Karnataka H.C : Whether writ jurisdiction under article 226 can not be invoked to challenge correctness or otherwise of notices issued under section 148 and proper remedy is to file an appeal after reassessment order under section 14

High Court Of Karnataka

Jeans Knit (P.) Ltd. Vs. DCIT, Circle 11(5) Bangalore

Section : 148, 10B

Assessment Year : 2006-07

Dilip B. Bhosale And B. Manohar, JJ.

Writ Appeal No. 5789 Of 2013 (T-It)

April 29, 2014

JUDGMENT

Dilip B. Bhosale, J. – This writ appeal is placed before us for admission. We have heard learned counsel for the parties and with their assistance gone through everything to which our attention was drawn.

2. The appeal is directed against the order dated 13th August, 2013 passed by learned Single Judge in W.P.No.36150/2013 rejecting the writ petition filed by the appellant at the stage of admission. The writ petition was instituted by the appellant challenging the notice dated 6-3-2012 issued by the Deputy Commissioner of Income-Tax, Circle-11 (5) (for short the Assessing Officer) to the appellant-assessee under Section 148 of the Income-tax Act, 1961 (for short the Act). The assessee also challenged the notices dated 3-1-2013 under Section 143(2) and 142(1) of the Act. Further, the assessee called in question the order dated 2nd August, 2013 passed by the Assessing Officer disposing of the objections filed by the petitioner dated 11-2-2013 to the initiation of reassessment proceedings under Section 147 of the Act.

3. The appellant-assessee had initially filed a writ petition bearing W.P.No. 13174/2013 in this Court wherein apart from challenging the very same notice under Section 148 and notices under Section 143(2) and 142(1) of the Act, the assessee had also prayed for quashing of the order dated 6-3-2012 whereby their objection to the initiation of reassessment proceedings under Section 147 of the Act was rejected. The said writ petition was disposed of by learned Single Judge vide order dated 23rd July, 2013 issuing directions to the Assessing Officer to consider the objections dated 11-2-2013 and the contentions raised therein and pass appropriate order strictly in accordance with law within the time frame. Accordingly, the Assessing Officer passed a detailed order on 2-8-2013 which is impugned in the subsequent writ petition i.e. W.P.No.36150/2013 from which, the present appeal arises.

4. In the appeal, the appellant-assessee has called in question both the orders of learned Single Judge i.e. order dated 13th August, 2013 passed in W.P.No.36150/2013 and the order dated 23rd July, 2013 passed in W.P.No. 13174/2013. The challenge to these orders is on two grounds. Firstly, the notice issued by the Assessing Officer under Section 148 is without jurisdiction, and secondly, on the ground that the learned Single Judge in the order dated 23-07-2013 ought not to have given second opportunity to the Assessing Officer to decide the objections and thereby allowed to improve the reasons. The order dated 2-8-2013 is also challenged on the ground that the Assessing Officer while deciding the objections afresh did not grant an opportunity of being heard to the appellant-assessee.

5. At the outset, we would like to consider the first submission namely the notice under Section 148 of the Act issued by the Assessing Officer is without jurisdiction. The assessee-company is engaged in the business of manufacturing and exporting “high fashion designer Jeans” to buyers like GStar, Guess, DDP, Pepe Jeans, GAAP, etc. In the present appeal, we are concerned with assessment year 2006-07. During the assessment year, the assessee had filed return of income on 27-11-2007 showing their total income ‘Nil’. Computation of income showing the net profit from business was Rs 45,37,37,724/-. Out of this amount, the assessee had claimed an amount of Rs.41,38,13,599/- as deduction under Section 10B of the Act. Further computation, by applying the provisions of the Act relates to total profit from the business of Rs.82,12,014/- which had been set off with the carry forward business loss for the assessment year 2005-06. The return of income was processed under Section 143(1) on 22-9-2007.

5.1 Thereafter, a survey under Section 133A was conducted at the business premises of the assessee on 5-11-2009. Simultaneously, a survey was also conducted on the same day at the premises of Fibers and Fabrics International Private Limited which is a sister concern of the assessee-company by the jurisdictional Assessing Officer. It was noticed that both the concerns were operated from the very same business premises situated at Industrial Area, Peenya, Bangalore. The premises of both the concerns were not having any demarcation and were not distinguishable. There was nothing to indicate that the two concerns were separate entities as the Management and Administration Staff of both the companies were the same. In view thereof, after verification of the records, a statement under Section 131 were recorded of Sri. Sreedhar, General Manager (Operations) and Sri. Nagesh, Manager (Plant and Machineries) of the assessee-company. On the basis of the statements of these two officials of the appellant-assessee and the documents/information revealed during survey of the business premises, it was noticed that Fibers and Fabrics International Private Limited had started its business in 2002 and they claimed and enjoyed deduction under Section 80HHC of the Act. The assessee had also started its business in the same business premises and claimed deduction under Section 10-B of the Act from the assessment year 2006-07. It was also noticed that Sri.Nagesh, Manager (Plant and Machineries) was working with Fibers and Fabrics International Private Limited and he was later shifted to the assessee-company along with other employees. It was stated on oath that the Units of Fibers and Fabrics International Private Limited at the following places were shifted. The established plant and machinery inside these units and the units which were shifted from Fibers and Fabrics International Private Limited to the assessee were :

21-E-1, 2nd Phase, Peenya Industrial Area, Bangalore.

34/A, 2nd Phase, Peenya Industrial Area, Bangalore.

Plot No.20-A/21-E, 2nd Phase, Peenya Industrial Area, Bangalore.

124, 5th Main Road, 2nd Stage, Yeshwanthpur Industrial Area, Yeshwanthpur, Bangalore.

Thus it was found that the entire machinery had been shifted from Fibers and Fabrics International Private Limited to the assessee-company on ‘as is where is basis. In the light of these facts, the reasons were recorded by the Assessing Officer. The relevant observation/reasons recorded by the Assessing Officer read thus:

Further investigations into the accounts of both the companies show the following turnover and claim of deductions by the two companies under various provisions of the Income-tax Act, thus proving the transfer of business

Assessment year Turnover of assessee (JKPL) JKPL (deduction u/s.10B) Turnover FFIPL FFIPL (deduction u/s. 80HHC)
2003 04 Rs.63.1 crore Rs.2,25,30,978
2004-05 Rs. 166.1 crore Rs.4,43,43,079
2005-06 Rs.1.93 crore (job-work) Company incorporated and no deduction claimed Rs.237.08 crore As per IT Act, 1961, deduction under Sec.80HHC ended.
2006-07 Rs. 155.4 crore Rs.41.3 crore Rs. 150.9 crore
2007-08 Rs.291.9 crore Rs.51.04 crore Rs.20.24 crore
2008-09 Rs.339.2 crore Rs.128.39 crore Rs.1.89 crore
2009-10 Rs.428.42 crore Rs.33.21 crore Rs.2.49 crore

This shows that there is a systematic transfer of business from FFIPL to JKPL, FFIPL was claiming deduction u/s.80HHC and when the deduction was no longer available under the Income-tax Act, the business was continued under a new name of JKPL and the assessee started claiming deduction u/s. 10B. Thus it is concluded that there is a reconstruction of business under the name JKPL and claiming of deduction u/s.10B.

6. Then the Assessing Officer after considering the provisions contained in Section 10B of the Act, in the reasons for reopening of the assessment dated 3-1-2013, observed thus:

“8. Therefore as per the provision of the Act, the assessee-company is not eligible for claiming deduction u/s. 10B as it is reconstruction of the business of FFIPL by JKPL. Further there is also transfer and usage of old plant and machinery by JKPL which has been used by FFIPL. It is also seen that the assessee has failed to maintain individual profit and loss accounts of the units and only a consolidated P & L is maintained.

9. The other points which strengthen the fact that it is the reconstruction of the existent business are the following:

Both FFIPL and JKPL are following the same business of manufacture and export of jeans.

The same business premises have been used by both FFIPL and JKPL.

Plant and machinery belonging to FFIPL have been transferred to and used by JKPL. This is also confirmed by notes to account to audit report for FY 2005-06 of FFIPL which mentions that, “effective October, 2005 the company leased certain land, building and machinery to an associate company JKPL. Therefore, operations in the company were on a curtailed basis and only jobwork was carried out for the said associate company”. This confirms that the major plant and machinery used in manufacturing were transferred from FFIPL to JKPL.

Almost all the employees including the technical and managerial level have been shifted from FFIPL to JKPL.

The vendors and clients of both the companies have remained the same. Therefore the whole business, its infrastructure and clientele have been transferred from FFIPL to JKPL.

(10) Section 10B specifically mentions that the assessee should be able to fulfil all the conditions to become eligible for deduction under that section. But it is noted here that there is a reconstruction of business of FFIPL under the new name of JKPL and also transfer of old plant and machinery from FFIPL to JKPL. Thus, the assessee-company fails to fulfil the conditions required to claim, deduction u/s.10B. Hence, it is not eligible for the claim of deduction of Rs.41,38,13,599/- u/s. 10B.”

7. This order according to the learned counsel appearing for the assessee is without jurisdiction. He submitted that it is based on the statements made under Section 131 by Sri. Sreedhar and Sri. Nagesh which were retracted by them subsequently. It was urged that a notice under Section 148 of the Act, issued on the basis of the retracted statements, is bad in law. Similar submissions were advanced by the learned counsel appearing for the assessee before learned Single Judge, which, in our opinion have been dealt with in accordance with law. As a matter of fact, we do not find any reasons to interfere with the order passed by learned Single Judge for more than one reason. Firstly, the learned Single Judges in both the orders have considered the matter in proper perspective, and secondly, the reasons recorded while issuing the impugned notice to the appellant-assessee justify its issuance. In order to avoid repetition we find it appropriate to reproduce the relevant observations made by learned Single Judge in the order dated 13.08.2013. The relevant observations read thus:

“3. The Deputy Commissioner of Income Tax considered the objections filed by the petitioner to the reasons for reassessment proceedings for the assessment year 2006-07 and passed the order dt. 2/8/2013 observing that the re-opening under Sec. 147/148 of the Income Tax Act for the impugned assessment year 2006-07 is within the legal provisions envisaged under the Act as there are reasons to believe that but for the transfer of the assets of Fibres & Fabrics International Private Limited, for short ‘FFIPL’, i.e., its business premises, entire machinery, same business of manufacture and export of jeans and almost all employees including technical and managerial being shifted from FFIPL to the petitioner-company, coupled with the testimony of one Nagesh, said to be an employee of FFIPL, later an employee of the petitioner, the new undertaking of the petitioner, could not have come into being and therefore petitioner is not entitled to the benefit under Sec. 10B of the Income-tax Act. The Deputy Commissioner having regard to several facts as set out in the reasons, as well as in the order impugned, has pointed out to the ‘reasons to believe’ which are based upon reasonable grounds including direct or circumstantial evidence, but not of mere suspicion, gossip or rumour, which it cannot but be said, the Deputy Commissioner was well within his jurisdiction to record the ‘reasons to believe’ that the income of the petitioner had escaped assessment by wrongfully claiming deduction under Sec. 10B of the Act. An examination of the order impugned is also in the direction of establishing the fact that the belief that is entertained by the Deputy Commissioner is neither arbitrary nor irrational, but after an examination as to whether the reasons are relevant and have a bearing on the matter in regard to which is required to entertain the belief. From the facts obtainable from the reasons and the order impugned, in my opinion, there is a rational and intelligible nexus between the-reasons and the belief.

6. The next submission of the learned counsel for the petitioner that job-work done by FFIPL for the petitioner, by itself and nothing more, cannot deprive the petitioner from claiming deduction under Sec. 10B of the Act, is a pure question of fact that has to be decided based upon an enquiry. It is well-settled law that it is for the authorities to lift the veil and ascertain the true nature of transaction that has taken place as between FFIPL and the petitioner, who claim to be sister-organizations, carrying on identical business. It is useful to notice that FFIPL could not make any further claims for deduction under Sec. 10B of the Income-tax Act after the period specified therein, whence the petitioner-company was incorporated and two years thereafter purchased the machinery of FFIPL disclosing the value of the old machinery was less than 20%. It is elsewhere said that tax planning may be legitimate provided it is within the framework of law. However colourable devices cannot be part of tax planning.

7. The reasons assigned by the Deputy Commissioner to reject the objections of the petitioner in the exercise of jurisdiction under Sec. 147/148 of the Income-tax Act for the assessment year 2006-07 cannot be said to be either arbitrary or irrational calling for interference in exercise of extraordinary writ jurisdiction under Art.226 of the Constitution of India.”

8. Learned counsel appearing for the appellant-assessee in support of his contentions before this court placed reliance upon some of the judgments to contend that the proper procedure as laid down by judicial pronouncements was not followed/adopted for issuing notice under Section 148 of the Act. He submitted that having regard to the observations made by the Supreme Court in the judgments, the appellant-assessee has every right to maintain the writ petition to challenge not only the first order passed by the Assessing Officer dated 3-1-2013 but even the subsequent order dated 23-07-2013. The judgments relied upon by the learned counsel in support of his submission are as follows: (1) Calcutta Discount Ltd. Co. v. ITO [1961] 41 ITR 191 (SC); (2) GKN Driveshafts (India) Ltd. v. ITO [2003] 259 ITR 19/125 Taxman 963 (SC); (3) CIT v. DR.N.Thippa Shetty [2010] 322 ITR 525 (Karn); (4) Prashanth S Joshi v. ITO [2010] 324 ITR 154/189 Taxman 1 (Bom); and CIT v. Kelvinator of India Ltd. [Civil Appeal Nos.2009-2011 of 2003].

9. On the other hand, Mr. Sanmathi, learned counsel appearing for the Revenue, at the outset, invited our attention to the judgment of the Supreme Court in CIT v. Chhabil Dass Agarwal [2013] 357 ITR 357/217 Taxman 143/36 taxmann.com 36 (SC) and submitted that the writ jurisdiction under Article 226 of the Constitution of India cannot be invoked to challenge the correctness or otherwise of the notices issues under Section 148 of the Act. Mr. Sanmathi further submitted that at the stage of issuance of notice under Section 148 of the Act, the Assessing Officer need not enter into sufficiency of reasons, but it has to be satisfied prima facie about issuing notice under Section 148 of the Act and record reasons as contemplated under sub-Section (2) thereof.

10. The judgment relied upon by the learned counsel appearing for the appellant-assessee in our opinion are of no avail to seek any relief in an intra court appeal arising from the order in writ petition under Article 226 of the Constitution of India. We are so observing in view of the reasons recorded by the Assessing Officer in the order dated 3-1-2013 and the order dated 2nd August, 2013 impugned in W.P.No.36150/2013, from which the present writ appeal arises. As observed earlier, on the face of it the reasons recorded by the Assessing Officer, in our opinion are sufficient to issue notice under Section 148 of the Act. In any case, as tried to be contended on behalf of the appellant-assessee it would not be possible in writ jurisdiction under Article 226 of the Constitution of India to reassess the entire material to reach a conclusion other than the one recorded by the learned Single Judge in both the orders, impugned in the present appeal.

11. The Supreme Court in Calcutta discount Company Ltd. (Supra) held that the condition precedent to exercise of jurisdiction under Section 34 of the Income-tax Act (Old Income-Tax Act, 1927) did not exceed and the Income-Tax Officer had, therefore, no jurisdiction to issue impugned notices under Section 34 in respect of the years 1942-43, 1943-44 and 1944-45 after the expiry of 4 years. In the facts of the present case, in our opinion, this judgment is of no avail to the appellant- assessee to contend that this court has power to issue an order prohibiting an Executive Authority from acting without jurisdiction. We have already observed that the action initiating proceedings by issuing notice under Section 148 is not without jurisdiction. In Kelvinator of India Limited, the Supreme Court was considering the question whether the concept of “change of opinion” stands obliterated with effect from 1st April, 1989, i.e. after substitution of Section 147 of the Income-tax Act, 1961 by Direct Tax Laws (Amendment) Act, 1987? It would be relevant to have a glance at the observations made by the Supreme Court in this case, which read thus:

“On going through the changes, quoted above, made to Section 147 of the Act, 1987, re-opening could be done under above two conditions and fulfilment of the said conditions along conferred jurisdiction on the Assessing Officer to make a back assessment, but in section 147 of the Act (with effect from 1st April, 1989), they are given a go-by and only one condition has remained, viz., that where the Assessing Officer has reasons to believe that income has excaped assessment, confers jurisdiction to re-open the assessment. Therefore, post 1st April, 1989, power to re-open is much wider. However, one needs to give a schematic interpretation to the words “reasons to believe” failing which, we are afraid, Section 147 would give arbitrary powers to the Assessing Officer to re-open assessments on the basis of ”mere change of opinion”, which cannot be per se reason to re-open. We must also keep in mind the conceptual difference between power to review and power to reassess. The Assessing Officer has no power to review; he has the power to re-assess. But re-assessment has to be based on fulfilment of certain precondition and if the concept of “change of opinion” is removed, as contended on behalf of the Department, then, in the garb of re-opening the assessment, review would take place. One must treat the concept of “change of opinion” as an in-built test to check abuse of power by the Assessing Officer. Hence, after 1st April, 1989, Assessing Officer has power to re-open, provided there is “tangible material” to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief.”

In GKN Driveshafts (India) Ltd.(supra), the Supreme Court while dealing with the notice issued under Section 148 of the Act made the following observations, which read thus:

“By the order under challenge, a Division Bench of the High Court at Delhi (see (2002) 257 ITR 702) dismissed the writ petition filed by the appellant challenging the validity of notices issued under sections 148 and 143(2) of the Income-tax Act, 1961. The High Court took the view that the appellant could have taken all the objections in its reply to the notices and that, at that stage, the writ petition was premature. Accordingly, the writ petition was dismissed on January 31, 2002. Aggrieved by that order, the appellant is in appeal before us. Mr. M.L. Verma, learned senior counsel appearing for the appellant, submits that the impugned notices relate to seven assessment years; that during the pendency of these appeals. In respect of two assessment years, viz, 1995-96 and 1996-97, assessment has been completed against which appeals have been filed. Notices relating to the other five assessment years, viz, 1992-93, 1993-94, 1994-95, 1997-98 and 1998-99, are now the subject-matter of these appeals. We see no justifiable reason to interfere with the order under challenge. However, we clarify that when a notice under section 148 of the Income-tax Act is issued, the proper course of action for the notice is to file a return and if he so desires, to seek reasons for issuing notices. The Assessing Officer is bound to furnish reasons within a reasonable time. On receipt of reasons, the noticee is entitled to the objections to issuance of notice and the Assessing Office is bound to dispose of the same by passing a speaking order in the instant case, as the reasons have been disclosed in these proceedings, the Assessing Officer has to dispose of the objections, if filed, by passing a speaking order, before proceeding with the assessment in respect of the abovesaid five assessment years.”

The Bombay High Court in Prashanth S. Joshi (Supra) was dealing with the notice issued under Section 148 of the Act, in the facts and circumstances of that case and therefore, in our opinion that judgment is of no avail to the appellant-assessee. In Hindustan Lever Ltd. v. R.B.Wadkar [2004] 268 ITR 332/137 Taxman 479 (Bom), the Bombay High Court was dealing with writ petition under Article 226 of the Constitution of India challenging the notice under Section 148 of the Act where the Assessing Officer had failed to disclose the reasons in spite of specific request made by the assessee. In our case, the assessee was not only furnished the reasons, but this Court had issued directions in the earlier writ petition to decide the matter afresh after considering the objections raised by the assessee in-depth, and it has been decided afresh by the Assessing Officer.

The Supreme Court in Chhabil Dass Agarwal (supra) was dealing with the question whether the writ jurisdiction under Article 226 of the Constitution of India can be invoked against the order of assessment when the statutory appeal was provided. The following observations made by the Supreme Court are relevant for our purpose.

‘In the instant case, the Act provides complete machinery for the assessment/reassessment of tax, imposition of penalty and for obtaining relief in respect of any improper orders passed by the Revenue authorities and the assessee could not be permitted to abandon that machinery and to invoke the jurisdiction of the High Court under article 226 of the Constitution when he had adequate remedy open to him by an appeal to the Commissioner of Income-tax (Appeals) The remedy under the statute, however, must be effective and not a mere formality with no substantial relief In Ram and Shyam. Co. v. State of Haryana [1985] 3 SCC 267, this court has noticed that if an appeal is from “Caesar to Caesar’s wife” the existence of alternative remedy would be a mirage and an exercise in futility. In the instant case, neither has the assessee-writ petitioner described the available alternate remedy under the Act as ineffectual and non-efficacious while invoking the writ jurisdiction of the High Court nor has the High Court ascribed cogent and satisfactory reasons to have exercised its jurisdiction in the facts of instant case.’

12. Thus, in view of the law laid down by the Supreme Court, the only remedy open to the appellant-assessee, in the facts and circumstances of the case and more particularly in view of the detailed reasons recorded by the Assessing Officer dated 2-8-2013 while dealing with all objections/contentions urged on behalf of the appellant-assessee including the question of jurisdiction to issue notice under Section 148 of the Act, is to file an appeal after the reassessment order under Section 147 of the Act. The Assessing officer, in our opinion, did follow the due procedure and recorded sufficient reasons. In this backdrop, it cannot be stated that this court gave an opportunity to the Assessing Officer vide its order dated 23.7.2013, to improve the reasons. Thus, the appeal is devoid of any merits and deserves to be dismissed. Order accordingly.

We keep open all contentions of the appellant-assessee on merits to be raised before the Assessing Officer. We hope and trust that the Assessing Officer shall consider the case on merits and decide the same in accordance with law.

Learned counsel for the parties confirm that all points argued by them have been considered and dealt with by us.

[Citation : 367 ITR 773]