(Per: HONOURABLE MS.JUSTICE HARSHA DEVANI) 1. The petitioner, a private limited company, has challenged a notice dated 30.03.2004 issued by the respondent under section 148 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) seeking to assess the petitioner under section 147 of the Act for the assessment year 2002-03.
2. The petitioner filed its return of income for the assessment year 2002-03 on 31.10.2002 declaring total income of Rs.7,65,11,550/. In its return of income, the petitioner had claimed depreciation of Rs.65,62,500/- in respect of intangible assets being Non Compete Territory Rights. Along with the return, the petitioner had filed its statement of total income giving details in respect of the depreciation claimed by it. The return was processed under section 143(1) of the Act and intimation accepting the return of income came to be issued under section 143(1) of the Act on 12.03.2003. Thereafter, by the impugned notice dated 30.03.2004, the respondent proposed to make assessment under section 147 of the Act for assessment year 2002-03. Upon receipt of such notice, the petitioner requested the respondent to furnish a copy of the reasons recorded. Pursuant to such request the reasons came to be furnished which read thus:
“Reasons for Re-opening Assessment u/s. 147 The return of income is filed on 31.10.2002 declaring total income of Rs. 7,65,11,550/-. The same was processed u/s. 143(1) of the I.T.Act on 12.03.2003. In Annexure-C Cluase-14 of particulars of depreciation allowance as per I.T. Act, 1961 it is seen that the assessee has claimed depreciation on Non-Compete Territory Rights of Rs. 65,62,500/-. The depreciation is not available on the Non-Complete Territory Rights. As the reason of wrong claim of depreciation the income of Rs. 65,62,500/- has escaped assessment within the meaning of section 147 of the I.T.Act.
In view of the above, I have reason to believe that income of Rs. 65,62,500/- has escaped assessment for A.Y.2002-03 for which an assessment is required to be re- opened u/s. 147 of the Act as there is omission and failure on the part of the assessee to disclose full and true facts required for the assessment. Accordingly, this assessment is to be re-opened u/s. 147 of the Act.”
3. Thereafter, the petitioner, by a letter dated 10.06.2004 raised various objections thereto, interalia, contending that in the return of income the petitioner had made full and true disclosure of facts with regard to Non Compete Territory Rights which is revealed from the disclosure of facts as appearing in the return of income itself. It was submitted that as per section 32(1)(ii) depreciation is allowable on “know-how, patents, copyrights, trade marks, licenses, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, owned, wholly or partly, by the assessee and used for the purposes of the business”. The petitioner had obtained licence for use of the trademark “RASNA” for the purpose of sale in Licensed Territory and for this an amount of Rs. 5,25,00,000/- had been incurred towards territorial rights given to the licensor. The asset is an intangible asset as provided under section 32(1)(ii) of the Act. Reference was made to a CBDT Circular No.772 dated 23.12.1998 giving explanatory notes on provisions relating to Direct Taxes contained in Finance (No.2) Act, 1998 to submit that on a perusal of the provisions of section 32 read with the circular issued by the CBDT giving explanation with regard to intangible assets, the observation of wrong claim of depreciation on Non Compete Territory Rights is contrary to the section as well as the CBDT Circular which is binding.
4. By a speaking order dated 10.12.2004, the respondent rejected the objections raised by the petitioner on the ground that after the return of income filed by the petitioner was processed under section 143(1) of the Act, on scrutiny of Annexure-C of clause 14 of particulars of depreciation allowance it was noticed that no details/particulars have been furnished for the claim of depreciation of intangible assets. Thus, prima facie the assessee did not furnish the necessary details of its claim so as to verify the correctness of the huge claim of depreciation amounting to Rs.65,62,500/- being 50% of the normal depreciation allowable on intangible assets. Dealing with the contentions raised by the petitioner, it was observed that on verification of the assessee’s claim it is clear that the assessee had not furnished the complete evidence and details about the purchase of so called rights. Thus, the assessee has clearly omitted and failed on its part to disclose true and full facts required for computing the correctness of its claim of depreciation. Being aggrieved the petitioner has filed the present petition.
5. Mr. S. N. Soparkar, Senior Advocate, learned counsel for the petitioner submitted that for the purpose of assumption of jurisdiction under section 147 of the Act, the Assessing Officer has to form a belief that income chargeable to tax has escaped assessment. Such reason to believe must be that of an honest and reasonable person based upon reasonable ground and must lead to a conclusion that the income has escaped assessment and such reasons should have nexus with the assumption of jurisdiction. Referring to the reasons recorded, it was submitted that the sole ground for reopening the assessment is that depreciation is not available on the Non-Compete Territory Rights and as such, by claiming depreciation at Rs. 65,62,500/-, income chargeable to tax has escaped assessment within the meaning of section 147 of the Act. Inviting attention to the provisions of section 32 of the Act, it was submitted that with effect from 01.04.1999, an assessee is entitled to depreciation even in respect of intangible assets. According to the learned counsel, Non-Compete Territory Rights undisputedly being a tangible asset, the very formation of belief of the Assessing Officer that income chargeable to tax has escaped assessment as depreciation is not available on Non-Compete Territory rights is fallacious. It was submitted that under the circumstances, the very formation of belief that income chargeable to tax has escaped assessment being without any basis, the assumption of jurisdiction under section 147 of the Act is without authority of law.
6. Vehemently opposing the petition, Ms. Paurami Sheth, learned senior standing counsel for the respondent placed reliance upon the affidavit-in-reply filed by the respondent. It was submitted that this is a case wherein merely an intimation under section 143(1) of the Act has been issued and that, no assessment has been framed under section 143(3) of the Act. Referring to the reasons recorded, it was submitted that the Assessing Officer has formed an opinion that income chargeable to tax has escaped assessment by reason of the fact that depreciation is not available on Non-Compete Territory Rights. Under the circumstances, the assumption of jurisdiction by the Assessing Officer is valid and legal. Referring to the order disposing of the objections, it was submitted that the Assessing Officer has recorded therein that on scrutiny of Annexure-C of Clause-14 of particulars of depreciation allowance, it was noticed that no details/particulars had been furnished for the claim of depreciation of intangible assets. Thus, the assessee did not furnish necessary details for its claim so as to verify the correctness of the huge claim of depreciation amounting to Rs. 65,62,500/- being 50% of the normal depreciation allowable on intangible assets. It was submitted that thus, upon verification of the assessee’s claim it was clear that the assessee had not furnished the complete evidence and details about the purchase of so called rights and as such had omitted to disclose full and true facts required for computing the correctness of its claim of depreciation. Under the circumstances, initiation of proceedings for assessment under section 147 of the Act is in accordance with law. It was, accordingly, urged that the action taken by the Assessing Officer by issuing the impugned notice is just, legal and proper and in accordance with the provisions of law, and as such there is no warrant for interference by this court.
7. The facts reveal that this is a case where prior to issuance of notice under section 148 of the Act, only an intimation under section 143(1) of the Act had been issued. In other words no scrutiny assessment leading to an order under section 143(3) had taken place. This is, therefore, a case of assessment under section 147 of the Act and not a case of reassessment. It is by now well settled that in a case where no assessment has been framed under section 143(3) of the Act, the scope of challenge to a notice under section 148 of the Act is very limited. The Supreme Court in the case of Assistant Commissioner of Income-Tax v. Rajesh Jhaveri Stock Brokers P. Ltd., (2007) 291 ITR 500 (SC,) was dealing with a case wherein the powers under section 147 were sought to be exercised in respect of a case where only an intimation under section 143(1) of the Act had been issued. The court observed that assessment is used as meaning sometimes “the computation of income”, sometimes “the determination of the amount of tax payable” and sometimes “the whole procedure laid down in the Act for imposing liability upon the tax payer”. In the scheme of things, as noted above, the intimation under section 143(1)(a) cannot be treated to be an order of assessment. It was held that the intimation under section 143(1)(a) was deemed to be a notice of demand under section 156, for the apparent purpose of making machinery provisions relating to recovery of tax applicable. By such application only recovery indicated to be payable in the intimation became permissible. And nothing more can be inferred from the deeming provision. Therefore, there being no assessment under section 143(1)(a), the question of change of opinion does not arise. The court further observed that section 147 authorizes and permits, the Assessing Officer to assess income chargeable to tax, if he has reason to believe that income for any assessment year has escaped assessment. The word “reason” in the phrase “reason to believe” would mean cause or justification. If the Assessing Officer has cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief. Whether the materials would conclusively prove the escapement is not the concern at that stage. This is so because the formation of belief by the Assessing Officer is within the realm of subjective satisfaction. The court observed that in case where in the past intimation under section 143(1)(a) has been issued, the only condition which is required to be satisfied is as to whether income, profit or gain chargeable to income tax have escaped assessment.
8. Thus, for the purpose of making an assessment under section 147 of the Act where earlier only an intimation under section 143(1) of the Act has been issued, only one condition is required to be satisfied before the Assessing Officer can assume jurisdiction to issue notice under section 148 of the Act, namely that he must have reason to believe that income chargeable to tax has escaped assessment. If the said condition is not satisfied the notice would be without jurisdiction. It is well settled as a result of several decisions of the Supreme Court that the words “has reason to believe” are stronger than the words “is satisfied”. The belief entertained by the Assessing Officer must not be arbitrary or irrational and must be reasonable. In other words, it must be based on reasons which are relevant and material. The court cannot investigate into the adequacy or sufficiency of the reasons which have weighed with the Assessing Officer in coming to the belief, but the court can certainly examine whether the reasons are relevant and have a bearing on the matters in regard to which he is required to entertain the belief before he can issue notice under section 148. If there is no rational and intelligible nexus between the reasons and the belief, so that, on such reasons, no one properly instructed on facts and law could reasonable entertain the belief, the conclusion would be inescapable that the Assessing Officer could not have reason to believe that any part of the income of the assessee has escaped assessment and the notice issued by him would be liable to be struck down as invalid. (See Ganga Saran & Sons P. Ltd. v. Income-tax Officer, (1981) 130 ITR 1).
9. In the aforesaid factual and legal background the scope of the present petition is very limited. All that is required to be examined is as to whether on the reasons recorded by the Assessing Officer, the requisite belief that income chargeable to tax has escaped assessment, could have been formed.
10. As can be seen from the reasons recorded, the sole ground for assumption of jurisdiction under section 147 of the Act is that the assessee had claimed depreciation on Non-Compete Territory Rights though depreciation was not available on such rights. As noted earlier the petitioner had by placing reliance upon a CBDT Circular as well as the provisions of section 32 of the Act and amended with effect from 1st April, 1999, objected to the assessment under section 147 of the Act on the ground that Non-Compete Territory Rights are intangible assets and depreciation is allowable on the same. In the order disposing of the objections, it is not the case of the respondent that Non-Compete Territory Rights are not intangible assets and therefore, the petitioner is not entitled to depreciation thereon. The ground on which the objections have been rejected is that sufficient particulars had not been furnished in support of the claim of depreciation of intangible assets. In the affidavit-in-reply also the Assessing Officer has reiterated that the assessee had not furnished details/particulars in the return of income for its claim of depreciation of so called intangible asset, that is, Non-Compete Territory Rights.
11. From the facts noted hereinabove, it is apparent that the formation of belief on the part of the Assessing Officer that income chargeable to tax has escaped assessment is without any basis in asmuchas the only ground for reopening the assessment is that depreciation is not available on Non-Compete Territory Rights. The order, disposing of all the objections, makes it amply clear that even according to the Assessing Officer; it is not as if depreciation is not available on Non-Compete Territory Rights, but that the assessee had not furnished sufficient particulars in respect of such claim. Thus, in the order disposing of the objections, the respondent has switched to a ground other than that stated in the reasons recorded. It is by now well settled that the reasons are to be read as they were recorded by the Assessing Officer. No additions can be made to those reasons. The reasons recorded cannot be supplemented by filing an affidavit more so when no foundation is laid in the reasons. In the facts and circumstances of the present case, as narrated hereinabove, on the reasons recorded by the Assessing Officer it cannot be said any belief as contemplated under section 147 of the Act could be founded upon the same. When the requirements of section 147 of the Act are not satisfied, the notice issued under section 148 of the Act is wholly illegal and invalid.
12. As regards the say of the respondent that necessary particulars/details in respect of the claim of depreciation on Non-Compete Territory Rights had not been furnished by the petitioner, the learned counsel for the petitioner had during the course of hearing of the matter, drawn the attention of the court to the statement of total income submitted alongwith the return of income to demonstrate that the claim of depreciation in respect of intangible assets had been specifically stated therein. In Annexure “C”, Clause 14 which contains particulars of depreciation allowance as per the Income Tax Act, 1961 details in respect of Non-Compete Territory Rights are furnished along with details of other assets. In Schedule D to the balance sheet wherein details of “Fixed Assets” are delineated, necessary particulars in respect of Non- Compete Territory Rights have also been stated. In Schedule S relating to “Significant accounting policies” below the heading “Depreciation” it has been categorically stated that depreciation on Territory Rights is provided over the period of the said rights. Again under the Related Party Disclosures Non-Compete Territory Rights have been mentioned. Thus, it is apparent that the contention that is now sought to be put forth to justify invocation of powers under section 147 of the Act that the petitioner had not disclosed necessary particulars is without any basis. In any case while examining the validity of initiation of proceedings under section 147 of the Act, what is required to be examined is as to whether the reasons recorded warrant holding of such belief so as to necessitate the issuance of notice under section 148 of the Act. As noticed earlier, the reasons recorded do not indicate that there was any material before the respondent to hold a belief so as to form an opinion, or have reason to believe that income chargeable to tax has escaped assessment so as to vest in the Assessing Officer jurisdiction to make assessment under section 147 of the Act. The impugned notice, therefore, cannot be sustained.
13. For the foregoing reasons, the petition succeeds, and is, accordingly allowed. The impugned notice dated 30.03.2004 issued by the respondent under section 148 of the Act, is hereby quashed and set aside. Rule is made absolute accordingly with no order as to costs.
[AKIL KURESHI, J.] [HARSHA DEVANI, J.]
JYOTI