Gujarat H.C : Gifts – Where a Singapore company transferred its shareholding in an Indian company to its Indian subsidiary company without any consideration, to prove that it was not a gift, it has to show that said transfer was authorised by its articles of association and it meets requirements of section 82 of Companies Act, 1956

High Court Of Gujarat

Dishman Pharmaceuticals & Chemicals Ltd. vs. DCIT (OSD) (No. 2)

Assessment Year : 2004-05

Section : 147

Akil Kureshi And Ms. Sonia Gokani, JJ.

Special Civil Application No. 15468 Of 2010

March  8, 2011 

JUDGMENT

Akil Kureshi, J. – The petition was heard for final disposal at the admission stage with the consent of learned advocates for the parties.

2. The petitioner-assessee has challenged a notice dated March 8, 2010, for reopening of assessment for the assessment year 2004-05. Along with the notice, the petitioner was served with a copy of reasons for reopening of the assessment recorded by the Assessing Officer. The petitioner questions the legality of such communication on various grounds.

3. The facts in brief are as follows :

3.1 For the assessment year 2004-05, the petitioner company filed the return by declaring income of Rs. 3,17,30,999 on November 1, 2004. The case of the petitioner was taken in scrutiny assessment by the Assessing Officer under section 143(3) of the Income-tax Act, 1961. On December 29, 2006, the Assessing Officer assessed the income of the petitioner at Rs. 8,38,88,973. The assessment order originally framed is produced on record at annexure B to the petition. A bare perusal of the order suggests that the Assessing Officer had strenuously gone into the various aspects of the income of the petitioner company such as its turnover, its profits from various activities and its claim for deduction under section 80HHC.

3.2 By the impugned communication dated March 8, 2010, long after the scrutiny assessment was framed in the year 2006, the Assessing Officer sought to reopen the assessment on the following ground :

“The assessee-company filed its return of income on November 1, 2004, declaring a total income of Rs. 3,17,30,999. The assessment was finalized under section 143(3) on December 29, 2006, determining the total income at Rs. 8,38,88,973. On verification of the records, it is seen that the enhanced figure, i.e., profits of business Rs. 3,84,56,031 taken was not reduced while giving effect to the order of the Commissioner of Income-tax (Appeals) and the loss from trading goods was ignored for the purpose of calculation of deduction under section 80HHC. This resulted into underassessment to the extent of Rs. 10,24,629.

In the light of about fact, I am of the firm belief that the income to the tune of Rs. 10,24,629 has escaped assessment within the meaning of section 147 of the Income-tax Act, 1961. Looking to the facts, it is a fit case of reopening the assessment for the assessment year under consideration as per the provisions of section 147 of the Income-tax Act, 1961.”

3.3 The petitioner raised objection to the notice for reassessment, vide its communication dated October 15, 2010. In this communication, the petitioner raised several grounds including that all facts and materials necessary to decide the claim of deduction under section 80HHC of the Act were part of the original assessment and were discussed at length by the Assessing Officer. The assessee further contended that there was no failure on its part to disclose fully and truly all material facts necessary for assessment made and that reasons recorded do not even suggest so.

3.4 Objections raised by the petitioner came to be disposed of by the Assessing Officer by an order dated November 10, 2010. The Assessing Officer recorded that there are two issues on which reassessment is required to be made. The first issue is regarding excess deduction allowed under section 80HHC and the second issue is regarding deemed dividend in the hands of the assessee-company.

3.5 At this stage, we may briefly notice that the second issue referred by the Assessing Officer in his order disposing of the objections of the petitioner was not part of the reasons recorded for reopening the assessment. To this aspect of the matter, we may advert to at a later stage. Suffice it to say, the Assessing Officer turned down various objections raised by the petitioner. The assessee was directed to furnish reply on the merits, if any, by December 9, 2010.

3.6 The assessee instead of filing such a reply, approached this court, filed the present petition and challenged the reopening of notice.

4. From the facts on record, it emerges indisputably that an assessment already framed under section 143(3) of the Act is sought to be reopened after four years of the end of the assessment year. In view of the provisions contained in section 147 of the Act, such reopening can be permitted only if the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment and that such escapement of assessment was on account of failure on the part of the assessee to file return under section 139 or in response to the notice issued under section 142(1) or under section 148 or to disclose fully and truly all material facts necessary for the assessment. Since, admittedly, the assessee had not failed to file the return, the question that needs to be considered in the present case is whether there was any escapement of income from assessment on account of failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment.

5. In the recent judgment in the case of Dishman Pharmaceuticals & Chemicals Ltd. v. Dy. CIT (OSD) (No. 1) [2012] 346 ITR 228/[2013] 30 taxmann.com 67 (Guj.) the aspects touching the powers of an Assessing Officer to reopen an assessment beyond four years of the end of the assessment year under section 147 of the Income-tax Act came to be considered. Referring to several judgments of the apex court and High Courts cited before the Bench the following observations were made (page 240) :

“From the above judicial pronouncements, the following principles can be culled out :

(i) To confer jurisdiction to the Assessing Officer to reopen the assessment under section 147 of the Income-tax Act, beyond four years from the end of the assessment year, the following two conditions must be satisfied (a) that the Assessing Officer must have reason to believe that the income chargeable to tax has escaped assessment ; and (b) that the same was occasioned, on account of either failure on the part of the assessee to make a return of his income for that assessment year, or to disclose fully and truly all material facts necessary for assessment of that year ; (ii) both the above conditions are conditions precedent and must be satisfied simultaneously before the Income-tax Officer can assume jurisdiction to reopen the assessment beyond four years of the end of the assessment year ; (iii) such reasons must be recorded and if the reasons recorded by the Assessing Officer do not disclose satisfaction of these two conditions, reopening notice must fail ; (iv) there is no set format in which such reasons must be recorded. It is not the language but the contents of such recorded reasons which assumes importance. In other words, a mere statement that the Assessing Officer had reason to believe that certain income has escaped assessment and such escapement of income was on account of non-filing of the return by the assessee or failure on his part to disclose fully and truly all material facts necessary for assessment would not be conclusive. Nor absence of any such statement would be fatal, if on the basis of reasons recorded, it can be culled out that there were sufficient grounds for the Assessing Officer to hold such beliefs ; (v) such reasons must emerge from the reasons recorded by the Assessing Officer and cannot be supplied through an affidavit filed before the court. However, the Gujarat High Court in the case of Aayojan Developers v. ITO [2011] 335 ITR 234 (Guj) has accepted the view that to elaborate such reasons already recorded, reference would be permissible to the affidavit filed by the Department before the court ; (vi) what would amount to true and full disclosure of all material facts must depend on each case and no strait jacket formula of universal application can be provided. It can, however, safely be stated that the duty of the assessee is to disclose primary facts and it is not his duty to lead the Assessing Officer to any particular inference of fact or of law on the basis of such primary disclosures. In other words, once the assessee discharges his duty of stating all the primary facts, what inferences and conclusions should be drawn is the duty of the Assessing Officer ; (vii) at the time of ascertaining whether the notice was validly issued, what could be the probable conclusion of fresh assessment if reopening is permitted, is not the inquiry of the court. In other words, the merits of the proposed action, through opening of the assessment, cannot be gone into by the court beyond prima facie stage.”

6. Bearing in mind the above legal principles, we are required to examine the contentions of both sides with reference to the facts on record.

7. Counsel for the petitioner contended that there was no concealment or failure on the part of the petitioner to fully and truly disclose all material facts for assessment of the income. He submitted that the return filed by the assessee was taken in scrutiny assessment by the Assessing Officer. After threadbare examination of all the aspects of the matter assessment was framed. Reopening of the assessment beyond four years thereafter, was not justified.

8. He further contended that the Assessing Officer had calculated the effect of direct and indirect cost attributable to export goods on the export turnover in respect of trading goods and found that a sum of Rs. 8,69,403 was required to be deducted from the figure of Rs. 1,13,70,679 arrived at by him on the basis of the ratio of adjusted profit of the business multiplied by adjusted export turnover to the adjusted total turnover. This aspect was thus very much before the Assessing Officer at the time of regular assessment proceedings.

9. He further contended that reasons recorded by the Assessing Officer nowhere either record or even demonstrate that any income escaped assessment on account of the petitioner not fully and truly disclosing all material facts necessary for assessment.

10. He, lastly, contended that the issue of any income under the head of deemed dividend under section 2(22) of the Act having escaped assessment was not part of the reasons recorded and the same cannot be pressed in service to justify reopening of the assessment.

11. On the other hand, counsel for the Revenue opposed the petition contending that on account of failure on the part of the assessee to fully and truly disclose material facts, income had escaped assessment. He contended that the assessee had himself agreed that additions be made under the heading of section 80HHC but disputed only recomputation of deemed dividend income. The petition is, therefore, required to be dismissed.

12. Having thus heard learned advocates for the parties and having perused the record, first and the foremost, we find that the reasons for reopening the assessment do not make out any case of escapement of income from assessment on account of the assessee not disclosing fully and truly all material facts necessary for the assessment. Quite apart from the fact that, no such suggestion is recorded in the reasons, independently also we do not find that the Assessing Officer’s stand in the reasons recorded can in any manner be construed as suggesting that the income escaped assessment on account of the assessee not disclosing the material facts.

13. As already noted, reasons for reopening stated that on verification of the records it is seen that the enhanced figure of profits of business of Rs.3,84,56,031 taken was not reduced while giving effect to the order of the Commissioner of Income-tax (Appeals) and the loss from the trading goods was ignored for the purpose of calculation of deduction under section 80HHC, which resulted into underassessment to the extent of Rs.10,24,629. It is, thus, the case of the Revenue that in the assessment framed certain loss from trading goods was ignored for the purpose of calculation under section 80HHC. In the reasons recorded there is reference to giving effect to the order of the Commissioner of Income-tax (Appeals) but the same pertains only to a question of loss from trading goods, which was allegedly ignored. This is clear from the order passed by the Assessing Officer disposing of the objections of the assessee to the reopening of assessment in which it is stated as under :

“As discussed above there are two issues on which reassessment are being made. The first issue is regarding excess deduction allowed under section 80HHC and the second issue is regarding deemed dividend in the hands of assessee-company. On the first issue the assessee stated, vide order-sheet dated March 25, 2010, that since they are not in a position to reconcile as per the detailed working provided to them. Therefore, they requested to pass order as per the detail working. In short, on the issue of excess deduction allowed under section 80HHC, the assessee has given his consent for making addition.

On the second issue of deemed dividend, the assessee has furnished written reply on March 25, 2010. The contention of the assessee that it has repaid more amount then it received from Schutz Dishman and, therefore, the provisions of section 2(22)(e) are not applicable, is not correct.”

14. Close perusal of the reasons recorded would immediately establish that, quite apart from no suggestion in the reasons regarding any attribution on the part of the assessee in fully and truly not disclosing material facts, all facts necessary for framing the assessment with respect to the said issue were very much before the Assessing Officer when he previously took the return of the assessee for scrutiny assessment.

15. In addition to the above, we have also perused the previous assessment order which clearly demonstrates that with respect to the claim of the assessee for benefit under section 80HHC of the Act, the Assessing Officer had undertaken detailed exercise before coming to final conclusions. In fact, with respect to question of export of trading goods, the Assessing Officer worked out reduction of Rs. 8,69,403. It may be that due to some error he did not account for this sum in final calculation. This aspect clearly emerges from the assessment order, the relevant portion of which is reproduced below :

“4. Calculation of deduction under section 80HHC(3)(c)(i) in respect of export of manufacturing goods.

Adjusted profit of the business x Adjusted export turnover

Adjusted total turnover

(a) Here the adjusted profit of the business means : profit of the business-profit derived from export of trading goods. 3,26,59,948 (-) nil = 3,26,59,948

(b) Adjusted export turnover = Export turnover – Export turnover in respect of trading goods = 19,58,89,672- 2,28,98,972 = 17,29,90,700

(c) Adjusted total turnover = Total turnover- Export turnover of buss. in respect of trading goods.

= 51,97,79,362-2,28,98,972

= 49,68,80,390

Deduction under section 80HHC(3)(c)(i)

Adjusted profit of the business x Adjusted export turnover

Adjusted total turnover

3,26,59,948 x 17,29,90,700

49,68,80,390

5. Calculation of deduction under section 80HHC(3)(c)(ii) in respect of export of trading goods is worked out as under :

Export turnover in respect of trading goods – direct and indirect cost attributable.

= 2,28,98,972 – 2,37,68,375

= (-) 8,69,403

= Indirect cost attributable to the export of trading goods -(-) 8,69,403

6. The above deduction is further increased as per the provisions to this sub-section which is worked out as under :

90% of export incentives x Export turnover = Nil

Total turnover of the business

7. The deduction in regard to sale made to export house is calculated as under :

Deduction under section 80HHC(1A) read with section 80HHC(3A)(b) supporting manufacturer :

Adjusted profit of the business x Turnover in respect of export house

Total turnover of the business

Thus, the total allowable deduction under section 80HHC is computed at 1,13,70,679

Allowable deduction = 30% x 1,13,70,679 = 34,11,203

Thus, the total allowable deduction under section 80HHC comes to be Rs. 34,11,203.”

Be that as it may, irrevocably, it stands established that the Assessing Officer was in possession of full facts to enable him to frame proper assessment. This is certainly not a case where the assessee could be blamed for not disclosing material facts.

16. Attempt, on the part of the Assessing Officer to rope in question of deemed dividend under section 2(22) of the Act needs to be noted only for rejection out of hand. In view of the settled legal position, if the reopening of assessment fails, on account of non-existence of reasons for such reopening, the Revenue cannot either sustain such reopening or bring within the assessment proceedings any other head of escaped income not mentioned in the reasons for reopening.

17. The proceedings drawn by the Assessing Officer on March 25, 2010, reliance to which was placed by counsel for the Revenue to contend that object of reopening of assessment, in our opinion, cannot be sufficient to non-suit the petitioner-assessee. At best, such proceedings would amount to inability on the part of the assessee to reconcile the working of the Assessing Officer in which, as already noted, he had erroneously not accounted for reduction of Rs. 8,69,403 though computed in his assessment order. The assessee was actively and strenuously opposing the attempt to reopen the assessment. He had filed his objections to the reopening notice. He had carried the issue to the High Court opposing the notice as well as the order disposing of the objections. The assessee never acquiesced in the reopening of assessment.

18. In the result, we are of the opinion that on the grounds noted above, reopening notice is invalid and must be declared so. Resultantly, the writ petition is allowed. Notice dated September 25, 2009, of reopening of assessment is quashed. Petition is disposed of accordingly.

[Citation : 346 ITR 245]

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