(Per : HONOURABLE MS. JUSTICE HARSHA DEVANI) 1. The petitioner in this petition under Article 226 of the Constitution of India has challenged the notice dated 7th January, 2005 issued by the respondent under section 148 of the Income Tax Act, 1961 (hereinafter referred to as 'the Act') reopening the assessment for assessment year 2001-02.
2. The petitioner, a private limited company, filed its return of income for assessment year 2001-02 on 31st October, 2001 declaring total income of Rs.31,039/-. The case of the petitioner came to be taken in scrutiny and an assessment came to be framed under section 143(3)(i) of the Act on 24th February, 2004. Subsequently, by the impugned notice, the Assessing Officer sought to reopen the assessment for the year under consideration. On request made by the petitioner to furnish a copy of the reasons recorded, the Assessing Officer furnished such reasons which read as under:-
“The assessee company has taken loan of Rs.6 crores and the same was diverted to a group company and interest expenses incurred was of Rs.1.30 crores. As against interest expenses of Rs.1.30 crores, the assessee has charged interest of Rs.25.77 lakhs only and incurred excess expenditure of Rs.76.34 lakhs. Then it appears that by claiming interest expenses of Rs.1.30 crores resulted in net under assessment of income of Rs.76.34 lakhs.”
3. Upon receipt of the reasons, the petitioner submitted its objections contending that earlier the case of the petitioner was taken up for limited scrutiny on two issues (i) interest bearing funds diverted for non-business purpose and (ii) selling and distribution expenses increased disproportionately vis-a-vis turnover. That in connection with the first issue, the petitioner had made detailed submissions which had been considered by the Assessing Officer on merits. That the Assessing Officer was fully satisfied regarding the claim of the assessee for interest paid and accordingly allowed the claim of the petitioner and did not make any separate addition on account of disallowance of any portion of the interest. It was contended that the stand taken by the Department for reopening the assessment that as against interest expenses of Rs.1.30 crores, the assessee had charged interest of Rs.25.77 lakhs only and incurred excess expenditure of Rs.76.34 lakhs which had resulted in net under-assessment of income of Rs.76.34 lakhs, is nothing but a change of opinion.
4. By an order dated 20th December, 2005, the respondent disposed off the objections whereby, he rejected the contention of the petitioner that reopening of assessment was merely a change of opinion. According to the respondent, M/s. Nachmo Textiles was the sister concern of the petitioner company and by availing loan at a higher rate, it had diverted the same to a sister concern at a lower rate of interest. He was further of the opinion that the contention of the petitioner that Nachmo Textiles had agreed to give sufficient trade discounts on the product to be supplied to them to enable the petitioner to meet with the interest cost from the trading margin was unsupported and no evidence had been produced by the petitioner to prove that in exchange of loans at a lower rate to M/s. Nachmo Textiles, it had given trade discount so as to meet with the deficiency caused by giving loan at a lower rate. Being aggrieved, the petitioner has filed the present petition.
5. Mr. B.S. Soparkar, learned advocate for the petitioner invited attention to the reasons recorded to submit that the sole ground for reopening the assessment is in respect of the diversion of interest bearing fund for non-business purpose. Referring to the assessment as originally framed under section 143(3) of the Act, it was pointed out that originally in scrutiny assessment, two issues had been raised one of which was as regards the interest bearing fund having been diverted for non-business purpose. It was submitted that pursuant to the notice issued by the Assessing Officer under section 143(2) of the Act, the petitioner had filed detailed submissions. That the Assessing Officer on being satisfied that the explanation given by the petitioner had, by a reasoned order, allowed the claim of the petitioner. It was submitted that while reopening the assessment, the Assessing Officer has not come across any new or additional material for the purpose of forming a belief that income chargeable to tax has escaped assessment. Therefore, the reopening is based on a mere change of opinion which is not permissible in law. In support of the submission, the learned advocate placed reliance upon the decision of the Supreme Court in the case of Commissioner of Income-Tax vs. Kelvinator of India Ltd., 320 ITR 561. It was accordingly submitted that reopening of the assessment being based upon mere change of opinion, the assumption of jurisdiction by the Assessing Officer under section 147 of the Act is without authority of law and as such, the impugned notice deserves to be quashed and set aside.
6. Opposing the petition, Mrs. Mauna Bhatt, learned senior standing counsel for the respondent, strenuously argued that the petitioner had during the course of the regular assessment proceedings failed to disclose that M/s. Nachmo Textiles was a sister concern of the petitioner company. It was submitted that at the material time when the assessment came to be framed under section 143(3) of the Act, the Assessing Officer was not aware of the fact that M/s. Nachmo Textiles to whom interest bearing funds had been advanced was a sister company of the petitioner. Under the circumstances, it cannot be said that the reopening of assessment is based merely on change of opinion. Reliance was placed upon the reasons recorded by the respondent for rejecting the objection raised by the petitioner. In support of her submission, the learned counsel placed reliance upon the decision of the Bombay High Court in the case of Multiscreen Media Private Limited vs. Union of India and Another, 324 ITR 54.
7. A perusal of the impugned notice indicates that the same has been issued on 7th January, 2005 in relation to assessment year 2001-02. Thus, the reopening is within a period of four years from the end of the relevant assessment year. Under the circumstances, proviso to section 147 of the Act would not be attracted. Therefore, the sole ground on which the reopening can be assailed is that the Assessing Officer has not formed any belief that income chargeable to tax has escaped assessment. The other ground that can be urged is that the reopening is based upon a mere change of opinion on the ground that the said question has been duly examined by the Assessing Officer while framing assessment under section 143(3) of the Act.
8. As can be seen from the reasons recorded, the sole ground on which the assessment is sought to be reopened is that the petitioner company had taken loan of Rs.6 crores which was diverted to a group company and interest expenses to the tune of Rs.1.30 crores had been incurred as against which the assessee had charged interest of Rs.25.77 lakhs only resulting in excess expenditure of Rs.76.34 lakhs. Thus, it is the case of the respondent that there is an under-assessment of income to the tune of Rs.76.34 lakhs.
9. On behalf of the petitioner, it has been contended that the reopening is based upon a mere change of opinion and that the Assessing Officer has not come across any new material on the basis of which he can form a belief that income chargeable to tax has escaped assessment. In this regard, it may be pertinent to refer to the order made by the Assessing Officer under section 143(3) of the Act wherein it has inter alia been recorded thus:-
“From the Profit and Loss Account of the assessee it is found that the assessee had received interest income of Rs.25,79,071/- as against which the assessee had paid interest and finance charges of Rs.1,30,04,183/-. The assessee was asked to furnish evidences in support of its claim for interest payment and case was fixed for hearing on 30-10-2002. In response to which Mr. Manan Shah, C.A. attended and case was discussed with him. Subsequently notices u/s 143(2) was issued and in response to which the assessee filed its submissions dated 4th February 2004, 9th February 2004 and 18th February 2004, which were personally delivered in the office by Mr. Manan Shah, C.A.
The assessee company is dealing in 100% cotton knitted fabrics which the assessee is purchasing from Nachmo Textiles, a division of Nachmo Knitex Ltd. Considering the market trend of the said product the assessee has decided to increase its sale by tapping various market resources and for that purpose the assessee wrote a letter to the said Nachmo Textiles, from whom assessee was purchasing 100% cotton knitted fabrics. The assessee received a reply from the said Nachmo Textiles, a division of Nachmo Knitex Ltd. informing that for the purpose of supplying the higher demand of goods they are making negotiations with their bankers for required funds but they may take time and hence in the meantime the assessee was requested to give required advance of the finance required against the manufactured goods to be supplied to the assessee. As the assessee was not having sufficient own fund to make such temporary advance of finance to the said M/s Nachmo Textiles, the assessee had to borrow the money and advanced the same to M/s Nachmo Textiles. In the course of negotiation with the said M/s Nachmo Textiles it was decided to advance the said amount interest free the assessee requested the said M/s Nachmo Textiles to give sufficient trade discount on the products to be supplied by them to enable the assessee to meet with the interest cost from the trading margins and on the basis of the said condition the assessee had financed Rs.6 crores to the said M/s Nachmo Textiles. In response to the assessee's letter dated 3rd April 2000, the assessee received a letter from M/s Nachmo Textiles, a division of Nachmo Knitex Ltd. agreeing to give higher trade discount to compensate the assessee the interest cost, but the same will be given after receipt of the order on case to case basis. Considering all the above referred aspects the assessee advanced a sum of Rs.6 crores in the month of April 2000 and M/s Nachmo Textiles, a division of Nachmo Knitex Ltd. also fulfilled its promise and supplied the manufactured goods in time giving higher trade discount on account of which the assessee company could increase its gross profit margin. In the assessment year 2000-01 the assessee had earned gross profit of 5.23% as against 12.76% for the present assessment year. After considering the above referred arrangement vis-a-vis the increase in sales in the last 9 months, the assessee find that they cannot reach the expected target of sale and hence it was decided to discontinue the arrangement and therefore, the assessee requested vide its letter dated 28- 12-2000 to the said M/s Nachmo Textiles to return the said temporary advance of Rs.6 crores given to them which the assessee had borrowed. On the basis of the request of the assessee the said M/s Nachmo Textiles had ultimately returned the said temporary advance of Rs.6 crores to the assessee in the month of January 2001 and the assessee in turn returned the borrowings made by the assessee. The assessee had paid interest of Rs.1,02,13,107/- on the said temporary advance of Rs. 6 crores but at the same time the assessee had received a sum of Rs.25,79,071/- from the said M/s Nachmo Textiles, a division of Nachmo Knitex Ltd. on its normal business of trading with the said company. The said amount of receipt of interest is shown under the head “Other Income”. Therefore ultimately net interest burden of the assessee is only Rs.76,34,036/- which have been claimed as a business expenditure u.s.36(1)(iii). The assessee earned substantial amount of gross profit amounting to 12.76% which in terms of rupees by way of incremental GP as compared to last year works out to Rs.82,60,946/- which covers the interest burden of Rs.76,34,036/- of the assessee and hence your assumption that interest bearing funds are diverted for non-business purpose is incorrect and we have to request your goodselves to allow our claim for interest payment u/s.36(1)(iii) of the Act.”
10. On the basis of the aforesaid submissions made by the assessee, the Assessing Officer recorded his finding as under:-
“4.1 The contentions made by the assessee in its above referred three written submissions were duly verified and it was found that the amount borrowed by the assessee were utilized for the business purpose as contended by the assessee company. The assessee had provided advance to M/s Nachmo textiles from whom the assessee is purchasing 100% cotton knitted fabrics and in turn the said Nachmo textiles had agreed to give sufficient trade discount on the products to be supplied by them to enable the assessee to meet with interest cost from the trading margins. The utilization of funds were therefore, for the purpose of regular business of the assessee company. The assessee had submitted sufficient evidences in support of the above contentions which are placed on record. Thus the conditions laid down u/s 36(I)(iii) has been fulfilled in the case of the assessee.”
11. From the submissions made by the petitioner during the course of the assessment under section 143(3) of the Act and the findings recorded by the then Assessing Officer, it is apparent that the Assessing Officer has duly applied his mind to the controversy in issue and was satisfied that there was sufficient evidence in support of the contention of the assessee that the utilisation of funds was for the purpose of regular business of the assessee company. Now, the assessment is sought to be reopened on the ground that the claim of the petitioner that Nachmo Textiles had agreed to give sufficient trade discounts on the product to be supplied to them to enable the petitioner to meet with the interest cost from the trading margin is unsupported and no evidence has been produced by the petitioner to prove that in exchange of loans at at lower rate M/s. Nachmo Textiles had given trade discounts so as to meet the deficiency caused by giving loan at a lower rate.
12. From the submissions made by the petitioner during the course of the assessment proceedings as well as the findings recorded by the Assessing Officer, it is apparent that the petitioner had furnished necessary evidence in support of its case that in exchange of the loan at a lower rate to M/s. Nachmo Textiles, it had given trade discounts so as to meet with the deficiency caused by giving loan at a lower rate. Thus, the reasons recorded by the Assessing Officer are apparently contrary to the record of the case.
13. Besides, the contention which is now sought to be raised that the petitioner had not disclosed that Nachmo Textiles is a sister concern is coming out for the first time in the submission made by the learned counsel for the respondent. Such contention is not borne out from the reasons recorded or in the order rejecting objections or even in the affidavit filed by the respondent. Though, in the reasons recorded it has been stated that M/s. Nachmo Textiles is a sister concern of the petitioner company and that by borrowing loan at a higher rate, the petitioner had diverted the same to a sister concern at a lower rate of interest, it is nowhere stated that such fact had come to the notice of the Assessing Officer only subsequently pursuant to some fresh information received by him. Moreover, assuming that the fact regarding Nachmo Textiles being a sister concern of the petitioner company has come to the notice of the Assessing Officer for the first time subsequent to the framing of the original assessment, the ground on which the assessment is sought to be reopened is that the claim of the petitioner that Nachmo Textiles had agreed to given sufficient trade discounts on the product to be supplied to the petitioner to enable it to meet with the interest cost from the trading margin was unsupported and no evidence had been produced. From the facts noted hereinabove, more particularly the submissions made by the petitioner during the course of regular assessment and the findings recorded by the Assessing Officer, it is apparent that the said ground raised by the Assessing Officer is contrary to the record inasmuch as, it is only on the basis of the supporting documents and evidence produced by the petitioner that the Assessing Officer while framing assessment under section 143(3) of the Act had recorded that the petitioner had provided advance to M/s. Nachmo Textiles from whom it was purchasing 100% cotton knitted fabrics and in turn the same Nachmo Textiles had agreed to give sufficient trade discounts on the products to be supplied by them to enable the assessee to meet with the interest cost from the trading margin. Under the circumstances, the Assessing Officer on the basis of the material produced by the petitioner having been satisfied that the utilisation of funds advanced to M/s. Nachmo Textiles was for the purpose of regular business of the petitioner company, the reopening of assessment on the very same ground without there being any additional material, is clearly based upon a mere change of opinion. The Supreme Court in the case of Commissioner of Income-Tax vs. Kelvinator of India Ltd. (supra) has held that one needs to give a schematic interpretation to the words “reason to believe'' failing which section 147 would give arbitrary powers to the Assessing Officer to reopen assessments on the basis of “mere change of opinion”, which cannot be per se reason to reopen. The court observed that one must keep in mind the conceptual difference between the power to review and power to reassess. The Assessing Officer has no power to review; he has the power to reassess. The reassessment has to be based on fulfilment of certain pre- conditions and if the concept of “change of opinion” is removed, 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 Assessing Officer. Hence, after 1st April, 1989, the Assessing Officer has power to reopen, provided there is “tangible material” to come to the conclusion that there is escapement of income from assessment. Under the circumstances, the assumption of jurisdiction by the Assessing Officer under section 147 of the Act is invalid.
14. The above referred decision would be squarely applicable to the facts of the present case.
15. Insofar as the decision of the Bombay High Court in the case of Multiscreen Media Private Limited vs. Union of India and Another (supra) on which reliance has been placed by the learned counsel for the respondent, the same does not carry the case of the respondent any further inasmuch as in the facts of the said case, the Assessing Officer had reopened the assessment on the basis of fresh material which had come before him. In the facts of the present case, nothing has been brought on record by the respondent to indicate that the Assessing Officer had any tangible material to reopen the assessment under section 147 of the Act.
16. For the foregoing reasons, the petition succeeds and is accordingly allowed. The impugned notice dated 7th January, 2005 issued by the respondent is hereby quashed and set aside. Rule is made absolute accordingly with no order as to costs.
( Akil Kureshi, J. ) ( Harsha Devani, J. ) hki