High Court Of Madras
Tamil Nadu Petroproducts Ltd. vs. CIT & ANR.
Section 80HHC, 80-IA, 147, 148, Art. 226
Asst. Year 2001-02
N. Paul Vasanthakumar, J. Writ Petn. No
s. 28457 of 2008 & 19260 of 2009;
Misc. Petn. Nos. 1 of 2008 & 1 of 2009
17th September, 2010
Counsel Appeared :
Arvind B. Dattar for M/s Subbaraya Aiyar, Padmanabhan & Ramamani, for the Petitioner : J. Narayanaswamy, for the Respondent
JUDGMENT
N. Paul Vasanthakumar, J. :
Both the writ petitions are filed by the same petitioner, namely M/s Tamil Nadu Petroproducts Limited, Chennai. The issue involved in both the cases being one and the same, both the writ petitions are disposed of by this common order.
In Writ Petn. No. 28457 of 2008 the petitioner has challenged the notice dt. 3rd Aug., 2007 calling for returns for re-assessment of income for the asst. yr. 2001-02 insofar as escaped assessment under s. 147 of the IT Act, 1961. In Writ Petn. No. 19260 of 2009 the petitioner has challenged the order dt. 19th Nov., 2008 overruling the objection filed by the petitioner for the notice dt. 3rd Aug., 2007.
The brief facts necessary for the disposal of these writ petitions are as follows : (a) The petitioner company is engaged in the business of manufacture and export of Linear Alkyl Benzene and Epichlorhydrin and it is eligible for claiming deduction under s. 80HHC of the IT Act, 1961 in respect of its export activities. Petitioner is also having four power generating Units for production of power, which is partly consumed for its own use and the balance is sold to the Tamil Nadu Electricity Board. Petitioner also claims deduction under s. 80-IA of the Act in respect of one power generation unit. (b) According to the petitioner, for the asst. yr. 2001-02 the petitioner filed its returns of income on 31st Oct., 2001 by declaring total income of Rs. 57,36,72,000. The said return was processed by the AO under s. 143(1) of the Act on 22nd March, 2003. The AO however reopened the assessment under s. 147 by issuing notice under s. 148 on 3rd Sept., 2004 by stating that the petitioner had claimed a sum of Rs. 8,56,47,000 as revenue expenditure instead of treating the amount as capital expenditure. (c) According to the petitioner, the re-assessment was completed on 13th Feb., 2006 and no addition was made in respect of which assessment was reopened. However, the AO has disallowed the provision for bad and doubtful debts and re-computed the deductions under s. 80HHC and denied deductions under s. 80-IA of the Act. (d) Petitioner preferred an appeal before the CIT(A) in IT Appeal No. 669 of 2005-06 and on 1st Dec., 2006 the said order was set aside. According to the petitioner the AO again reopened the assessment under s. 147 by issuing notice dt. 3rd Aug., 2007 and directed the petitioner to file returns of income. (e) Petitioner submitted a reply on 8th Aug., 2007 and stated that the return filed on 31st Oct., 2001 may be treated as return for reassessment. The petitioner also requested to furnish the reasons recorded for reopening the assessment. On 7th Aug., 2008 the second respondent gave reasons for reopening the assessment. (f) On receipt of the said reasons, petitioner filed its objections by letter dt. 15th Nov., 2008 and contended that there is no material or reason available for re-opening the assessment for the year 2001-02 as all materials were disclosed in the returns already filed. The said objection was overruled by the second respondent by order dt. 19th Nov., 2008 by stating that notice under s. 148 of the Act for the accounting year 2001-02 was issued by the AO after getting prior approval of the appropriate authority of the Department as per the provisions of s. 148. In the order dt. 19th Nov., 2008 it is stated that the petitioner has misrepresented the facts and therefore reassessment notice was issued as deductions under s. 80HHC has been claimed by the assessee in excess by wrongly including the interest receipt as the business receipt. The benefit of deduction under s. 80HHC has been wrongly claimed on interest receipts as export incentives. The receipt of compensation from M/s CIBA India (P) Ltd., for the cessation of supply agreement for the supply of Epichlorohydrin to Petro Araldite (P) Ltd., has been wrongly shown as capital receipt without any basis. (g) Since the relevant material evidence was found after verification of the records of M/s CIBA India (P) Ltd., particularly the receipt of compensation was for the cessation of supply agreement for the purpose of supply of Epichlorohydrin to the petitioner, the same is directly related to business income. Further the claim of s. 80-IA has been wrongly made without reducing the s. 80HHC profits of the year as per the provisions of s. 80-IA of the Act. Hence the objection raised was overruled and stated that the re-assessment proceeding were validly initiated. The petitioner was directed to produce the corresponding submission before the second respondent during the next date of hearing on 27th Nov., 2008 at 4.00 p.m.
The respondents have filed counter affidavit stating that notice for re-assessment was issued on the information available on record relating to the assessment of M/s CIBA India (P) Ltd., for the asst. yr. 2001-02 wherein the entire amount of Rs. 63.02 crores was stated to be paid only as compensation to the petitioner for terminating the supply agreement dt. 22nd Jan., 1998 and entering into the new supply agreement dt. 22nd March, 2001. The petitioner has misrepresented the facts in the original returns of income by way of notes of account Schedule 12 under the heading ‘Contingent Liabilities’ and therefore there is non-disclosure of full and true material facts before the Income Tax Authorities. The petitioner’s objection submitted for the re-assessment notice stating that mere change of opinion on the part of the AO cannot be accepted in terms of Expln. 1 to s. 147 and the judgment of the Delhi High Court Consolidated Photo & Finvest Ltd. vs. Asstt. CIT (2006) 200 CTR (Del) 433 : (2006)
281 ITR 394 (Del) and the judgment of the Supreme Court reported in Sri Krishna (P) Ltd. vs. ITO (1996) 135 CTR (SC) 75 : (1996) 221 ITR 538 (SC). Petitioner having wrongly stated the above receipt of Rs. 63.02 crores under the heading ‘Contingent Liabilities’ in the notes of accounts and as there was no actual liability on the part of the petitioner during that year, the objection was overruled and speaking order was passed. The petitioner having wrongly claimed excess deductions under s. 80HHC by ignoring the provisions contained in s. 80-IA(9) cannot contend that re-assessment notice was issued wrongly and the objection raised was also rejected. It is also stated in the counter affidavit that the writ petitions are not maintainable since the petitioner has an alternate remedy by way of filing appeal as prescribed under the IT Act, 1961 if it is aggrieved, if a final order is passed after production of records by the petitioner for the re-assessment proceeding. Heard the learned senior counsel for the petitioner and the learned standing counsel for the IT Department. Several decisions were cited by both the counsels in support of their respective submissions. I have considered the rival submissions.
The reassessment notice under s. 148 was issued on 3rd Aug., 2007 on finding out escaped assessment. For the said notice, the petitioner was informed of reasons by stating that verification of records of M/s CIBA India (P) Ltd., for the asst. yr. 2001-02 revealed that they have paid compensation of Rs. 63.02 crores to the petitioner for the termination of supply agreement. The said amount has been paid as compensation to the petitioner for terminating the supply agreement dt. 22nd Jan., 1998 and for entering into supply agreement dt. 22nd March, 2001. Though the petitioner company claimed the entire amount of Rs. 63.02 crores as capital receipt, the facts gathered show that at least a part of it should be on revenue account. Therefore the entire sum could not have been paid to the assessee for surrender at its first right of purchase of CIBA’s share. The petitioner company continued to have its share in Petro Araldite. The substantial part of Rs. 63.02 crores should be in relation to compensation for the alleged termination of contract and it should be treated as revenue receipt. The Supreme Court in the decisions CIT vs. Rai Bahadur Jairam Valji & Ors. (1959) 35 ITR 148 (SC) and Miss Dhun Dadabhoy Kapadia vs. CIT (1967) 63 ITR 651 (SC) held that any amount of compensation received for cancellation of supply agreement is only a business income.
The petitioner company has also made wrong claim under s. 80HHC treating the interest receipt as export incentive. Therefore the second respondent has reason to believe that the income chargeable to tax has escaped assessment in view of the failure on the part of the assessee Company to disclose true and full material facts as required by proviso to s. 147. The objection raised by the petitioner was also considered and overruled by order dt. 19th Nov., 2008 and a direction was issued to consider the matter on merits to produce the corresponding submissions during the next hearing on 27th Nov., 2008.
Writ Petn. No. 28457 of 2008 challenging notice dt. 3rd Aug., 2007 is not maintainable after filing objections, which were overruled by the subsequent order dt. 19th Nov., 2008 and therefore the prayer made in Writ Petn. No. 28457 of 2008 has become infructuous even on the date of filing of the said writ petition on 28th Nov., 2008 and the said writ petition is dismissed as infructuous.
10. The objections raised have been considered and overruled and the respondent is having an honest reason to believe that there is non-disclosure of true and full facts in the accounts already submitted. The requirement to initiate re-assessment under s. 147 of the IT Act, 1961 is explained by the Hon’ble Supreme Court in the decision reported in CIT vs. Kelvinator of India Ltd. (2010) 2 SCC 723. In paras 3 to 8 it is held thus :
“3. After enactment of the Direct Tax Laws (Amendment) Act, 1987 i.e. prior to 1st April, 1989, s. 147 of the Act reads as under : ‘147. Income escaping assessment.—If the AO, for reasons to be recorded by him in writing, is of the opinion that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of ss. 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in ss. 148 to 153 referred to as the relevant assessment year) : (Emphasis, italicized in print, supplied)
4. After the Amending Act, 1989, s. 147 reads as under : ‘147. Income escaping assessment—If the AO has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of ss. 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in ss. 148 to 153 referred to as the relevant assessment year) :’ (Emphasis, italicized in print, supplied)
On going through the changes, quoted above, made to s. 147 of the Act, we find that, prior to the Direct Tax Laws (Amendment) Act, 1987, reopening could be done under the above two conditions and fulfilment of the said conditions alone conferred jurisdiction on the AO to make a back assessment, but in s. 147 of the Act (w.e.f. 1st April, 1989), they are given a go-by and only one condition has remained viz. that where the AO has reason to believe that income has escaped assessment, confers jurisdiction to reopen the assessment. Therefore, post 1st April, 1989, power to reopen is much wider. However, one needs to give a schematic interpretation to the words ‘reason to believe’ failing which, we are afraid, s. 147 would give arbitrary powers to the AO to reopen assessments on the basis of ‘mere change of opinion’, which cannot be per se reason to reopen.
We must also keep in mind the conceptual difference between power to review and power to reassess. The AO has no power to review; he has the power to reassess. But reassessment 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 reopening 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 AO. Hence, after 1st April, 1989, the AO has power to reopen, 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. Our view gets support from the changes made to s. 147 of the Act, as quoted hereinabove. Under the Direct Tax Laws (Amendment) Act, 1987, Parliament not only deleted the words ‘reason to believe’ but also inserted the word ‘opinion’ in s. 147 of the Act. However, on receipt of representations from the companies against omission of the words ‘reason to believe’, Parliament reintroduced the said expression and deleted the word ‘opinion’ on the ground that it would vest arbitrary powers in the AO.
8. We quote hereinbelow the relevant portion of Circular No. 549 dt. 31st Oct., 1989 [(1990) 82 CTR (St) 1], which reads as follows : ‘7.2. Amendment made by the Amending Act, 1989, to reintroduce the expression ‘reason to believe’ in s. 147A number of representations were received against the omission of the words ‘reason to believe’ from s. 147 and their substitution by the ‘opinion’ of the AO. It was pointed out that the meaning of the expression, ‘reason to believe’ had been explained in a number of Court rulings in the past and was well settled and its omission from s. 147 would give arbitrary powers to the AO to reopen past assessments on mere change of opinion. To allay these fears, the Amending Act, 1989, has again amended s. 147 to reintroduce the expression “has reason to believe” in the place of the words “for reasons to be recorded by him in writing, is of the opinion. Other provisions of the new s. 147, however, remain the same. (Emphasis, italicized in print, supplied)”
Applying the said decision to the facts of this case, the proceedings initiated for re-assessment cannot be quashed at the threshold. It is open to the petitioner to produce records and satisfy the authority that there is no necessity for re-assessment and there was no suppression or nondisclosure of true and full accounts while submitting the returns for the original assessment and it is for the authority to consider all aspects and pass final orders. If any final order is passed after placing all the records and if that order is adverse to the petitioner, it is always open to the petitioner to file appeal before the appellate authority as well as before the Tribunal and thereafter approach this Court. Thus, there are remedies available to the petitioner and the writ petition filed challenging the notice and overruling of objection for reassessment cannot be entertained in the light of the judgment of the Supreme Court reported in Raj Kumar Shivhare vs. Directorate of Enforcement (2010) 4 SCC 772 : 2010 (4) LW 1.
In the result, both the writ petitions are dismissed. No costs. It is made clear that no finding is rendered by this Court regarding the liability of the petitioner for paying any additional income tax and it is open to the AO to decide the same on its own merits and in accordance with law.
[Citation : 330 ITR 342]
