Bombay H.C : Reassessment notice was bad in law where it was based upon allowance of excessive deduction under section 80-IB but facts revealed that claim for deduction under section 80-IB was allowed in original assessment after consideration

High Court Of Bombay

Lalitha Chem Industries (P.) Ltd. Vs. DCIT – 9 (2)

Assessment Year : 2006-07

Section : 80-IB, 147

Mohit S. Shah, Cj. M. S. Sanklecha, J.

Writ Petition (L) No. 2741 Of 2013

November 27, 2013

JUDGMENT

M. S. Sanklecha, J. – Rule returnable forthwith. At the request of learned Counsel for the parties, the petition is taken up for final disposal.

2. By this Petition under Article 226 of the Constitution of India, the petitioner challenges:—

(a) Notice dated 28 March 2013 issued by respondent No.1 – (Assessing Officer) under Section 148 of the Income Tax Act, 1961 (the Act) by which the assessment for the Assessment Years 2006-07 is sought to be re-opened; and

(b) Order dated 1 August 2013 passed by the Assessing Officer disposing the objections raised by the petitioner to the grounds for re-opening of the assessment for Assessment Year 2006-07.

3. The petitioner is engaged in the business of manufacturing of chemicals etc. It has two manufacturing units-one at Tarapur and another at Silvasa. During the Assessment Year 2006-07, the petitioner unit at Silvasa was entitled to the benefit of deduction under Section 80IB of the Act.

4. On 23 November 2006, the petitioner filed its return of income for Assessment Year 2006-07 declaring its total income at Rs.1.23 Crores. In its return, the petitioner had also claimed a deduction of Rs.31.99 lakhs under Section 80IB of the Act in respect of its Silvasa Unit.

5. The Assessing Officer took up the petitioner’s case for scrutiny assessment and on 29 August 2008 passed an Assessment Order under Section 143(3) of the Act for the Assessment Year 2006-07. The aforesaid order of Assessment dated 29 August 2008 reduced the claim for deduction under Section 80IB of the Act from Rs.31.99 lakhs to Rs.27.67 lakhs. Besides determining the total income of the petitioner at Rs.1.27 Crores.

6. On 28 March 2013, the Assessing Officer issued a notice under Section 148 of the Act to the petitioner seeking to re-open the assessment for the Assessment Year 2006-07. This was on the ground that he has reason to believe that the income chargeable to tax had escaped assessment under Section 147 of the Act. On receipt of the notice, the petitioner sought the reasons recorded by the Assessing Officer for re- opening the assessment for the Assessment Year 2006-07 under Section 148 of the Act. Consequent to the above, the Assessing Officer on 4 April 2013 furnished the reasons for re-opening of the assessment for the Assessment Year 2006-07 which reads as under:—

“The assessee company is engaged in the business of manufacturing of chemicals, metalic chemicals, metalic sterates, fatty acids, PVC Stabilizers and Placticizers etc. It is having two manufacturing units one each at Tarapur and Silvasa. In respect of manufacturing unit at Silvasa, the assessee has claimed deduction u/s. 80IB of the I. T. Act. In both the units the assessee was engaged in the production of the identical items viz. PVC stabilizer and metallic sterates, plasticizers, fatty acids, waxes and others. Both units consume same raw material and manufacture same outputs. However, in respect of Tarapur unit the assessee company had debited conversion charges of Rs.3393254/- where as in r/o Silvasa Unit no such expenditure was debited. All other expenditure (manufacturing) were more or less in the said proportion of the turnover of both the units. As such, conversion charges of both the units were debited in Tarapur unit only. Proportionate expenses of silvasa unit would be Rs.1945004/-. Similarly in respect of Administrative, selling and other expenditures Tarapur unit with turnover of Rs.29.76 crore has been charged with Rs.24976318/- whereas Silvasa unit (with turnover of Rs.30.61 crore) had been charged with only Rs.12991615/-. Moreover, Director’s Remuneration of Rs.8400000/- has been charged on Tarapur Unit. However, during Assessment Year 2005-06, only Rs.840,000/- paid to the Directors of the Company. Thus there was 10 fold increase in the directors remuneration during the A Y 2006-07. It would not be out of place to mention here that even the Tarapur unit enjoyed the status of 80IB unit till A Y 2005-06. So the assessee company suppressed expenses of 80IB unit by debiting excess expenses to non 80IB unit. Expenses allowable to Silvasa Unit would be Rs.21763121/- and to Tarapur unit Rs.16204812/-.

Thus profit of Tarapur unit would be more by Rs.10716510/- and profit of Silvasa unit i.e. 80IB unit would be less by Rs.10716510/-. This would render Silvasa unit not eligible for 80IB deduction during the year as there would be no profit available for deduction. Therefore ,deduction of Rs.2767813/- allowed to the assessee company was irregular. This has resulted in the under assessment of Rs.2767813/-.

In view of the above facts, I have reason to believe that income of Rs.27,67,813/- chargeable to tax has escaped assessment by reason of failure on the part of assessee to disclose fully and truly all material facts with the meaning of Section 147 of the IT Act, 1961.”

7. On 8 July 2013, the petitioner filed its letter dated 28 June 2013 objecting to the re-opening of the assessment for Assessment Year 2006-07. In particular, the petitioner pointed out that the re-opening is sought to be done beyond the period of 4 years from the end of the Assessment Year 2006-07. Thus, the notice for re-opening the assessment is without jurisdiction as there has been no failure on its part to disclose fully and truly all material facts necessary for assessment for the Assessment Year 2006-07. In particular, the petitioner pointed out that the entire claim of the petitioner for deduction under Section 80IB of the Act was examined by the Assessing Officer in detail during the assessment proceedings resulting in the claim being reduced from Rs.31.99 lakhs to Rs.27.67 lakhs. Besides, there is no tangible material indicated that would result in the Assessing Officer having reason to believe that income for the Assessment Year 2006-07 had escaped assessment. In view of the above, it was requested that the notice dated 28 March 2013 issued under Section 148 of the Act be withdrawn.

8. On 1st August 2013, the Assessing Officer rejected the petitioner’s objection dated 28th June 2013 to the reasons for re-opening the assessment for the Assessment Year 2006-07. The Assessing Officer held that there was a failure on the part of the petitioner to disclose fully and truly all material facts necessary for assessment of Assessment Year 2006-07. Further, it held that merely because the case of the petitioner was accepted as correct in the original assessment, would not preclude the re-opening of the assessment subsequently.

9. Ms. Aasifa Khan, learned Counsel appearing for the petitioner in support of the petitioner submits :—

(a) The notice dated 28 March 2008 under Section 148 of the Act seeking to re-open the assessment for Assessment Year 2006-07 is without jurisdiction. This is so because the reasons furnished do not indicate any tangible material to have reason to believe that income chargeable to tax has escaped assessment. Besides, as in this case the assessment being sought to be re-opened is beyond a period of four years from the end of the Assessment Year, the reasons for reopening do not indicate any failure on the part of the petitioner to truly and fully disclose all material facts necessary for assessment. Both the aforesaid conditions precedent are not satisfied in this case resulting in the proceedings for reopening being without jurisdiction;

(b) The entire basis for re-opening of the assessment for Assessment Year 2006-07 is that the claim for deduction under Section 80IB of the Act made by the petitioner in respect of its Silvasa Unit was not justified. This for the reason as stated in the grounds for reopening is that expenses incurred in the operation of the Silvasa Unit were debited to the Tarapur Unit without indicating any tangible material in support of the same. Thus this is mere change of opinion and would not warrant re-opening of assessment for Assessment Year 2006-07;

(c) During the original Assessment Proceedings, the claim of the petitioner in respect of deduction under Section 80IB of the Act was examined and in that context, the expenses and income of the Silvasa Unit was also examined leading to reduction of claim for deduction under Section 80IB of the Act from Rs.31.99 lakhs to Rs.27.67 lakhs; and

(d) There was no failure on the part of the petitioner to disclose fully and truly all expenses incurred by them in running its two Units and the allocation of expenses between them.

10. As against the above, Mr. Tejveer Singh, learned Counsel appearing for the revenue in support of the impugned notice and order urges the following :—

(a) There was failure on the part of the petitioner to fully and truly disclose all material facts during the course of Assessment proceedings for the Assessment Year 2006-07 leading to the Assessment order dated 28th August 2008. In particular, he submits that the petitioner had suppressed expenses incurred in respect of 80IB Unit i.e. Silvasa Unit by debiting its non 80IB unit i.e. Tarapur Unit and failed to disclose this diversion of expenses during the course of the assessment proceedings;

(b) This non-debiting of expenses to the Silvasa Unit had resulted in increasing profit to the Silvasa Unit so as to enable enjoyment of the benefit of deduction under Section 80IB of the Act. Thus resulting in claiming excessive relief under Section 80IB of the Act and the same is in terms of Explanation 2 to Section 147 of the Act deemed to be a case where income chargeable to tax has escaped assessment;

(c) On an identical issue, the Delhi High Court in Honda Siel Power Products Ltd. v. Dy. CIT [2012] 340 ITR 53/[2011] 197 Taxman 415/10 taxmann.com 2 has held in case of assessment sought to be reopened after the end of four years from the end of the relevant assessment year that there was a failure to disclose fully and truly all material facts when the petitioner failed to disclose the proportionate expenses relating to tax free income. This expenditure was included in the expenditure incurred in earning taxable income and thus reducing the taxable profits. This decision in Honda Siel Power Products Ltd. (supra) would apply to the present facts; and

(d) The claim of the petitioner that the allocation of the expenditure between non 80IB unit and 80IB unit was appropriate/ just could be considered during the course of re-assessment proceedings. At this stage, the Court should not interdict the re-opening proceedings, by quashing the impugned orders.

11. It is a settled position in law that under the Act, the Assessing Officer has power to re-assess but has no power to review an assessment as settled by the Apex Court in the matter of CIT v. Kelvinator India Ltd. [2010] 320 ITR 561/187 Taxman 312. The power of re-assessment could only be exercised if certain pre-conditions are satisfied. The primary conditions being that the Assessing Officer must have reason to believe that income chargeable to tax has escaped assessment. This reason to believe must be based upon some tangible material i.e. it cannot be a mere ipsi dixit of the Assessing Officer. A different view on tangible material available earlier would be a change of opinion and not amount to reason to believe that income chargeable to tax has escaped assessment. Besides, one more additional requirement to be satisfied where assessment sought to be re-opened is beyond the period of 4 years from the end of the relevant years, is that there must be a failure on the part of the assessee to truly and fully disclose all material facts necessary for assessment. Further, the obligation of an assessee is only to disclose fully and truly all material facts necessary for assessment. It is not the job of the assessee to disclose the legal inferences to de drawn from those facts as held by the Apex Court in Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191. At the stage of issuing of a notice to reopen the only question to be considered is whether there is relevant material to form the reasonable belief that income has escaped assessment and not whether the material is sufficient to prove beyond doubt that income has in fact escaped assessment.

12. We shall now consider the rival submissions keeping in mind the settled legal position as mentioned hereinabove. The admitted / undisputed position between the parties is:

(a)the assessment sought to be re-opened by the impugned notice dated 28 March 2013 is beyond a period of 4 years from the end of the relevant Assessment Year i.e. Assessment Year 2006-07;

(b) during the course of the original Assessment Proceedings the petitioner had claimed benefit of deduction under Section 80IB of the Act in respect of its Silvasa Unit. This claim for deduction under Section 80IB of the Act had been examined and reduced from Rs.31.99 lakhs to Rs.27.67 lakhs;

(c) the petitioner had in its accounts viz. profit and loss accounts allocated various common expenses between the non 80IB unit and 80IB unit and this was a vital ingredient in determining the deduction available under Section 80IB of the Act to the Silvasa Unit; and

(d) according to the revenue income chargeable to tax has escaped assessment in view of excessive relief having been granted in respect of deduction under Section 80IB of the Act (as noted in the impugned order 1st August 2013)

13. As the assessment sought to be reopened is beyond the expiry of four years from the end of the relevant assessment year i.e. 2006-07, two conditions precedent have to be satisfied. Firstly, the Assessing officer issuing the notice for reassessment must have reason to believe that income chargeable to tax has escaped assessment on the basis of tangible material and secondly there must be a failure to disclose truly and fully all facts necessary for assessment when the original assessment proceedings took place.

14. So far as the first precondition for reopening is concerned, we find that reasons as disclosed rely upon the same tangible material which was and/or ought to have been a subject matter of examination before determining the deduction available under Section 80IB of the Act and passing the Assessment order. The material which forms the basis of reason to believe is the allocation of expenditure between the two units leading to higher deduction under Section 80IB of the Act in respect of the petitioner’s Silvasa Unit. We find that during the Assessment proceedings the Assessing Officer has examined the claim for deduction under Section 80IB of the Act and for that purpose had called upon the petitioner to file details of expenses claimed in its profit and loss account. This allocation of expenditure between the two units was very much present before the Assessing Officer while considering the claim for deduction under Section 80IB of the Act with regard to Silvasa Unit. The Assessing Officer at that point of time appears to have been satisfied that the allocation of expenditure made by the petitioner between the two units and did not reduce the claim by increasing the expenditure attributable to Silvassa Unit. The contention of the revenue that this aspect of the matter has not in terms been dealt with and/or examined in the Assessment order is not acceptable. We find that while considering the claim of the quantum of deduction available under Section 80IB of the Act the passing on of expenditure to the other unit while allocating common expenditure is too obvious an aspect to have not been examined by the Assessing officer particularly when he is considering the quantum of deduction available under Section 80IB to one of the units i.e. Silvasa Unit. Therefore one must necessarily proceed on the basis that while examining the quantum of deduction to be allowed under Section 80IB of the Act (which admittedly the assessment order does consider) the issue of allocation of expenditure for that purposes would necessarily have been examined. Therefore there is no tangible material to lead to a reason to believe that income has escaped assessment but only change of opinion on the part of the Assessing Officer on the material available, thus cannot be a subject matter of reassessment.

15. So far as the second precondition for reopening of assessment beyond the period of four years from the end of the relevant assessment year is concerned viz. failure to disclose fully and truly all materials facts necessary for assessment is concerned there is no dispute that the petitioner had in its accounts viz. profit and loss accounts allocated various common expenses between the non 80IB unit and 80IB unit. This was also subject to examination in determining the deduction available under Section 80IB of the Act to the Silvasa Unit. However the objection of Mr. Tejveer Singh on behalf of the revenue is that to qualify as full and true disclosure the petitioner was obliged to disclose/point out to the Assessing officer that the common expenses allocated by them between the Silvasa Unit and the Tarapur Unit can also be differently allocated. We find this rather strange as there is no dispute that these expenses as allocated had been disclosed. However the reasons allege that the expenses had to be allocated in a different ratio. The alternative methods/manner of allocation of expenses is not for the assessee to disclose. This is beyond the realm of disclosure of material facts necessary for assessment by the assessee. Therefore we find that there has been disclosure of material facts truly and fully for the purposes of assessment on the part of the petitioner.

16. The reliance by the revenue upon the decision of Delhi High Court in Honda Siel Power Products Ltd. (supra) is misplaced. In the above case the revenue sought to reopen an assessment beyond the end of four years from the end of the relevant Assessment year 2000-2001 on the ground of failure to fully and truly disclose all material facts during the original assessment proceedings. In its return of income as originally filed no details with regard to proportionate expenses relatable to tax free and other income were furnished and deduction of all expenses from taxable income was claimed. The case of the petitioner therein was that there was no obligation when the return was filed in 2000 to disclose the proportionate expenses relating to tax free income as Section 14-A of the Act was not in the statute. However the court held that Section 14-A of the Act was brought on the statute on 1 April 2001 w.e.f. 1962. Thus during the course of assessment proceedings which culminated with an Assessment order on 30 November 2003, the petitioner therein was required to disclose the facts during the Assessment Proceedings. Thus the court held there was a failure to disclose material facts truly and fully leading to the court not interfering with the notice for reopening under section 148 of the Act even when the same was beyond a period of four years from the end of the relevant assessment year. Besides unlike in the case of Honda Siel Power Products Ltd. (supra) where no disclosure of expenses incurred in respect of tax free income was at all made, in this case the petitioner had disclosed the allocation of expenditure between the non 80IB unit and 80IB unit in its profit and loss accounts and would obviously been subject of scrutiny while considering the claim for deduction under Section 80IB of the Act.

17. Thus we are of the view that the petitioner had disclosed fully and truly all material facts necessary for assessment. Even if it is assumed that the expenses were not allocated appropriately between the Tarapur Unit (non 80IB unit) and Silvasa unit (80IB unit) as contended by the revenue, yet the same was accepted by him while considering the deduction under Section 80IB of the Act. To permit the present proceedings for reassessment would be to permit the reopening proceedings on account of change of opinion. If re-assessment is allowed, on the basis of said change of opinion, it would amount to review which is not permissible under the law.

18. In view of the above, we are of the view that the notice dated 28 March 2013 under Section 148 of the Act, seeking to re-open the assessment for the Assessment Year 2006-07 as well as the order dated 1 August 2013 rejecting the petitioner’s objections to the re-opening of the assessment are bad in law. Therefore, the impugned notice dated 28th March 2013 and order dated 1 August 2013 are quashed and set aside.

19. Petition allowed. Rule made absolute in the above terms with no order as to costs.

[Citation : 364 ITR 213]