Bombay H.C : ‘Contingent deposit’ collected by assessee from customers so as to protect itself from disputed sales tax liability, was to be treated as income of assessee, if same was not kept in separate interest bearing bank account but made a part of business turnover

High Court Of Bombay

Voltas Limited vs. ACIT, Range/Circle 7(3)

Assessment Year : 2004-05

Section : 147

Dr. D.Y. Chandrachud & M.S. Sanklecha, JJ.

Writ Petition No. 312 Of 2012

February 15, 2012

JUDGMENT

Dr. D.Y. Chandrachud, J. – The assessee seeks to challenge the validity of a notice issued on 30 March, 2011 seeking to reopen an assessment for Assessment Year 2004-05. The reopening of the assessment is beyond a period of four years.

2. The reasons which have been communicated to the assessee for reopening the assessment are as follows :

“In this case, the order dated 16.12.2009 giving effect to ITAT’s order dated 10.07.2009 for A.Y.2005-06 was passed recomputing the income u/s. 115JB at Rs.59,54,59,577/-.

In this order set off of brought forward unabsorbed depreciation of A.Y. 1994-95 of Rs.25,81,11,415/- was given to the assessee, out of this Rs.12,36,24,359/- was set off against “Business Income”, Rs.5,79,11,393/- against “Income from House property”, Rs.2,66,55,387/- against “Income from Other Sources” & Rs.4,99,20,276/- against “Capital Gains”.

As per section 32 of Income Tax Act, 1961 unabsorbed depreciation can be carried forward for indefinite period and it can be set off against any heads of income except the income under the head ‘salaries’. But unabsorbed depreciation relevant to A.Y. 1997-98 to A.Y. 2001-02 cannot be carried forward and set off against any other heads of income except income under the head ‘business or profession’ for more than eight assessment years immediately succeeding the assessment year for which the loss was first computed. Similarly, brought forward unabsorbed depreciation allowance for and up to A.Y.1996-97 which could not be set of up to A.Y. 1996-97 shall be carried forward for set off against income under any head for a maximum period of 8 Assessment Years starting from A.Y. 1997-98 up to A.Y. 2004-05.

The above cited legal position was also confirmed by the special bench of ITAT Mumbai on 30.06.2010 in the case of DCIT v. Times Gyaranty Ltd. [ITA Nos. 4917 & 4918/Mum/2008].

On perusal of the details, it is seen that while giving effect to ITAT’s order, the income is computed u/s. 115JB at Rs. 59,54,59,577/-. However, no additions on account of provision for diminution in the value of investment charged to Profit & Loss Account of Rs.2,61,30,260/- and on account of provisions for doubtful debts/ advances of Rs.9,83,92,365/- was made to the book profit declared by the assessee.

For the purpose of section 115JB every company should prepare the Profit & Loss Account in accordance with the provisions of Parts II & III of Schedule VI to the Companies Act, 1956.

In was also laid down that the book profit can be increased by the amount of deferred tax and the provisions there for was inserted by Finance Act, 2008 with retrospective effect from the Assessment Year 2001-02 and the amount or amounts set aside as provisions for diminution in the value of any asset inserted by Finance Act, 2009 with retrospective effect from the Assessment Year 2001-02.

Therefore, owing to the above mentioned reasonings there is under assessment of income to the tune of Rs.25,81,11,415/- & Rs.12,45,22,625/- respectively on the above mentioned issues.

Therefore I have reason to believe & I am satisfied that the income of the assessee chargeable to tax, has escaped assessment for A.Y. 2005-06. Proceedings u/s. 147 of the Act are therefore required to be initiated.”

3. The assessee submitted its objections to the reasons communicated by the Assessing Officer. The objections have been disposed of by an order dated 15 November 2011. From the order passed by the Assessing Officer on the objections raised by the assessee, the basis for reopening the assessment is confined to two issues. The first issue is that the assessee set off unabsorbed depreciation for Assessment Year 1994-95 amounting to Rs.25.81 Crores in Assessment Year 2005-06. In a judgment of its Special Bench in Dy. CIT v. Times Guaranty Ltd. [2010] 40 SOT 14 (Mum.) (SB) the Tribunal held that unabsorbed depreciation for the period up to 1996-97 could be carried forward and set off against the income from any head for a maximum period of eight assessment years. Hence, according to the Assessing Officer the set off of unabsorbed depreciation for Assessment Year 1994-95 against the income of Assessment Year 2005-06 was not in accordance with law and consequently income has escaped assessment. The second issue in relation to which the assessment is reopened is that while giving effect to the order of the Tribunal, income was computed under Section 115JB without any addition on account of provision for diminution in the value of investment and provision for doubtful debts/advances. In this regard reliance has been placed on a subsequent amendment made by the Finance Act of 2009 with retrospective effect from 1 April 2001. According to the Assessing Officer since the amendment to Section 115JB has been brought about with retrospective effect from 1 April 2001, the Assessing Officer was ipso facto entitled to issue a notice under Section 148 since the relevant income by way of diminution in the value of assets/investments which was required to be added back has not been brought to tax.

4. The submission of learned senior counsel appearing on behalf of the assessee is that –

(i) Ex facie, neither the reasons which have been communicated to the assessee nor the grounds which have been adduced for rejecting the objections of the assessee contain even an allegation that there was a failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. Consequently, the jurisdictional condition for reopening an assessment beyond a period of four years has not been fulfilled;

(ii) The record before the Court would show that there was a complete and full disclosure by the assessee on the basis of its claim in the return of income that was filed for Assessment Year 2005-06;

(iii) The judgment of the Special Bench of the Tribunal was delivered on 30 June 2010 which was after the assessment order for Assessment Year 2005-06 which was issued on 31 December 2007. Similarly, the amendment to Section 115JB was brought in by the Finance Act of 2009, though with retrospective effect from 1 April 2001. A subsequent judicial decision and for that matter a subsequent legislative amendment cannot ipso facto result in an inference of a failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. Since the reopening has taken place beyond a period of four years, the validity of the reopening of the assessment depends upon the fulfilment of the requirement that there must be a failure on the part of the assessee to fully and truly disclose the material facts which is absent in the present case.

5. On the other hand, counsel appearing on behalf of the Revenue submitted that the Assessing Officer was within his jurisdiction, even beyond a period of four years in having due regard to the subsequent decision of the Special Bench of the Tribunal and to the legislative amendment brought about by the Finance Act of 2009 though this was after the order of assessment.

6. Before we deal with the rival submissions, it would be necessary to advert to the material on the record. By a letter dated 26 October 2005 the assessee while enclosing its return of income for Assessment Year 2005-06 forwarded inter alia (i) the report of its auditor under Section 115JB(4) in respect of its MAT computation and (ii) the tax audit report under Section 44AB. In the computation of income, the assessee added back to its profit before taxation the provision for diminution in the value of investment and increase in the provision for doubtful debts and advances, charged to the Profit & Loss Account. This was a part of the normal computation of income by the assessee. The assessee effected a set off of the business loss brought forward from Assessment Years 1999-2000 and 2000-01 against its business income. Similarly, the assessee made a set off of its unabsorbed depreciation for Assessment Year 1994-95 against the business income, income from house property, capital gains and income from other sources. The tax audit report which was furnished together with the return of income provided details of the brought forward loss and of the depreciation allowance in Exhibit H. Exhibit H provided under the head of depreciation an amount as assessed of Rs.67.50 Crores. Similarly, in the Profit and Loss Accounts of the assessee for the year ending 31 March 2005, the total investments were reflected at Rs.60.19 Crores while there was a provision for diminution in value to the extent of Rs.13.97 Crores. Schedule H contained a provision for doubtful debts of Rs.26.15 Crores.

7. During the course of the assessment proceedings, a notice was issued to the assessee on 9 February 2007 requiring inter alia a disclosure of details for provisions made, which were claimed as a deduction during the year. By a separate notice dated 19 June 2007 the assessee was called upon to furnish a list of accounts for which a provision for doubtful debts and advances was charged to the Profit and Loss Account.

8. The Assessing Officer made his order of assessment for Assessment Year 2005-06 on 31 December 2007. The total income of the assessee was computed by setting off unabsorbed depreciation against the business profits, income from house property and income from other sources. A total amount of Rs.71.07 Crores, was set off as unabsorbed depreciation, while a balance of Rs.47.35 Crores was carried forward.

9. The assessment for Assessment Year 2005-06 is sought to be reopened beyond a period of four years of the end of the relevant assessment year. Both the grounds which have been formulated by the Assessing Officer for reopening the assessment pertain to events which have taken place after the order of assessment was passed. The first of those is the judgment of the Special Bench of the Tribunal which was delivered on 30 June 2010, according to which unabsorbed depreciation for the period up to 1996-97 could be carried forward and set off against the income under any head for a maximum period of eight assessment years. Consequently according to the Assessing Officer unabsorbed depreciation pertaining to Assessment Year 1994-95 could not have been set off against the income for Assessment Year 2005-06. The second of those events is a legislative amendment brought about by the Finance Act of 2009 with retrospective effect from 1 April 2001. According to the Assessing Officer income was computed under Section 115JB without any addition being made on account of provision for diminution in the value of investment and provision for doubtful debts and advances. Both the reasons which have been indicated by the Assessing Officer may be reflective of the fact that there is an escapement of income. But, that in itself is not sufficient to validate the reopening of assessment beyond a period of four years. Beyond a period of four years, the power of the Assessing Officer is structured by the requirement that there must be a failure on the part of the assessee to fully and truly disclose all material facts necessary for the assessment. Neither the reasons which have been communicated to the assessee nor for that matter the order passed on the objections raised contains any allegation or statement that there has been a failure on the part of the assessee to disclose fully and truly material facts necessary for the assessment. While a subsequent decision of a Court or a legislative amendment enforced after the order of assessment may legitimately give rise to an inference of an escapement of income, before the Assessing Officer proceeds to reopen an assessment after the expiry of four years of the end of the relevant Assessment Year, he must nonetheless apply his mind to the fundamental question as to whether there has been a failure to disclose on the part of the assessee. In the present case, ex facie there is no such allegation. Moreover, the return of income and the material placed on the record by the assessee together with the return would make it abundantly clear that the assessee had set forth the basis of its claim and there was no suppression of material facts. In these circumstances, and for the reasons that are stated hereinabove, we are of the view that the fundamental condition for reopening the assessment beyond a period of four years has not been fulfilled.

9A. In Sesa Goa Ltd. v. Jt. CIT [2007] 294 ITR 101/[2008] 168 Taxman 281 (Bom.) a Division Bench of this Court has held that a subsequent decision of a Court cannot justify the reopening of an assessment after a period of four years by itself, as the subsequent decision would not necessarily mean that there was a failure on the part of the assessee to disclose fully and truly all material facts. In CIT v. K. Mohan & Co. (Exports) [IT Appeal Nos. (Lodg.) 2347 of 2010 & 1263 of 2011, dated 1-7-2011], a Division Bench of this Court dealt with an appeal arising from a decision of the Tribunal cancelling reassessment proceedings initiated by the Assessing Officer beyond a period of four years from the end of the relevant Assessment Year. The assessment was sought to be reopened as a result of a retrospective amendment to Section 80HHC introduced by the Taxation Laws Amendment Act, 2005 with effect from 1 April 1998. The Division Bench held that if the Legislature amends the provisions of the Act with retrospective effect, it cannot be said that there was a failure on the part of the assessee to disclose fully and truly all material facts relevant for the purposes of assessment. A similar view was taken by the Division Bench in its recent judgment dated 24 January 2012 in DIL Ltd. v. Asstt. CIT [2012] 18 taxmann.com 290 (Bom.) dealing with the retrospective amendment of Section 115JB by the Finance Act of 2009 with effect from 1 April 2001. The Division Bench noted that clause (i) of Explanation 1 was introduced to include the amount or amounts set aside as provision for diminution in the value of investment. In view of the retrospective amendment of law by Parliament, the Court held that the Assessing Officer may have reason to believe that income has escaped assessment. But that in itself was not held to be sufficient for reopening an assessment beyond a period of four years unless there was a failure on the part of the assessee to fully and truly disclose all material facts necessary for assessment.

10. Rule is accordingly made absolute by setting aside the impugned notice dated 30 March 2011.

There shall be no order as to costs.

[Citation : 349 ITR 356]

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