the excise duty is payable only at the time of clearance of goods from factory. Till that time finished goods are to be stored in bonded stores and excise duty is not payable on such goods as long as same is lying in bonded premises.

The respondent accepted this explanation and, therefore, no addition was made to the value of closing stock on account of excise duty as the same was not payable till the goods were cleared by the petitioner.

II Reg. Rs.871.06 lakh claimed as expenses on stores, spares and tools consumed:

With regard to this item the petitioner dealt with the issue under its letter dated 18-2-99 in para 22 thereof and by way of Ann. AU, the details of the said stores and spares consumed amounting to Rs.8,71,06,200 were given. As some further details were required by the respondent, a list running into 30 pages was furnished containing itemwise details of the said stores and spares consumed. As the respondent was satisfied about the details, no additions were made in the assessment order in this regard.

III Reg. Deduction u/s.80-0 of the Act:

With regard to this deduction, the petitioner dealt with the same by its letter dated 10-12-98 at para 6 thereof. Full details of the consultancy income received in foreign currency were enclosed. The claim was to 50% deduction on the income received by the petitioner in respect of consultancy fees in foreign currency. They had claimed on gross receipts of Rs.1,59,10,426 a deduction of 50% i.e. Rs. 79,55,213. The respondent in para 15 of his assessment order took view that from the gross receipts expenses had to be deducted while calculating the consultancy fees. Accordingly, he reduced the amount claimed by Rs.3,55,000 resulting into relief given at 5 0% on the said amount being Rs.77,77,712. The details of the expenses were furnished by the petitioner in the course of assessment.

IV Reg. : Claim u/s. 80HHC of the Act :

The working of the claim u/s.80HHC for export benefits was given by the petitioner along with the return accompanied by report of the Chartered Accountant. The issue was dealt with by the petitioner in its letter dated 22-1-99 in para 2(b). Thereafter, another letter was given on 24-2-99 whereby in para 1 thereof, the petitioner supplied the revised working for deduction u/s.80HHC by Ann. BA of the said revised working while passing the assessment order.

The petitioner says that the respondent in para 5 deals with relief u/s. 80HHC and in para 15 has dealt with relief u/s.80-0. On other two points, as the explanation offered by the petitioner was accepted, no question of referring to the same in the assessment order arose.

Hereto annexed as Exh. A is the copy of assessment order dated 9-3-99 received on 22-3-99.”

10. In addition to such averments, the petitioner has also produced several documents in the form of correspondences between the petitioner and the Assessing Officer during the course of original assessment. For example at page 84 of the paper book, we have a letter dated 22.1.1999 written by the petitioner to the Assessing Officer justifying besides other claims, it claim for reduction under section 80 HHC of the Act. The details of such claims and justification was pointed out. At page 91 of the paper book, we have yet another letter of assessee dated 18.2.1999 in which further details as called for by the Assessing Officer with respect to various claims of the petitioner assessee were explained. In yet another letter dated 24.2.1999, the petitioner wrote to the Assessing Officer that in continuation of earlier letter dated 22.2.99 following further details are supplied. In such letter the petitioner touched the aspect of claim of 80HHC and supplied the details as desired by the Assessing Officer. Full figures of such claims were filed.

11. From the above, it can be seen that quite apart from the reasons recorded not stating that the income chargeable to tax had escaped assessment for the failure on part of the assessee to disclose truly and fully all material facts, even from the record, such essential condition is demonstrably not justified.

12. The assessee had made several claims in the return filed supported by documents. During the course of scrutiny assessment, these claims which are the subject-matter of reasons recorded were examined by the Assessing Officer. The assessee pointedly brought to the notice of the Assessing Officer such claims made. It may be that in the ultimate order of assessment that the Assessing Officer passed, these specific issues were not recorded. However, this would be entirely different from suggesting that such issues escaped the notice of the Assessing Officer for the reason of assessee failing to disclose truly and fully all material facts. Additionally in the petition itself the assessee has categorically averred that the Assessing Officer had issued notice dated 19.8.1999 at the behest of the audit party calling upon the explanation of the petitioner. It is further averred that the letter was issued under the audit objection only. It was also contended that the Assessing Officer was fully aware about all four issues and not only in the original assessment proceedings, but also during the first reassessment proceedings.

13. These averments have not been touched by the respondent though two affidavits have been filed before us. This would further led credence to the petitioner’s grievance that reopening notice has been issued at the behest of the audit party. Quite apart from the petitioner’s averment in this regard we are intrigued by the fact that though precisely on these four issues, the Assessing Officer called upon the petitioner’s explanation through a letter dated 19.8.1999, in the subsequent notice for reopening which the Assessing Officer issued on 23.1.2002 (not impugned in this petition), only one ground was taken as reason to reopen the assessment which was outside of the issues on which the explanation of the assessee was called for. This would further demonstrate that the Assessing Officer at that point of time was not inclined to reopen the assessment on the above-noted four grounds.

14. Sum total of the above discussion is that impugned notice lacks validity with consequential effect. Same is therefore, quashed. Petition is disposed of. Rule made absolute.

[Citation : 353 ITR 405]

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