IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION NO. 15523 of 2011 FOR APPROVAL AND SIGNATURE:
HONOURABLE MR.JUSTICE VIJAY MANOHAR SAHAI and HONOURABLE MR.JUSTICE N.V.ANJARIA ================================================================
1 Whether Reporters of Local Papers may be allowed to see the judgment ?
2 To be referred to the Reporter or not ?
3 Whether their Lordships wish to see the fair copy of the judgment ?
4 Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ?
5 Whether it is to be circulated to the civil judge ?
================================================================ PRABHUDAS KISHORDAS TOBACCO PRODUCTS PVT LTD Petitioner(s) Versus ASSISTANT COMMISSIONER OF INCOME TAX Respondent(s) ================================================================ Appearance:
MR SN SOPARKAR, SR. ADV., WITH MRS SWATI SOPARKAR, & MR. BANDISH SOPARKAR, ADVOCATES for the Petitioner(s) No. 1 MS PB SHETH, ADVOCATE for the Respondent(s) No. 1 NOTICE SERVED for the Respondent(s) No. 1 ================================================================ CORAM: HONOURABLE MR.JUSTICE VIJAY MANOHAR
SAHAI
and
HONOURABLE MR.JUSTICE N.V.ANJARIA
Date : 25/07/2012 ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE N.V.ANJARIA) In the present writ petition under Article 226 of the Constitution, the petitioner-assessee challenges notice dated 25.05.2011 issued by the respondent – Assistant Commissioner of Income Tax, under section 148 of the Income Tax Act, 1961, seeking to reopen the assessment for the Assessment Year 2008-09, in case of the petitioner.
2. With consent of learned advocates for both the sides, the petition is taken up for final hearing today. Therefore, Rule. Learned advocate Mrs. P.B. Sheth for the respondent – Department waives service of Rule.
3. The relevant facts are summarised as follows. The petitioner is engaged in manufacturing of tobacco products particularly Bidis of various sizes and brands which are mainly made of processed tobacco. The assessee company filed its return of income on 25.09.2008 declaring total income at Rs.125,71,88,290/- along with return of fringe benefits. It showed taxable value of fringe benefits at Rs.42,30,459/-. The assessing officer by its order dated 30.11.2009 asked the petitioner to provide certain details. In item no. 11 of the said letter, a specific query was raised asking to furnish complete details regarding disallowance under section 14A read with Rule 8D. The petitioner by its letter dated 26.02.2010 gave full details of the method determining the expenditure amount in relation to income not includable in total income. The assessing officer passed the assessment order on 29.03.2010 whereby he made certain addition under section 14A of the Act.
3.1 Thereafter, the Respondent issued impugned notice dated 25.05.2011 under section 148 of the Act, reopening the assessment for the year 2008-09. The petitioner in response to the said notice filed letter dated 31.05.2011 requesting the respondent to provide copy of reasons recorded before issuance of reassessment notice under section 148 of the Act. Thereafter, the respondent on 29.06.2011 supplied the copy of the reasons recorded. On receipt of the reasons for reassessment and within 30 days from the date of receipt of show cause notice under Section 148, the petitioner by its letter dated 12.07.2011 raised various objections, and requested the respondent to drop the reassessment proceedings. The Assessing Officer decided the same and rejected the same on 30.09.2011. The petitioner has thereafter approached this court by way of this petition.
3.2 At this stage, reasons recorded by the assessing officer for reopening may be seen. They are extracted hereunder, “REASONS FOR RE-OPENING ASSESSMENT U/s.147 OF THE I.T.ACT,1961 , Reg.: PRABHUDAS KISHORDAS TOBACCO PRODUCTS PVT LTD. A.Y.:2008-09.
The assessee was engaged in the business of Manufacturing of Bidis & various pharmaceutical products and filed its return of income declaring total income of Rs.25,71,88,290. The assessment was finalized u/s. 143(3) of the Act on 29.03.2010 determining total income of Rs.25,72,75,610.
It is seen from the assessment records that the assessee had earned income exempt. While passing the order u/s 143(3) of the Act, an amount of Rs.87,322/- had disallowed expenses under the provision of section 14A of the Act, but no disallowance was made out of interest expenses of Rs.16,28,84,426/-. The interest expenses disallowable work out to Rs.12,21,725/- u/s.14A in terms with Rule 8D.
As discussed above, the disallowable expenses u/s.14A of Rs.12,21,725/- resulted in under assessment.
In view of the facts discussed above, I have reason to believe that income of Rs.12,21,725/- being the disallowable expenses u/s.14A chargeable to tax has escaped assessment for A.Y. 2008-09 and accordingly it is the fit case for reopening the assessment u/s.147 for the A.Y. 2008-09.
Hence notice u/s.148 is issued accordingly.
Place: Ahmedabad Name : (T.C.MEENA) Date : 25.5.2011 Designation: ACIT(OSD),Circle-5, Ahmedabad”
4. Heard learned senior counsel Mr. S.N. Soparkar, assisted by learned advocate Mr. Bandish Soparkar for the petitioner, and Ms. P.B. Sheth for the respondent-Department.
4.1 Learned senior counsel for the petitioner submitted that the respondent officer has erroneously assumed the jurisdiction to reopen the assessment. He took the court through the reasons recorded for reopening, to submit in the context that the issue on which reopening was proposed was already considered by the Assessing Officer at the time of passing the assessment order. According to him, the Assessing Officer acted on the same material and no tangible additional material was with the Assessing Officer to justify the exercise of powers under section 147 of the Act. It was submitted that the words `reason to believe’ in the section suggest that the belief must be honest and based upon reasonable ground and not in the nature of change of opinion or suspicion, gossip or rumour. He further submitted that the expenses under section 14A was rightly allowed and once the decision was reached by the Assessing Officer regarding the disallowable expenses and the assessment order was passed taking into account the said aspect, there was no reason for him to change the view that the actual expenses disallowable were Rs.12,21,725/- and to reopen the assessment on that basis. It was submitted that before finalizing the assessment the Assessing Officer had raised queries with reference to the very issue and the petitioner had answered those queries. Learned senior counsel submitted that the action to reopen the assessment and the consequential notice issued under section 148 of the Act were based on a mere change of opinion, which, he submitted, was not permissible in view of the settled law.
4.2 On the contrary, learned advocate for respondent-Department submitted that the assessment was reopened within period of four years, and as the Assessing Officer had reason to believe on the basis of material with him that the expenses under section 14A was not correctly treated, and the disallowable expenses were not given due effect, he was justified in invoking his powers under section 147 of the Act. He submitted that there was an escapement of income as the disallowable expenses of Rs.12,21,725/- under section 14A of the Act was liable to be treated as income.
5. The powers to reopen the assessment are derived from section 147 of the Act. The provision of section 147 in its first part deals with reopening of assessment which is within the span of four years from the end of the assessment year for which the assessment was finalized. If the assessing officer has reason to believe that an income on which the tax was liable to be paid had escaped assessment, he can reopen the assessment for the assessment year concerned when such escapement comes to his notice subsequently. This part of the provision applies within four years. The first proviso to the section says that once the assessment under section 143(3) is made for the relevant assessment year, no action shall be taken under this section after expiry of four years unless the escapement could be attributed to the failure on the part of the assessee to fully disclose the material.
5.1 The parameters on which the power to reopen the assessment may be exercised are well settled. The Assessing Officer must have a reason to believe that the income has escaped and such reason to believe has to arise on the basis of tangible material. The Assessing Officer acting on the same material or acting to review the material already considered, is not permitted to reopen the assessment on such basis. A change of opinion is no ground. A change of opinion is no ground for exercise of powers under Section 147, as is reiterated and emphasized in the celebrated decision in Commissioner of Income Tax Vs Kelvinator of India [(2010) 320 ITR 561 (SC)], which held as under:
“The concept of change of opinion on the part of the Assessing Officer to reopen an assessment does not stand obliterated after the substitution of section 147 of the Income Tax Act, 1961, by the Direct Tax Laws (Amendment) Acts, 1987 and 1989. After the amendment, the Assessing Officer has to have reason to believe that income has escaped assessment, but this does not imply that the Assessing Officer can reopen an assessment on mere change of opinion. The concept of “change of opinion” must be treated as an in-built test to check the abuse of power. Hence after April 1, 1989, the Assessing Officer has power to reopen an assessment, provided there is “tangible material” to come to the conclusion that there was escapement of income from assessment. Reason must have a link with the formation of the belief.”
5.2 The above principle was highlighted by this court in Garden Silk Mills Ltd. v. DCIT [90 Taxman 421 (Guj)] wherein it was observed as under, “The Assessing Officer is required to record his reasons in every case before issuing notice and, accordingly, in the instant case, the reasons recorded by the Assessing Officer were placed on record. There was nothing to indicate that there was failure on the part of the assessee to make a return of its income and to disclose fully and truly all material facts necessary for assessment. In the reasons, there was nothing to indicate that the Assessing Officer in consequence of the information in his possession had reason to believe that income had escaped assessment. It is well-known that the Assessing Officer is entitled to act on information received after the original assessment. Such information may have been gathered from the record of assessment itself. The Assessing Officer could not take any action under this section merely because he happened to change his opinion or to hold an opinion different from that of his predecessor on same set of facts. From the assessment order, it clearly appeared that the Assessing Officer had applied his mind to computation of income and, therefore, it was not open to the successor-ITO to issue notice under section 148. The revenue could not point out anything from the reasons that after the order of assessment by the Assessing Officer any further information had been received by the assessing Officer which could enable him to exercise his powers under section 148. From the reasons recorded by the Assessing Officer, it was clear that there was no new information but merely a change of opinion. If it would have been the case that facts were not disclosed fully and truly, then it could be said that by not disclosing the facts claims were made and were allowed. But the assessment order clearly indicated that the Assessing Officer was satisfied about the factual and legal aspect of the case. It was also not suggested by the revenue that the relevant facts for the purpose of assessment had been concealed or had not been fully and truly disclosed by the assessee. Hence, there was merely a change of opinion and that could not amount to escapement of income. Hence, notices issued under section 148 were quashed.”
5.3 Applying the above well settled tests to the facts of this case, the aspect emerging are these. -
5.3.1 Before passing the assessment order, the Assessing Officer had by letter dated 30.11.2009 raised certain queries. Query No. 11 in the said communication was as under:
“Please furnish the complete details of investment shown in Schedule to Balance Sheet with details of income earned therefrom working of disallowance u/s 14A r.w. Rule 8D may also be furnished.”
5.3.2 The assessee by his letter dated 26.02.2010 replied to the various queries including the above query as under:
“In continuation of our earlier replies, we would like to submit that there should be no disallowance under section 14A of Income Tax act. There is no nexus between Exempt income and expenditure incurred. There is also no nexus between Borrowed fund and fund invested in Investment yielding tax free income. There is no new Investment during the year under consideration.
We submit that interest earned during the year was higher than the interest paid and accordingly, no interest is attributable towards dividend income. The net Interest is income and interest is not entered as expenditure in Profit and loss account. We rely on the decision of Deputy Commissioner of Income tax v. Tata Investment Corporation Ltd. [2008] 113 TTJ 512 (MUM). In this case A.O. has accepted Assessee’s view regarding Net Interest to be considered and disallowed only expenditure, in this regards revenue has accepted the view taken by A.O. And in appeal revenue has not taken this ground.
It is further respectfully submitted that very recently Hon’ble Punjab & Haryana High Court has decided this issue and held that under the rule 8D disallowance can be made only if there is actual nexus between tax Free income & Expenditure Nexus could not be applied on mere presumption. Punjab & Haryana High Court’s decision in the case CIT Vs Hero Cycle is the first decision of the High Court on this point. This is departure from the principles laid down by ITAT in DAGA Capital.
Kindly therefore now no disallowance be made in our case as there is no nexus between tax free income & Expenditure.
Without prejudice to the above please find working under rule 8D.”
5.3.3 In the assessment order dated 21.03.2010 the Assessing Officer discussed the issue with regard to disallowance under section 14A of the Act. The relevant part is reproduced as under:
“Disallowance u/s.14A of the Act The assessee has shown dividend income of Rs.15,19,833/- from the investment made by it in shares and securities and the same has been claimed as exempt. In this regard, during the course of assessment proceedings, the assessee was asked to show cause as to why proportionate disallowance of interest expenditure should not be made u/s.14A of the IT Act as the assessee has made huge investment in shares and received dividend income from it, which is claimed as not-taxable. During the year, the investment in shares were shown at Rs.1,56,81,814/- and has earned dividend income of Rs.15,19,833/- from it. During the assessment proceedings, it was contended by the assessee that no disallowance u/s.14A requires to be made as there is “income” under the head “interest”, after netting of interest income and interest expenditure. This contention of the assessee is not acceptable, because, as a result of diversion of funds for investment in earning tax-free income, instead of repaying the borrowers, the assessee was left with less funds, forcing it to utilize borrowed funds. Hence, the interest expense was claimed on higher side and the burden of interest expense could have been lessened, if the assessee had repaid the borrowers instead of making investment in earning tax-free income. Moreover, the assessee has not explained and proved that the investment was made out of interest-free funds only. Therefore, interest expense is considered for the purpose of making disallowance u/s.14A, without netting the same, i.e. setting-off against interest income. On perusal of the books of accounts, it is noticed that the assessee is having substantial borrowings in the form of unsecured and secured loans and has claimed interest expenses.
In this regard, the CBDT has issued Notification No.45/2008 dated 24th March,2008 prescribing the rules for calculation of disallowance under section 14A. As per para-2(2)(ii) and 2(2)(iii) of the said notification, in case where assessee has incurred expenditure by way of interest, which is not directly attributable to a particular income or receipt of amount, should be computed as per the following formula, viz:-
A*B + B*0.5% C
A The amount of expenditure by way of interest.
B Average value of investment of which income does not form part of the income.
C Average value of total assets as per the Balance sheet as on the first day and last day of the previous year.
A Interest Exp. (taken at Rs. NIL as there is income under this head.
B Average investment As on 1.4.2007 1,92,47,014/-
As on 31.3.2008 1,56,81,814/- 1,74,64,414/-
C Average of total assets As on 1.4.2007 2,17,43,55,342/-
As on 31.3.2008 2,48,24,71,910/-
2,32,84,13,626/-
+ 1,74,64,414 x 0.50% 87,322 Total 87,322 Thus the amount of interest, attributable to investment made in shares and securities, from which dividend is earned and claimed as exempt, works out to Rs.87,322/- and the same is added to the total income of the assessee company.
(Disallowance – Rs. 87,322/-) Subject to the above remarks and from the data made available, the total income of the assessee company is worked out as under:-
Total income as per return of income Rs.25,71,88,290 Add: Disallowance u/s.14A of the Act (as discussed above) Rs. 87,322 Revised total income Rs.25,72,75,612 Rounded off to Rs.25,72,75,610 MAT WORKING:
Book Profit as worked out u/s.115JB of the Act Rs.28,38,04,422 Add: (i) Addition on account of disallowance u/s.14A (as discussed above) Rs. 87,322 Revised Book Profit Rs.28,38,91,744 Tax @ 10% on book profit Rs.2,85,11,347/-
As the tax on normal income is more than the tax worked out u/s. 115JB of the Act, the tax is levied on normal income.
Assessed u/s. 143(3) of the Income-tax Act, 1961. Give credit for prepaid taxes, if any, after due verification. Interest is charged u/s.234A, 234B and 234C of the Act.
Place: Ahmedabad Sd/-
Date : 29.03.2010 Dy. Commissioner of Income-tax Circle-5, Ahmedabad”
6. The above facts unmistakably show that the issue of disallowable expenses under section 14A was considered by the Assessing Officer on the basis of facts and material on record, which are related to the said issue. The Assessing Officer considered the question not only in his assessment order, but also in the prior stages of passing of the assessment order. Specific queries were raised and those queries were answered by the assessee thrice in writing. Therefore, it was on the basis of consideration of material and after due application of mind thereto, the Assessing Officer worked out disallowance under section 14A of the Act, and arrived at the amount of Rs.87,322/-.
6.1 In the reasons for reopening, now, what is stated is that no allowance was made out of interest expenses of Rs.16,28,84,426/-, and the interest expenses disallowable, therefore, worked out to be Rs.12,21,725/- in place of the figure arrived at in the assessment order. On such process of reasoning, the Assessing Officer had a reason to believe that thereby underassessment had resulted. Therefore, it is evident that in the reasons recorded for reopening, the Assessing Officer sought to redefine its finding on the basis of the same facts and materials. It is not indicated as to which new material he came across for drawing such reasons and the conclusion as recorded in the reasons. The omission to draw a particular conclusion or possibility of a different conclusion or proposing change in the conclusion on the ground that the one recorded in the assessment order was not proper or even a changed conclusion contemplated afterwards, when based on the same material already considered by the Assessing Officer, cannot furnish a valid ground to reopen the assessment. On such premises, the exercise of powers under section 147 is not permissible. The reassessment is not review proceedings.
6.2 In the aforesaid view, the action to reopen the assessment was not based on any tangible material, but was based on those facts and material, which were already on record of the Assessment Officer and on the basis of which, the assessment order was passed, including consideration of claim under section 14A. It was a mere change of opinion on the part of the Assessing Officer, because from the facts which he had considered and had applied his mind, the decision was sought to be reviewed to create a ground that particular kind of expenses which were disallowable on those facts were omitted. In the facts and circumstances, the respondent Assessing Officer exceeded his jurisdiction and the powers under section 147 were exercised without fulfilling the necessary conditions for exercise of powers.
7. In the result, the petition succeeds. The impugned notice dated 25.05.2011 by respondent Assistant Commissioner of Income Tax (OSD), Circle 5, Ahmedabad, under section 148 of the Income Tax Act, 1961, is hereby quashed and set aside. As the notice is set aside, the further proceedings and orders, including the order rejecting the objections of the petitioner to reopen shall follow the consequences and shall not stand valid. Rule is made absolute accordingly without any order as to costs.
(V.M.SAHAI, J.) sndevu (N.V.ANJARIA, J.)