Having regard to the unworkability of the provisions and that Section 55 itself was introduced relevant only to the subsequent assessment year, namely, 1995-96, the Apex Court held that till the amendment in 1995, the compensation received on surrendering the tenancy rights could not be assessed to capital gains. Thus, on the fact position as found by the Tribunal and which form the very basis of the order under Section 263 that the assessee was treated as tenants as per the document dated 25.02.1994, the genuineness of which was never questioned by the Revenue, we have no hesitation in confirming the order of the Tribunal. In the above circumstances, we reject the questions raised by the Revenue.
HIGH COURT OF MADRAS
Commissioner of Income-tax, Chennai
v.
Amal Generators Ltd.
TAX CASE (APPEAL) NO. 1199 OF 2005
Date of Pronouncement – JUNE, 19, 2012
JUDGMENT
Mrs. Chitra Venkataraman, J. – The Revenue is on appeal as against the order of the Tribunal raising the following substantial questions of law:
1. Whether on the facts and in the circumstances of the case the Tribunal was right in holding the question of whether the receipt on account of surrender of tenancy rights could be taxed as capital gains cannot be looked at by them?
2. Whether on the facts and in the circumstances of the case the Tribunal was right in holding the question of whether the assessee was in fact a tenant at the relevant point in time was a ground extraneous to the proceedings under Section 263 of the Income Tax Act?
3. Whether on the facts and in the circumstances of the case the Tribunal was right in not considering the applicability of the amendment to Section 55(2) of the Income Tax Act whereby the cost of acquisition of tenancy rights is stated to be nil?
4. Whether on the facts and in the circumstances of the case the Tribunal was right in holding that the receipt on account of tenancy rights is a capital receipt, but refusing to look at the question of taxing the same as capital gains?
2. At the time of hearing, learned Standing Counsel placed before us further questions of law, which are stated to be substantial questions of law, as follows:
1. Whether in the facts and circumstances of the case the Appellate Tribunal being the highest facts finding authority, was right in not entertaining the fresh grounds raised by the department based on material evidences, which was not placed before the Commissioner in his proceedings under Section 263 of the Income Tax Act?
2. Whether in the facts and circumstances of the case the Appellate Tribunal being the highest facts finding authority, having satisfied through the lease deed dated 25.08.1978 that the assessee is not the lessee/tenant of the premises from 1978, can the same assessee claim surrender of tenancy right over the premises in 1994 with the new owners of the premises?
3. Whether in the facts and circumstances of the case the Appellate Tribunal was right in holding that the assessee had the tenancy rights over the premises, when the same was occupied by its sister concern Sri Rama Vilas Services Ltd.?
4. Whether in the facts and circumstances of the case the Appellate Tribunal was right in holding that the compensation received by the Assessee is not from surrender of tenancy rights and the same is assessable under "Income from other sources"?
3. The assessment herein relates to the assessment year 1994-95. The assessee herein is a company. The assessee was the lesee of the premises known as Dinrose Estate since 1950 on a monthly lease rent of Rs. 2,150/-. It had however subleased it in 1950 itself to its 100% subsidiary company by name M/s. Sri Rama Vilas Service Limited at a lease rental of Rs. 2,150/-. The owners were receiving the lease rent from the subsidiary company itself. Admittedly, after 1974, there was no renewal of the lease in favour of the assessee. In 1978, the assessee company and the owners of the property agreed for execution of the lease deed directly in favour of the 100% subsidiary company M/s. Sri Rama Vilas Service Ltd. and accordingly, the deed was entered into on 28.7.1978 between the owner of the property and M/s. Sri Rama Vilas Service Ltd. In 1979, the property in question was purchased by four persons viz., B. Radhamma, B. Papa Raju, Y. Rajyalakshmi and B.V. Raju from the original owner in 1979. On 25.2.1994, the four co-owners on the one hand and the assessee and M/s. Sri Rama Vilas Service Ltd. as second and third party, entered into a Memorandum of Understanding, as per which, the assessee and M/s. Sri Rama Vilas Service Ltd. were stated to have surrendered their tenancy rights in favour of the four co-owners and in lieu of the surrender of the tenancy rights, the assessee was paid a sum of Rs. 2.60 crores and M/s. Sri Rama Vilas Service Ltd., a sum of Rs. 1.30 crores. It is stated that the four co-owners had sold the leased property to Madras Telephones. The tenancy was terminated on 25.2.1994. The receipt of Rs. 2.60 crores as compensation on the surrender of tenancy rights was not offered as income by the assessee. In the assessment finalised, the Assessing Authority accepted the contention of the assessee that the tenancy rights being capital in nature, the receipt of Rs. 2.60 crores as compensation for the surrender of the tenancy rights could not be assessed. In exercise of the jurisdiction under Section 263 of the Income Tax Act, the Commissioner of Income Tax (Appeals) sought to revise the order, placing reliance on the decision of the Income Tax Appellate Tribunal, Special Bench, Mumbai in Cadell Wvg. Mill Co. (P.) Ltd. v. Asstt. CIT [1995] 55 ITD 137 and the decision of the Allahabad High Court in CIT v. Gulab Chand [1991] 192 ITR 495. The assessee objected to the said notice on the ground that under the terms of the agreement dated 25.2.1994, the assessee was given compensation of Rs. 2.60 crores for relinquishing its right on handing over vacant possession to the vendors, who agreed to pay the said sum to the assessee. Pursuant to the said agreement, the possession of the property was handed over to the vendors. Thus the said receipt could not be considered as income, nor could be included as a casual receipt. On scrutiny of the agreement, the Commissioner of Income Tax (Appeals) pointed out that in the agreement dated 25.2.1994 between the owners of the property, the assessee and its subsidiary Sri Rama Vilas Services Ltd. (in short, SRVS), it was noted that the assessee and its subsidiary were tenants of the property since 1950. The Commissioner viewed that a perusal of the agreement showed that there was nothing to speak on the specific right given to the assessee and to the subsidiary company of sub-lease or sub-tenancy of the tenanted premises. Thus there was nothing for the company to transfer by way of interest or asset; hence relinquishing or surrendering of the rights of such premises could not be treated as a capital asset to treat the compensation received as a capital receipt. On the other hand, the receipt in question arose out of an agreement between the assessee and the owners of the property, who had agreed to pay the assessee a sum of Rs. 2.60 crores and a sum of Rs. and Rs. 1.30 crores to Sri Rama Vilas Services Ltd., for agreeing to vacate the premises and hand over possession to the owners. Thus, adopting the reasoning of the Special Bench of the Tribunal, Mumbai, the Commissioner confirmed the proposal to revise the assessment; that the compensation received was liable to be assessed under Section 10(3) of the Income Tax Act. A direction was given to that effect to the Assessing Officer, to redo the assessment. The assessee went on appeal before the Income Tax Appellate Tribunal. In the course of the appeal proceedings, while objecting to the view of the Commissioner to keep the receipt as a casual receipt, the assessee pointed out to the document pertaining to the earlier lease that the assessee had with the original vendor under lease deed dated 06.12.1969 and subsequently, the original vendor and SRVS entering into lease deed dated 28.8.1978 and submitted that as per the document dated 06.12.1969, the right of the assessee to sub-lease was recognised by the then vendor. On the sale of the property, the assessee and SRVS entered into a memorandum of understanding with the purchasers. On the sale by the said landlord to Madras Telephones, it was agreed that the assessee shall be paid compensation for the surrender of lease rights.
4. The Revenue, however, submitted that as per the document dated 28.8.1978, SRVS was recognised as a tenant and they were paying the rent directly to the owner. Thus the assessee was not a lessee at all of the property in question after 28.8.1978 and it had no tenancy rights at all. The Revenue further pointed out that the assessee was never in possession of the leased property to contend that it had leasehold interest to surrender and hence, was capital in nature; in the light of the above, the Revenue took the stand that the receipt was to be taxed as income under the head "income from other sources". Even assuming that the receipt was to be treated as capital receipt, going by Section 55(2)(a)(ii), which, according to the Revenue, was procedural in nature, the receipts were to be taxed to capital gains. Thus, even though the cost of acquisition was nil, the entire receipt was taxable. In considering the rival submissions, the Tribunal overruled the objection of the Revenue to the admissibility of fresh evidence, viz., the lease deed entered in 1969 and 1978 and took the view that in a revisional proceedings under Section 263, there was no question of the assessee having any opportunity to furnish a fresh document before the Assessing Authority and the lease deeds dated 06.12.1969 and 28.08.1978 were necessary to decide the issue on hand. Thus, on going through the lease deed dated 06.12.1969, the Tribunal came to the conclusion that the assessee, as a lessee, was given a right to assign, sub-lease and part with possession of the property or any part thereof. As far as the document dated 28.8.1978 with SRVS and the original owner was concerned, the Tribunal arrived at a factual finding that the deed did not refer to continuation of any lease right to the assessee herein and for all intended purposes, SRVS was the lessee to the exclusion of others and the lease rentals were paid directly to the owner of the property. In considering the contention of the Revenue that the document dated 25.02.1994 never recognised SRVS as a tenant and that they had also filed a suit against SRVS, the Tribunal pointed out that the filing of the suit was a matter which was not denied by the assessee and the owners had filed an eviction suit against SRVS.
5. As far as the initiation of proceedings under Section 263 of the Income Tax Act was concerned, the Tribunal pointed out that the entire order proceeded on the premise that the tenancy rights of the assessee was personal in nature, which could not be transferred to any other person, and hence not capital. On a reading of the agreement dated 25.02.1994 between the assessee, sister concern and the purchaser/owner, the Tribunal held that the two companies were recognised by the purchaser/owner as tenants. The Tribunal held that the Assessing Authority and the Commissioner of Income Tax proceeded on the admitted fact that the assessee had tenancy rights. In the background of the said fact and that the decision of the Special Bench relied on by the Commissioner of Income Tax was overruled by the decision of the Bombay High Court in the decision in Cadell Wvg. Mill Co. (P.) Ltd. v. CIT [2001] 249 ITR 265, the order of the Commissioner of Income Tax under Section 263 was liable to be set aside and the assessee's appeal allowed, treating the right as a capital asset and the receipt as capital in nature. The said decision was confirmed in the decision in CIT v. D.P. Sandu Bros. Chembur (P.) Ltd. [2005] 273 ITR 1. Thus the reasoning of the Commissioner based on the Special Bench's view thus having been found overruled, the Tribunal rejected the contention of the Revenue holding that the assessment order was prejudicial to the interests of the Revenue. The Tribunal held that the said view could not be upheld, considering the admitted fact on the tenancy right of the assessee. The Tribunal held that the correctness or otherwise of the order of the Commissioner of Income Tax (Appeals) could be considered only on the grounds considered by the Commissioner for revision and nothing more. When the assessee was able to satisfy the Tribunal that the grounds for the decision given by the Commissioner were wrong on facts or not tenable in law, the Tribunal had every jurisdiction to set aside the order of the Commissioner. Thus the Tribunal viewed that when the assessee had satisfied the Tribunal that the grounds for the decision given by the Commissioner of Income Tax (Revision) could not be upheld, the appeal had to be allowed. The Tribunal pointed out that given the admitted fact that the assessee was treated as a tenant and the entire proceedings before the Commissioner went on that premise, it was no longer open to the Revenue to take a different view. Following the decision of the Karnataka High Court in CIT v. L.F. D'Silva [1991] 192 ITR 547, which, in turn, followed the decision in CIT v. Jagadhri Electric Supply & Industrial Co. [1983] 140 ITR 490, the Tribunal rejected the Revenue's contention. Aggrieved by this, the present appeal has been filed by the Revenue before this Court.
6. Learned Standing Counsel appearing for the Revenue pleaded vehemently before this Court that the assessee had produced fresh documents before the Tribunal, particularly the document dated 28.8.1978, which was between the vendor and the subsidiary company of the assessee. The assessee could no longer claim the status as a tenant to contend that for the surrender of the tenancy rights, the compensation received had to be treated as capital in nature. In the absence of materials to show that the assessee was a tenant at the time of execution of the document dated 25.02.1994, the question of any receipt at the hands of the assessee being treated as capital, did not arise. Taking us through the order of the Tribunal, learned Standing Counsel appearing for the Revenue pointed out that the assessee produced fresh documents before the Tribunal. On going through the documents, the Revenue contended that the assessee could not be treated as tenant. He further contended that the assessee had not placed the document dated 28.8.1978 before the Commissioner and hence, in fairness to their plea, the order of the Tribunal has to be set aside.
7. Countering the said contention of the Revenue, learned counsel appearing for the assessee pointed out that in the face decision of the Apex Court in D.P. Sandu Bros. Chembur (P.) Ltd. (supra), confirming the Judgment of the Bombay High Court in Cadell Wvg. Mill Co. (P.) Ltd. (supra), it is no longer open to the respondent to contend that the receipt was casual in nature; hence, assessable under Section 10(3) of the Act. Apart from that, learned counsel further pointed out that when once the Commissioner had assumed jurisdiction under Section 263 on certain stated facts, the basis of the order passed under Section 263 cannot be altered by the Revenue in the appeal preferred by the assessee. He submitted that on the very contention of the Revenue, the revisional proceedings merited to be held as bad in law, since the very basis of the assumption of jurisdiction is lost there. He further pointed out that the Commissioner had proceeded to treat the tenancy rights under document dated 25.02.1994 as personal in nature and following the Special Bench decision, held the receipt to be taxed as a casual receipt. Thus considering the decision of the Special Bench overruled by the Bombay High Court decision and the same confirmed by the Apex Court by dismissing the Special Leave Petition, it is no longer open to the Revenue to contend that the receipts are casual in nature; hence, assessable under law. He further pointed out that Section 55(2) was amended with effect from 1.4.1995, which has no relevance to the assessment year under consideration, namely, 1994-95. In the circumstances, the capital receipt at the hands of the assessee could not be assessed as capital gains, there being no cost of acquisition. He also made serious objection to the additional grounds now taken at the time of hearing, which are different from what was originally placed before this Court. In the circumstances, going by the well reasoned order of the Tribunal, the Tax Case needs no interference.
8. Heard learned counsel appearing for both sides.
9. The contention of the assessee is two fold, viz., given the fact that the Commissioner of Income Tax (Appeals) has jurisdiction to revise the orders which are prejudicial to the Revenue, and for this purpose, Section 263 requires the Commissioner to call for and examine the records available at the time of examination by the Commissioner. On a perusal of the notice of revision under Section 263, it is clear that the Commissioner intended to revise the order of the Assessing Authority on the admitted fact position that he was a tenant, based on the decision of the Special Bench. It is a matter of record that the only ground on which the Commissioner exercised his jurisdiction to interfere with the order was that the assessee was not having any right to transfer its interest in tenancy and hence, rights being personal, the compensation received has to be considered as income assessable at the hands of the assessee.
10. Thus following the decision of the Special Bench in Cadell Wvg. Mill Co. (P.) Ltd. (supra), the Commissioner held that the income was assessable under Section 10(3) of the Income Tax Act. Thus a reading of the Commissioner's order shows the admitted fact that as per the document dated 25.02.1994, the assessee's status as a tenant was not disputed. It is also a matter of record herein to point out that the genuineness of the document dated 25.02.1994 remained unassailed by the Revenue. Hence, the admitted fact position is that the assessee was a tenant. The only ground on which the order of the Assessing Officer was sought to be revised was the character of the receipt alone and applying the decision of the Special Bench of the Tribunal, the Commissioner of Income Tax (Appeals) held that it was to be assessed as income under Section 10(3) of the Income Tax Act. Thus a reading of the order of the Commissioner shows that he had no doubt at all in his mind that the entire revision proceeded on the admitted fact that the assessee was a tenant. When the assessee went on appeal before the Tribunal, it is no doubt true that the Tribunal placed before the Tribunal, the first lease deed dated 06.12.1969 between the assessee and the owner and the second lease deed dated 28.08.1978 between SRVS, the subsidiary company of the assessee, and the owner. It is no doubt true that there was no mentioning of the name of the assessee in the said deed, but for some reasons best known to the assessee, when the memorandum of understanding was executed on 25.02.1994 between the assessee, its subsidiary company and the vendors, the assessee was recognised as a tenant under the said vendor. The Tribunal pointed out that admittedly, the documents were placed by the assessee on the premise that it being an appeal as against the revision order of the Commissioner, the assessee had no opportunity to furnish the documents before the Assessing Officer. Though the Revenue took serious objection to the reasoning of the Tribunal on this, we do not think that the acceptance of this document had, in any manner, improved the case of the assessee or had worsened the case of the Revenue, for the simple reason that the status of the assessee as on the date of memorandum of understanding dated 25.02.1994, under which compensation was paid to the assessee, was as a tenant under the vendor. As already pointed out, with the genuineness of the document dated 25.02.1994 remaining undisturbed, when the vendor had treated the assessee as a tenant, it is not for the Revenue to question it unless and until the genuineness of the document dated 25.02.1994 itself was questioned by the Revenue, a fact which admittedly is otherwise. Therefore, in the background of this fact, we do not appreciate the reasoning of the Revenue that by admission of the original lease deed and the subsequent lease deed, the Revenue had been put on a difficult platform to defend its case.
11. Leaving this aside, it is rather surprising to note that the Revenue went on a diametrically different factual plane to contend that the assessee could not be treated as a tenant, by reason of the document dated 28.08.1978 entered into between the assessee's subsidiary company and the vendor. Learned Standing Counsel pointed out that there is no reference at all in the said document as to the assessee being considered as a tenant under the owner. If the Revenue's contention on facts has to be accepted, we are afraid, the very basis of the Section 263 order fails, in which event, the entire order of the Commissioner has to be set aside. As already pointed out, whatever might have been the terms of understanding under the document dated 28.08.1978, as far as the present case is concerned, the right to receive compensation is traceable to the document dated 25.02.1994. Consequently, it is not open to the Revenue to contend that the order of the Commissioner could be sustained on a different fact situation, a position which is not open to the Revenue to contend so. In this connection, the decision of the Karnataka High Court in L.F. D'Silva (supra) merits to be seen. The said case dealt with the scope of jurisdiction of the Tribunal in an appeal from the order passed by the Commissioner of Income Tax (Appeals). The facts therein are that the assessee therein was a co-owner of a property, along with two others and the assessee had equal share in the property. During the relevant accounting year, the firm called M/s. Curzon Project, consisted of six partners, which included the assessee and the co-owners. The firm was engaged in the business of developing property. Admittedly, the property was contributed towards the capital contribution of the three partners, with each co-owner's contribution being Rs. 9 lakhs and the property was valued at Rs. 27 lakhs. The other partners had not contributed anything towards the share capital. On the retirement of one of the Partners of the firm, he being one of the co-owners, the said partner was paid a sum of Rs. 9,00,000/- from the capital of the partnership and the firm was re-constituted and the share of the assessee was declared as one-ninth instead of one-sixth. There was also a variation of the share of another partner. After four years, on the re-constitution on 30.4.1985, the assessee retired from the partnership. Along with him, the other co-owners also retired. In the circumstances, the assessee was assessed to income tax for the assessment year 1981-82, which was a subject matter of revision under Section 263. The notice stated that on the reduction of the assessee's share from 1/6th to 1/9th, the assessee was paid a sum of Rs. 3 lakhs by the firm. The notice further stated that when the assessee contributed the property as towards his capital, there was extinguishment of the title and hence, the same constituted "transfer" within the meaning of Section 2(47). Consequently, any profits or gains arising from such transfer of capital asset was chargeable as capital gains. Thus in the process, whatever gain was earned was liable to be assessed under Section 45 to capital gains. As against the order of the Commissioner of Income Tax (Appeals) under Section 263, the assessee went on appeal before the Income Tax Appellate Authority. By that time, the decision of the Apex Court in Sunil Siddharthbhai v. CIT [1985] 156 ITR 509 had come, holding that even though the contribution of the property towards capital of the firm involved a transfer, there was no provision to apply the capital gains tax. Revenue contended that the transaction entered into by the assessee was a sham one and a device to overcome the levy of capital gains and sought for a remand to examine the genuineness of the transaction. Thus the Revenue sought for a remand of the case. The Tribunal rejected the said contention and held that the genuineness of the partnership was a different matter and that there were no materials to doubt the genuineness of the transaction. On appeal by the Revenue, rejecting the said contention, the High Court pointed out that while initiating proceedings, the Commissioner never doubted the genuineness of the transaction in question. It was not his case that the contribution towards the share capital made by the assessee was only a ruse or device for converting the asset into money. He sought to revise the assessment order purely on the basis of the law as he understood it; he proceeded that there was an element of transfer in the transaction of contributing the personal asset as the share capital in the firm. Partially, the Commissioner was justified in this assumption. However, the inapplicability of Section 48 of the Act and the impracticability of evaluating the capital gain were not realised by the Commissioner. The notice issued by the Commissioner proceeded as if there was a valid transfer under a genuine situation. The basis of initiation of the proceedings by the Commissioner, hence, could not be altered before the Appellate Tribunal; the scope of the proceedings had to be the same as the one envisaged by the Commissioner, having regard to the peculiar nature of the revisional jurisdiction under Section 263.
12. Pointing out that the Tribunal had given a definite finding that the transaction could not be suspected to be a sham one, the High Court rejected the Revenue's case for a remand. In so holding, the Karnataka High Court also referred to the decision of the Punjab and Haryana High Court in Jagadhri Electric Supply & Industrial Co. (supra). The High Court therein pointed out that the Tribunal cannot uphold the order of the Commissioner on any other ground, which, in its opinion, was available to the Commissioner as well. It observed that if the Tribunal is allowed to find out the ground available to the Commissioner to pass an order under Section 263(1) of the Act, then it will amount to a sharing of the exclusive jurisdiction vested in the Commissioner, which is not warranted under the Act. It is all the more so, because the Revenue has not been given any right of appeal under the Act against an order of the Commissioner under Section 263(1) of the Act. In case he proceeds thereunder after hearing the assessee in pursuance of the notice given to him, then the appeal filed by the assessee under Section 253(1)(c) of the Act cannot be treated on the same footing as an appeal against the order of the Appellate Assistant Commissioner passed in the assessment proceedings, where both the parties have been given the right of appeal. In this view of the matter, the argument raised on behalf of the Revenue that, in appeal, the Tribunal may uphold the order appealed against on grounds other than those taken by the Commissioner in his order, was held as not tenable.
13. The High Court further pointed out that under Section 263, it is only the Commissioner who has been authorised to proceed in the matter and therefore, it is his satisfaction, according to which, he may pass necessary orders thereunder in accordance with law. Thus the High Court held that while hearing the appeal of the assessee, the Tribunal cannot substitute the ground which the Commissioner himself did not think proper to form the basis of his notice, to pass the order. The said decision was again followed in CIT v. Chandrika Educational Trust [1994] 207 ITR 108, wherein, the Kerala High Court, on a similar situation as in L.F. D'Silva (supra), held that in entertaining an appeal from the Commissioner's order, the Tribunal has to examine whether the order is sustainable in law and whether it is within the powers conferred under Section 263 of the Income Tax Act. When the Commissioner chooses to set aside the order of the Income Tax Officer on a particular ground, the Tribunal cannot go beyond that, to sustain the order on a different ground.
14. Again, in the decision in CIT v. Howrah Flour Mills Ltd. [1999] 236 ITR 156, the Calcutta High Court held that the Tribunal cannot justify an order passed under Section 263 on grounds other than those mentioned by the Commissioner in the revised order itself. We are in entire agreement with the reasoning of the Punjab and Haryana High Court decision in Jagadhri Electric Supply & Industrial Co. (supra), the Kerala High Court decision in Chandrika Educational Trust (supra), Karnataka High Court decision in L.F. D'Silva (supra) and the Calcutta High Court decision in Howrah Flour Mills Ltd. (supra), that if an order had been made on a particular factual position, the Revenue cannot sustain the order by varying the vary basis of the order to contend that the facts are otherwise. In the circumstances, we reject the contention of the Revenue, thereby the Tribunal was not right in not entertaining fresh grounds taken by the Revenue.
15. As regards the relief to be considered under Section 55(2) of the Income Tax Act, the Supreme Court, in the decision in D.P. Sandu Bros. Chembur (P.) Ltd. (supra), confirmed the view of the Bombay High Court in Cadell Wvg. Mill Co. (P.) Ltd. (supra). A reading of the judgment of the Apex Court shows that the amendment of Section 55(2) took effect from 1st April 1995. Till the amendment of law was there, if the cost of acquisition could not, in fact, be determined, the transfer of capital assets could not attract capital gains.
16. The Apex Court pointed out that tenancy right is a capital asset, the surrender of tenancy right is a transfer and the consideration received therefor is a capital receipt within the meaning of Section 45, had not been questioned before the Supreme Court and that in any event, the said proposition was taken to have been concluded by the decision of the Apex Court in A. Gasper v. CIT [1991] 192 ITR 382. Thus the consideration on tenancy rights, normally, would be subjected to capital gains under Section 45 of the Income Tax Act.
17. However, having regard to the unworkability of the provisions and that Section 55 itself was introduced relevant only to the subsequent assessment year, namely, 1995-96, the Apex Court held that till the amendment in 1995, the compensation received on surrendering the tenancy rights could not be assessed to capital gains. Thus, on the fact position as found by the Tribunal and which form the very basis of the order under Section 263 that the assessee was treated as tenants as per the document dated 25.02.1994, the genuineness of which was never questioned by the Revenue, we have no hesitation in confirming the order of the Tribunal. In the above circumstances, we reject the questions raised by the Revenue.
18. As far as the questions raised now before this Court are concerned, we do not think that they deserve any consideration, considering the fact position which was admitted by the Commissioner while passing the order under Section 263 of the Income Tax Act.
In the result, the Tax Case Appeal stands dismissed. No costs.
It is now a settled law that if an explanation is added to a section of a statute for the removal of doubts, the implication is that the law was the same from the very beginning and the same is further explained by way of addition of the Explanation. Thus, it is not a case of introduction of new provision of law by retrospective operation. We have found that the petitioner had disclosed all the materials regarding its activities and there was no suppression of materials. In spite of such disclosure, the Assessing Officer gave benefit of the provision by considering the then Explanation which was substantially the same and thus, it could not be said that any income escaped assessment in accordance with the then law. We have already pointed out that the Assessing Officer has now given a second thought over the same materials and according to him, as the assessee is a contractor or supplier of irrigation products, it cannot be called a developer of any new infrastructural facility.
From the materials placed before him by the petitioner, the Assessing Officer earlier did not arrive at such conclusion and thus, the amended Explanation subsequently added cannot be of any help to him in arriving at the second opinion based on the alleged new law.Moreover, in the reason assigned in support of initiation of reopening proceedings, such reason has not been disclosed. We, thus, find that the condition precedent for issue of notice impugned in this Special Civil Application has not been established from the materials on record and consequently, the notice is liable to be quashed on that ground.
SUPREME COURT OF INDIA
Assistant Commissioner of Income-tax (OSD)
v.
Parixit Industries (P.) Ltd.
CC.NO. 15455 OF 2012
Date of Pronouncement- September 14, 2012
ORDER
Heard learned counsel for the petitioner.
Delay condoned.
The special leave petition is dismissed.
———————-
High Court in respect of the above is as follows :-
HIGH COURT OF GUJARAT
Parixit Industries (P.) Ltd.
v.
Assistant Commissioner of Income-tax (OSD) Circle-5
SPECIAL CIVIL APPLICATION NO. 17722 OF 2011
MARCH 12, 2012
JUDGMENT
Bhaskar Bhattacharya, Actg. CJ. – By this writ-application under Article 226 of the Constitution of India, an assessee under the Income Tax Act, 1961 ["the Act"] has prayed for a direction upon the income tax authority not to proceed further in pursuance of the notice issued under Section 147 of the Act, being Exhibit-I. It has also prayed for quashing the order passed by the respondent rejecting the objection of the writ-petitioner, being Exhibit-M to this application.
2. The facts relevant for the purpose of disposal of this writ-application may be summed up thus:
2.1 For the Assessment Year 2006-07, the writ-petitioner submitted a return with computation of income showing gross total income of Rs. 1,64,00,177/- and claimed deduction of Rs. 1,06,28,939/-under Section 80-IA of the Act. The return was also accompanied by the requisite audit report under Section 80-IA [7] in form No. 10CCB. The return was also accompanied by the annual report of the petitioner company for the said year.
2.2 Assessing Officer of the petitioner sent a notice under Section 143[2] of the Act to the petitioner along with detailed questionnaire and those were replied to by the petitioner by its letter dated March 5, 2008.
2.3 One of the queries was regarding deduction under Section 80-IA of the Act. The writ-petitioner in that reply supplied over again report in Form 10CCB and reproduced the provision of Section 80-IA [4] indicating the applicability of the benefit to the nature of the enterprises. The writ-petitioner also pointed out that the company had entered into an agreement with a Government of Gujarat Company by the name of Gujarat Green Revolution Company Ltd. and also with a Government of Andhra Pradesh Company by the name of Andhra Pradesh Micro Irrigation Project for supply and installation of Micro Irrigation System.
2.4 The Assessing Officer passed scrutiny assessment order dated March 25, 2008 and in the said order, the Assessing Officer specifically referred to the above questionnaire and the above letter dated March 5, 2008. It may not be out of place to mention here that in the questionnaire, the Assessing Officer had raised 14 queries as would appear from the reply given by the writ-petitioner dated March 5, 2008.
2.5 The Assessing Officer, on the basis of the aforesaid answers, made three additions/disallowances by way of Provident Fund/Employees State Insurance payment/disallowance under Section 40[a][ia] and the depreciation on vehicles.
2.6 The Assessing Officer, thereafter, issued a notice dated March 9, 2010 under Section 148 of the Act in respect of allowing of bad debts in Section 143[3] assessment and provided the reasons recorded by his order dated March 9, 2010.
2.7 Thereafter, the Assessing Officer again issued a notice dated March 4 2011 under Section 148 of the Act. The petitioner, by letter dated April 7, 2011 acknowledged the notice and requested that the return under Section 139 of the Act dated December 30, 2006 should be treated to be the one in response to the above notice and further requested to supply the reasons recorded by the Assessing Officer for reopening of the assessment.
2.8 The Assessing Officer supplied the reasons dated March 4, 2011 under a covering letter dated June 7, 2011. The reasons assigned by the Assessing Officer are quoted below:
"It is seen that during the year assessee company claimed deduction u/s. 80IA[4] on the ground that the assessee is an enterprises carrying out business of developing infrastructure facilities fulfill all the conditions laid down in sub clause [a][b][c] of Section 80IA[4][i] of the I.T. Act and also claimed that it has developed irrigation project.
It has come to my notice that the assessee is engaged in manufacturing of irrigation projects i.e. Drip irrigation, Sprinkler irrigation, Micro sprinkler, Gravity fed family drip system etc. and the same irrigation products have been supplied to various Companies and in some cases the assessee has worked as contractor.
As discussed above, as the assessee is a contractor or supplier of irrigation products and it cannot be called a developer of any new infrastructural facility. Therefore it cannot be said that the assessee has entered into agreement for developing a new infrastructure facility.
In view of the above facts, assessee has not fulfilled the condition of Section 80IA [4] of the I.T. Act and has wrongly claimed deduction u/s. 80IA [4] of the I.T.Act, 1961.
In view of the facts discussed above, I have reason to believe that income of Rs. 106,28,939/- being the amount of inadmissible deduction wrongly claimed by the assessee u/s. 80IA[4] chargeable to tax has escaped assessment for A.Y. 2006-07 and accordingly it is the fit case for reopening the assessment u/s. 147 for AY 2006-07."
2.9 The writ-petitioner, on September 1, 2011 filed objections pointing out that the notice impugned for reopening was based on mere change of opinion, because the benefit under Section 80-IA was allowed after the relevant points underwent the process of inquiry and assessment during the proceedings under Section 143[3] of the Act.
2.10 The Assessing Officer, however, rejected the objections by his order dated September 18, 2011 thereby alleging that it was not a case of change of opinion.
3. Being dissatisfied, the writ-petitioner has come up with the present writ-application.
4. Mr. J.P. Shah, learned counsel appearing with Mr. Manish J. Shah, on behalf of the petitioner strenuously contended before us that the change of opinion cannot be the basis of notice under Section 148 of the Act within four years. According to Mr.Shah, in the course of regular assessment under Section 143 of the Act, the Assessing Officer raised a specific query regarding the relief under Section 80-IA of the Act claimed by the petitioner and the petitioner gave elaborate reply dated March 5, 2008. Mr. Shah points out that the Assessing Officer being satisfied framed a favourable opinion and did not make the addition/disallowance of Section 80-IA relief claimed by the writ-petitioner.
5. According to Mr. Shah, therefore, there was no justification of issuing notice under Section 148 of the Act simply on the basis of change of opinion which is not even borne out by the record.
6. In support of such contention, Mr. Shah relies upon the decision of the Supreme Court in the case of Calcutta Discount Co. Ltd., v. ITO, [1961] 41 ITR 191 (SC). Mr. Shah, therefore, prays for setting aside the notice issued under Section 148 of the Act and the reasons recorded by the Assessing Officer, rejecting the objections filed by the writ-petitioner.
7. Mr. Manish R. Bhatt, the learned Sr. Advocate, appearing with Mrs. Mauna M. Bhatt, on behalf of the Revenue, has, on the other hand, opposed the aforesaid contentions raised by Mr. Shah and has contended that all that is necessary for the purpose of invoking Section 148 of the Act within the period of limitation is that something escaped at the time of regular assessment. According to Mr. Bhatt, it appears that while granting relief under Section 80-IA of the Act in the regular assessment, the Assessing Officer overlooked certain materials including the provision contained in Explanation added to sub-section (13) to Section 80-IA of the Act, which was substituted in the year 2009 with retrospective operation from April 1, 2000. Mr. Bhatt also relies upon Explanation 3 to Section 147 of the Act in support of his contention that the above point, although not taken in the reason assigned in support of invoking the provisions contained in section 147, can be availed of by him in this proceedings. Mr. Bhatt, therefore, prays for dismissal of the present writ-application.
8. Therefore, the only question that arises for determination in this writ-application is whether the Assessing Officer was justified in issuing notice under Section 148 of the Act in the facts of the present case.
9. In order to appreciate the aforesaid question, it will be profitable to refer to the provisions contained in Section 147 of the Act, which is quoted below.
Income escaping assessment.
"147. If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 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 sections 148 to 153 referred to as the relevant assessment year]:
Provided that where an assessment under sub-section [3] of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section [1] of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year:
Provided further that the Assessing Officer may assess or reassess such income, other than the income involving matters which are the subject matters of any appeal, reference or revision, which is chargeable to tax and has escaped assessment.
Explanation 1.– Production before the Assessing Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of the foregoing proviso.
Explanation 2.– For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely:-
(a) where no return of income has been furnished by the assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax;
(b) where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return;
(c) where an assessment has been made, but–
(i) income chargeable to tax has been under assessed; or
(ii) such income has been assessed at too low a rate; or
(iii) such income has been made the subject of excessive relief under this Act; or
(iv) excessive loss or depreciation allowance or any other allowance under this Act has been computed.
Explanation 3.– For the purpose of assessment or reassessment under this section, the Assessing Officer may assess or reassess the income in respect of any issue, which has escaped assessment, and such issue comes to his notice subsequently in the course of the proceedings under this section, notwithstanding that the reasons for such issue have not been included in the reasons recorded under sub-section [2] of section 148."
10. In the case before us, the assessee having challenged the notice of reassessment in a proceeding under Article 226 of the Constitution, before proceeding further, we propose to deal with the scope of interference in such a matter.
11. The Supreme Court in the case of CIT v. A. Raman & Co. [1968] 67 ITR 11 had the occasion to deal with such a question. We may appropriately refer to the following observations made by a three-judge-bench in the above matter by relying upon the majority view taken in an earlier decision of that court taken by a bench of five judges:
"4. It was held by this Court in Calcutta Discount Co. Ltd. v. Income-tax Officer, [1961] 41 ITR 191 = (AIR 1961 SC 372) that the High Court in appropriate cases has power to issue an order prohibiting the Income-tax Officer from proceeding to reassess the income when the conditions precedent do not exist. At p. 207, K. C. Das Gupta, J., delivering the majority judgment of the Court observed:
"It is well settled however that though the writ of prohibition or certiorari will not issue against an executive authority, the High Courts have power to issue in a fit case an order prohibiting an executive authority from acting without jurisdiction. Where such action of an executive authority acting without jurisdiction subjects or is likely to subject a person to lengthy proceedings and unnecessary harassment, the High Courts, it is well settled will issue appropriate orders or directions to prevent such consequences.
The High Court may, therefore, issue a high prerogative writ prohibiting the Income-tax Officer from proceeding with reassessment when it appears that the Income-tax Officer had no jurisdiction to commence proceeding.
5. The condition which invests the Income-tax Officer with jurisdiction has two branches: (i) that the Income-tax Officer has reason to believe that income chargeable to tax has escaped assessment; and (ii) that it is in consequence of information which he has in his possession and that he has reason so to believe. Since the learned Judges of the High Court have concentrated their attention upon the second branch of the condition and have reached their conclusion in favour of the assessees on that branch, it would be appropriate to deal with the correctness of that approach. The expression "information" in the context in which it occurs must, in our judgment, mean instruction or knowledge derived from an external source concerning facts or particulars, or as to law relating to a matter bearing on the assessment. If as a result of information in his possession the Income-tax Officer has reason to believe that income chargeable to tax had escaped assessment, the Income-tax Officer has jurisdiction to assess or reassess income under Section 147 (1) (b) of the Income-tax Act, 1961, Information in his possession that income chargeable to tax has escaped assessment furnishes a starting point for assessing or re-assessing income. If he has that information, the Income-tax Officer may commence proceedings for assessment or reassessment. To commence the proceeding for reassessment it is not necessary that on the materials which came to the notice of the Income-tax Officer, the previous order of assessment was vitiated by some error of fact or law.
6. The High Court exercising jurisdiction under Article 226 of the Constitution has power to set aside a notice issued under Section 147 of the Income-tax Act, 1961, if the condition precedent to the exercise of the jurisdiction does not exist. The Court may, in exercise of its powers, ascertain whether the Income-tax Officer had in his possession any information: the Court may also determine whether from that information the Income-tax Officer may have reason to believe that income chargeable to tax had escaped assessment. But the jurisdiction of the Court extends no further. Whether on the information in his possession he should commence a proceeding for assessment or reassessment, must be decided by the Income-tax Officer and not by the High Court. The Income-tax Officer alone is entrusted with the power to administer the Act; if he has information from which it may be said prima facie, that he had reason to believe that income chargeable to tax had escaped assessment, it is not open to the High Court, exercising powers under Article 226 of the Constitution, to set aside or vacate the notice for reassessment on a re-appraisal of the evidence.
7. The High Court in this case was apparently of the view that the information in consequence of which proceedings for reassessment were intended to be started, could have been gathered by the Income-tax Officer in charge of the assessment in the previous years from the disclosures made by the two Hindu undivided families. But that, in our judgment, is wholly irrelevant. Jurisdiction of the Income-tax Officer to reassess income arises if he has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment. That information must, it is true, have come into possession of the Income-tax Officer after the previous assessment, but even if the information be such that it could have been obtained during the previous assessment from an investigation of the materials on the record, or the facts disclosed thereby or from other enquiry or research into facts or law, but was not in fact obtained, the jurisdiction of the Income-tax Officer is not affected." [Emphasis supplied].
12. At this stage, we propose to refer to two more decisions of the Supreme Court, one, in the case of Gemini Leather Stores v. ITO [1975] 100 ITR 1 and the other, in the case of ITO v. Nawab Mir Barkat Ali Khan Bahadur, [1974] 97 ITR 239 which would be relevant for the purpose of this case.
13. In the case of Gemini Leather Stores (supra), while making a best judgment assessment, the Income-tax Officer had discovered certain transactions evidenced by the drafts, which the assessee had not disclosed. In spite of this discovery and the knowledge of all the material facts, the Income-tax Officer did not make necessary enquiries and draw proper inferences as to whether the amounts invested in the purchase of the drafts could be treated as part of the total income of the assessee during the relevant year. In such a situation, it was held that it was plainly a case of oversight and the Income-tax Officer could not take recourse to Section 147 (a) to remedy the error resulting from his own oversight and that therefore the notice under Section 148 should be quashed.
14. In the case of Nawab Mir Barkat Ali Khan Bahadur, Hyderabad (supra ), the Supreme Court even went to the extent that non-production of the documents at the time of the original assessments cannot be regarded as non-disclosure of any material facts necessary for the assessment of the respondent for the relevant assessment years, where such documents conform to the documents already filed by the assessee in material particulars.
15. The following observations are in this connection relevant and are quoted below:
"Non-production of the documents executed in 1957 at the time of the original assessments cannot therefore be regarded as non-disclosure of any material fact necessary for the assessment of the respondent for the relevant assessment years. The High Court was right in holding that the Income-tax Officer had no valid reason to believe that the respondent had omitted or failed to disclose fully and truly all material facts and consequently had no jurisdiction to reopen the assessments for the four years in question. Having second thoughts on the same material does not warrant the initiation of a proceeding under Section 147 of the Income-tax Act 1961." [Emphasis supplied].
16. At this stage, we may rather aptly refer to a latest three-judge-bench decision of the Supreme Court in the case of CIT v. Kelvinator of India Ltd. [2010] 187 Taxman 312 where the said court after taking into consideration the effect of Direct Tax Laws (Amendment) Act, 1987 on section 147 made the following observations while dismissing the appeals preferred by the Revenue:
"5. On going through the changes, quoted above, made to Section 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 assessing officer to make a back assessment, but in Section 147 of the Act (with effect from1-4-1989), they are given a go-by and only one condition has remained viz. that where the assessing officer has reason to believe that income has escaped assessment, confers jurisdiction to reopen the assessment. Therefore, post-1-4-1989, 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, 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.
6. We must also keep in mind the conceptual difference between power to review and power to reassess. The assessing officer 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.
7. 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 1-4-1989, 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. Reasons must have a live link with the formation of the belief. Our view gets support from the changes made to Section 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 Section 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 assessing officer.
8. We quote hereinbelow the relevant portion of Circular No. 549 dated 31-10-1989, which reads as follows:
"7.2. Amendment made by the Amending Act, 1989, to reintroduce the expression 'reason to believe' in Section 147.—A number of representations were received against the omission of the words 'reason to believe' from Section 147 and their substitution by the 'opinion' of the Assessing Officer. 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 Section 147 would give arbitrary powers to the Assessing Officer to reopen past assessments on mere change of opinion. To allay these fears, the Amending Act, 1989, has again amended Section 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 Section 147, however, remain the same." [Emphasis supplied]
9. For the aforestated reasons, we see no merit in these civil appeals filed by the Department, hence, dismissed with no order as to costs." [Emphasis supplied].
17. Bearing in mind the aforesaid principles, we now propose to consider the case before us.
18. After hearing the learned counsel for the parties and after going through the materials on record, we find that the only reason for issuing notice under Section 148 is reflected in the second and the third paragraph of the written reason sent to the petitioner, which we have already quoted above. According to the said reason, it had come to the notice of the concerned officer that the assessee was engaged in manufacturing of irrigation projects i.e. Drip irrigation, Sprinkler irrigation, Micro sprinkler, Gravity fed family drip system etc. and the same irrigation products have been supplied to various Companies and in some cases the assessee has worked as contractor.
19. The Officer concerned was, on the above fact, of the opinion that the assessee is a contractor or supplier of irrigation products and it cannot be called a developer of any new infrastructural facility. Therefore, it cannot be said that the assessee has entered into agreement for developing a new infrastructure facility.
20. In view of the above fact, the concerned officer opined that the assessee has not fulfilled the condition of Section 80IA [4] of the I.T. Act and has wrongly claimed deduction u/s. 80IA [4] of the I.T.Act, 1961. Consequently, in view of the facts mentioned above, he had reason to believe that income of Rs. 106,28,939/- being the amount of inadmissible deduction wrongly claimed by the assessee u/s. 80IA[4] chargeable to tax has escaped assessment for A.Y. 2006-07 and accordingly it is the fit case for reopening the assessment u/s. 147 for AY 2006-07.
21. From the above reason disclosed by the officer concerned it appears that it is not the case of the Revenue that the assessee had suppressed any material at the time of regular assessment and that any new document has come from which the above opinion was formed. It would appear from the documents supplied by the assessee at the time of original assessment that the fact that the assessee was engaged in manufacturing of irrigation projects (sic. products) i.e. Drip irrigation, Sprinkler irrigation, Micro sprinkler, Gravity fed family drip system etc. and that the same irrigation products have been supplied to various Companies and in some cases the assessee has worked as contractor could have been arrived at. In spite of existence of those materials on record, the Assessing Officer gave the relief under Section 80 IA of the Act. Now the concerned officer has changed his views from the selfsame materials on record. Thus, the Assessing Officer at the time of original assessment from the materials on record could arrive at a conclusion, which now he has reached.
22. The reason disclosed, therefore, does not come within the purview of Section 147 of the Act, as it is a case of second thought on the same materials.
23. Mr. Bhatt at this stage tried to convince us that at the time of original assessment, the Assessing Officer could not apply the provision contained in Explanation added to sub-section (13) of Section 80-IA of the Act, which was substituted in the year 2009 with effect from April 1, 2000. Mr. Bhatt submits that the Explanation 3 to Section 147 of the Act authorizes him to take such point before us notwithstanding the fact that such point was not taken by the Assessing Officer in the reason assigned in support of the notice.
24. We find that the Explanation to sub-section (13) of Section 80IA of the Act in vogue at the time of original assessment was inserted by the Finance Act, 2007 with effect from April 1, 2000 and at that time, the same was as follows:
"Explanation- For the removal of doubts, it is hereby declared that nothing contained in this section shall apply to a person who executes a work contract entered into with the undertaking or enterprise, as the case may be."
Subsequently, by way of further amendment of Finance Act, 2009 with effect from April 1, 2000 the above Explanation was substituted by the following one:
"Explanation- For the removal of doubts, it is hereby declared that nothing contained in this section shall apply in relation to a business referred to in the sub-section (4) which is in the nature of a works contract awarded by any person(including the Central or State Government) and executed by the undertaking or enterprise referred to in sub-section (1).
25. It is now a settled law that if an explanation is added to a section of a statute for the removal of doubts, the implication is that the law was the same from the very beginning and the same is further explained by way of addition of the Explanation. Thus, it is not a case of introduction of new provision of law by retrospective operation. We have found that the petitioner had disclosed all the materials regarding its activities and there was no suppression of materials. In spite of such disclosure, the Assessing Officer gave benefit of the provision by considering the then Explanation which was substantially the same and thus, it could not be said that any income escaped assessment in accordance with the then law. We have already pointed out that the Assessing Officer has now given a second thought over the same materials and according to him, as the assessee is a contractor or supplier of irrigation products, it cannot be called a developer of any new infrastructural facility.
26. From the materials placed before him by the petitioner, the Assessing Officer earlier did not arrive at such conclusion and thus, the amended Explanation subsequently added cannot be of any help to him in arriving at the second opinion based on the alleged new law.
27. Moreover, in the reason assigned in support of initiation of reopening proceedings, such reason has not been disclosed.
28. We, thus, find that the condition precedent for issue of notice impugned in this Special Civil Application has not been established from the materials on record and consequently, the notice is liable to be quashed on that ground.
29. We now propose to deal with the decision cited by Mr. Bhatt.
30. In the case of GKN Driveshafts (India) Ltd v. ITO [2003] 259 ITR 19 relied upon by Mr. Bhatt, as the judgment is a short one consisting of seven small paragraphs, we quote the entire judgment for the purpose of ascertaining whether the same is a binding precedent in the facts of the present case. The same is quoted below:
"1. Heard learned counsel for the parties.
2. Leave is granted.
3. By the order under challenge, a Division Bench of the High Court at Delhi dismissed the writ petition filed by the appellant challenging the validity of notices issued under Sections 148 and 143(2) of the Income Tax Act, 1961. The High Court took the view that the appellant could have taken all the objections in its reply to the notices and that, at that stage, the writ petition was premature. Accordingly, the writ petition was dismissed on 31-1-2001. Aggrieved by that order, the appellant is in appeal before us.
4. Mr M.L. Varma, learned Senior Counsel appearing for the appellant, submits that the impugned notices related to seven assessment years; that during the pendency of these appeals, in respect of two assessment years viz. 1995-96 and 1996-97, assessment has been completed against which appeals have been filed. Notices relating to the other five assessment years viz. 1992-93, 1993-94, 1994-95, 1997-98 and 1998-99, are now the subject-matter of these appeals.
5. We see no justifiable reason to interfere with the order under challenge. However, we clarify that when a notice under Section 148 of the Income Tax Act is issued, the proper course of action for the noticee is to file return and if he so desires, to seek reasons for issuing notices. The assessing officer is bound to furnish reasons within a reasonable time. On receipt of reasons, the notice is entitled to file objections to issuance of notice and the assessing officer is bound to dispose of the same by passing a speaking order. In the instant case, as the reasons have been disclosed in these proceedings, the assessing officer has to dispose of the objections, if filed, by passing a speaking order, before proceeding with the assessment in respect of the abovesaid five assessment years.
6. Insofar as the appeals filed against the order of assessment before the Commissioner (Appeals), we direct the Appellate Authority to dispose of the same, expeditiously.
7. With the above observations, the civil appeals are dismissed."
31. The general observations made in paragraph 5 of the judgment, in our opinion, cannot be construed as an absolute proposition of law on the subject. It appears that the said two-judge-bench did not refer to the earlier five-judge-bench or the three-judge-bench or even the two-judge-bench decisions of the Supreme Court quoted above by us in this judgment. In those judgments, those benches approved the proposition of law that a writ-court in exercise of power conferred under Article 226 of the Constitution of India can quash a notice of reopening of assessment under the circumstances indicated therein. Thus, in a case like the present one, where those conditions precedent have not been complied with, we, in exercise of power conferred under Article 226 of the Constitution, are entitled to quash the notice. The said decision, thus, cannot be said to have exhaustively laid down the law on the point.
32. Thus, in the case before us, in the absence of existence of "any tangible material" to come to the conclusion that there was escapement of income from assessment, the Assessing Officer exceeded his authority to reopen the assessment merely on the basis of a "change of opinion" and accordingly, it is a fit case of quashing the notice.
33. We, accordingly, pass order in terms of prayer A and B of paragraph 11 of the application.
34. There will be, however, no order as to costs
The author argues that Vodafone's offer to settle the controversy on payment of tax and waiver of interest & penalty is a god-sent opportunity for the Government to salvage the situation. It will save the Government the ignominy of the retrospective amendments being struck down in Court and also boost its image in the International community. If handled properly, even Manmohan Singh can be made to look like a real Statesman with vision and courage, adds the author
Vodafone's Chairman Analjit Singh went on record yesterday that Vodafone was open to settle with the Government pursuant to which it would pay tax of Rs. 8,000 crores if the Government waived the levy of interest and penalty.
Here's why the deal makes immense sense and why Finance Minister P. Chidamabaram should immediately grab it.
(i) The retrospective amendments stand the risk of being struck down:
I analyzed this in detail here. Basically, the retrospective amendments can be struck down as being violative of Articles 14 & 19 of the Constitution if Vodafone can show that they are "arbitrary, unreasonable and impose an unforeseen financial burden".
Litigation is most unpredictable. Who knows what point will appeal to the Judge? Suppose the Courts do uphold Vodafone's plea and declare the retrospective amendments ultra vires. Imagine the ignominy and the embarrassment that the Country will have to face. Why take the chance?
(ii) The Penalty is in any case not leviable:
It is a pipe dream if the Government feels that it has any chance of recovering penalty. U/s 273B of the Act, penalty cannot be imposed u/s 271C (failure to deduct tax at source) if there was "reasonable cause" for the failure. What can be more "reasonable cause" than that the Supreme Court itself held Vodafone not liable to deduct tax at source. A retrospective amendment cannot convert that which was "reasonable" into something that is "unreasonable".
But, if Chidu is smart, he won't tell Vodafone that the Government has no chance of success. Instead, he will use the threat of penalty as a "bargaining chip" to let Vodafone (and the international community) think that they got a good deal by the waiver of the penalty.
(iii) Even the recovery of interest is very dodgy:
The levy of interest u/s 201(1A) is also doubtful because while in normal circumstances, interest is automatic and mandatory, that is not so where the levy arises due to a retrospective amendment. "An assessee is not expected to be clairvoyant and cannot do the impossible", it was held in Haryana Warehousing Corp vs. DCIT 75 ITD 155 (Del) (TM) & DCIT vs. Indo Rama Syntheitics (ITA 678/ 679/Del/2012) where the demand for interest u/s 234B & 234C arising from a retrospective amendment was quashed.
Here also, Chidu has to play his cards well and negotiate with a poker face so that Vodafone feels that it has got a good deal by the waiver.
(iv) Best case scenario on a platter:
If you look at the best case scenario from the Government's perspective, it is that the retrospective amendments are upheld by the Courts. However, the recovery of the interest and penalty will get embroiled in litigation for several years because it will start at the lowest level. Worse, all the precedents are in favour of Vodafone. At the end of the day, all that the Government can hope to recover is the tax of Rs. 8,000 – and if Vodafone is ready to hand that over today itself on a platter, what can be better?
(v) Salvaging Manmohan Singh's sullied reputation:
If handled properly by employing proper PR professionals, the entire settlement exercise can be used to bolster Prime Minister Manmohan Singh's image which has been sullied by the Washington Post calling him a "tragic figure" and other unmentionable names. Manmohan Singh can now be made to look like a real Statesman with great vision and courage. The ensuing positive sentiment that will sweep the nation will take the winds out of the sails of Mamata Banerjee and the other opponents of the FDI reforms.
The only question is how to give effect to the settlement under the Law. This is not a problem. The AO is yet to pass an order u/s 201. He can pass an order levying tax but not the interest or the penalty. The only thing is that the same terms will have to be offered to all the others who are similarly placed because otherwise the Government will be accused of discrimination.
So, accepting Vodafone's proposal for settlement will be a win-win for the Government. In one stroke, the Government will snatch victory from the jaws of defeat and come out smelling of roses!
CBDT faces SC's ire but its Litigation Management System is working well!
IT is widely believed that History repeats itself but, of course, after a reasonable time gap. But here is a peculiar case where the 'Present' has repeated itself if we go by the latest observations of the CJI Justice S H Kapadia, lambasting the Income Tax Department for inordinate delay in filing appeals in Citi Bank NA case (See '2012-TIOL-78-SC-IT'). So, how has the 'Present' repeated itself? The year was 2007, and Justice Kapadia had flayed the litigation management system of the CBDT and directed the Department to furnish the status of judgements relied upon by the lower courts in rendering the impugned judgements. And the ill-managed CBDT had no answer except the audacity to promise major revamp of its internal SLP-filing system and also the creation of an ambitious National Judicial Reference System (NJRS) and the Judicial Workflow Management System (JWMS). The Supreme Court had then relented and admitted hundreds of its 'terribly' delayed SLPs. On the same issue, TIOL Netizens may recall, the Bombay and Delhi High Courts had dismissed hundreds of appeals u/s 260A of the Income Tax Act by refusing to condone unexplained and inordinate delays. Mercifully for the Exchequer, keeping in mind the societal interests, the Apex Court remanded dozens of cases back to the High Courts but directed the Department to file appeals within eight weeks.
Such a short span of time was indeed a litmus test for the Department, which had earlier promised to switch over to a new leaf. There is doubtless large distance between making a tall promise and changing the habit of the behemoth our bureaucracy is. But the Hon'ble CJI was perhaps serious about seeing the cardinal change in the appeals and SLP filing system of the Department, and that is why he kept on pushing it to the edge for reforms and efficiency. And, much to the surprise of the topbrass even in the CBDT, a handful of officials working in the Directorate of Legal Research managed to meet the tight deadlines for filing appeals before the High Courts as per the Apex Court direction. And they did it in their own ingenious way - partly focussed on building a new system and partly bypassing the time-gobbling procedures to directly interact with the CITs concerned. Thus, the Legal Directorate has indeed been markedly successful in sensitising the CITs and CCITs for strictly filtering down quality cases to a few hundreds. For instance, out of about 2300 requests for SLPs in 2011, this Directorate zeroed in on only about 1300 quality cases and the Apex Court finally admitted only about 50 cases and dismissed the rest. In other words, their efforts to insist on framing of quality questions of laws, which deserve the attention of the Supreme Court, finally dissuaded a good number of field officers, habitually filing frivolous appeals or filing SLPs only to ward off audit paras or also perhaps the routine vigilance proceedings.
TIOL Netizens may recall the CBDT has in the recent past substantially hiked the monetary limits for filing appeals before the Tribunal, the HC and the Supreme Court. And the force behind such a reform was the Directorate of Legal Affairs, which has also inspired the sister Board of the CBDT to introduce similar 'First Stage Filter' for frivolous appeals. To bring uniformity in procedures, the CBDT introduced the Standard Operating Procedures for filing SLPs. Then came the liberalisation of guidelines for engaging quality counsels in high stake cases before the higher judiciary. Although the limit for reimbursement of expenses for DRs has been recently doubled but it is still woefully inadequate if we compare it to the other party to the litigation. Worse, the DRs in various Benches of the ITAT do not have even their own funds to subscribe to various offline and online publications to enrich their judicial wisdom. They have to outstretch their palms before the offices of the CCITs-I, who may be a prisoner of his own whims and fancies and may not accede to their requests.
Only recently, the CBDT has come out with a system of Centralised Processing of Appeals, to reduce litigation and bring about a culture of consistency in decision-making. The idea is to formulate a 'Departmental View' on various contentious issues. And if such views are formed even in a few cases, the same may go a long way in reducing litigation and the tendency to file appeals and SLPs in every case. Then comes the most ambitious NJRS, which once put in place, may answer all the questions of the HCs and the Supreme Court. NJRS proposes to capture the entire life-cycle of an appeal filed in ITAT and thereafter in the 'Judicial Workflow Management System' module. It also intends to have repository of all decisions of ITAT, HCs and the Supreme Court. It would be a web-based solution and its access would be available to all the officers across the country. Although NJRS was expected to roll out two years back but the inefficiency of our babudom has not allowed it to create a 'kingdom of efficiency'. First, the short tenures of Members with Judicial charge did not enable them to understand its working and resultant benefits with full implications. Then, the dark clouds of uncertainty and whimsicial leadership did not allow the Board to function as a cohesive machinery. This led to a period of inertia with no designated officers posted to execute this project. Now that there are some officers posted for this project but the irony is the Board has treated this project like one of its routine field posting and picked up unwilling officers. Unless an officer with the requisite skill set is hand-picked, this project is not going to see the sun-rays of the day. I was told that when the CBDT topbrass explained this project to the New Finance Minister, he warmly gave his nod for its immediate implementation. But, even after having the nod of the highest custodian of revenue, the CBDT has failed to fathom the seriousness of the project and erred where it should not have!
If we go by the concerns of Justice Kapadia as expressed in the latest decision, one may find them hovering around two points - 1) Inordinate delay, and 2) Ricocheting effect. So far as the first point is concerned, a good quantum of reforms has been done, and the system may finally be successful in meeting the 90 days deadline for filing SLPs in at least 60-70% cases. Since the system is not yet fully steam-rolled for this tight deadline, there would be delay but certainly not inordinate! Once the CBDT bosses and the Finance Minister move fast to implement the NJRS in the coming three months, there are chances that there would be no ricocheting effect by the next year-end in most of the cases.
Unfortunately, as long as the vicious cycle of inefficiency and unaccountability continues to be the most salient feature of our work culture in the Government agencies, it would be little hard to expect the CBDT and its field formations to be a roaringly efficient revenue administration. How inefficiency and demoralisation set in in the system can be seen from the unexplainable delay in implementing the cadre-restructuring in both the Boards. There is humungous shortage of trained hands in the various Directorates and Commissionerates. It is over a decade but promotional avenues continue to be choked. Nationwide frustration has taken roots among the officers. Secondly, selection of manpower as per their skill sets for annual transfer is never done. The only governing principle for transfer is mandatory rotation from sensitive to non-sensitive. A good number of officers manage to corner the creamy posts in the Department and others, even after qualifying and excelling in skills, are given unmistakable hints to hibernate for more years. A demotivating workforce fails to do even routine work like in the Citi Bank NA case where huge delay was caused as none cared for what the Apex Court referred to as 'high stakes'. Once the Bombay HC dismissed the appeal for condonation of delay, the ball landed up at Raisina Hill where top babus showed scant respect for accountability and, having seen the angry mood of the Apex Court, directed the field to file 'Review Petition' - further delay in filing SLP. Then the ball ricocheted back to North Block for filing SLP. The file went to the Law Ministry where it got stuck in a 'narrow duct' at the top and a further delay of six months took place. By the time it was filed, the length of delay had exceeded the boundaries of reasonableness, which legitimately infuriated the Apex Court. Having seen an unfortunate consistency of lapses particularly in too many high stake cases, the Apex Court had no option but to wonder whether the delay can also be attributed to some sort of 'connivance'. But what the Apex Court has missed in this order is the large component of delay accounted for by the Central Agency Section (CAS) of the Ministry of Law. In good number of cases, the CAS consumes huge time, which adds to the weight of delays. On an average, Income Tax SLPs account for about 50% of total SLPs filed by all the Departments of the Central Government in a month. Since CAS believes that more is merrier as it means more fees for drafting and paper work and also representation, it makes no efforts to reduce the number and also fails to do justice to the homework required to argue a case. In other words, a lot of reforms are required even at the CAS-stage.
Whether there is any element of truth in the connivance theory, which may be looked into by the Vigilance machinery, but what is important here is that the Apex Court deserves kudos for sustained hammering on judiciary-driven reforms in the litigation handling system of the CBDT. It is high time for both the Revenue Boards which need to swing into top gear to unlock revenue from the ever-mounting tax arrears - about Rs FOUR LAKH CRORE combined. For the Income Tax alone, the arrears are in the region of Rs THREE lakh crore, and interestingly, some of the dead arrears like those of Harshad Mehta etc continue to be there. Similarly, a good chunk of Rs 71000 Cr is in the names of Hasaan Ali and Tapuriah. All such unrealistic demands should be discounted by taking into confidence the watchdogs like CAG and PAC and let there be a realistic figure to be realised. In terms of importance, litigation management should be given if not more, at least as much attention as the revenue collection gets. Let's hope in the days to come, litigation management becomes a prime area to attract good talent in the Department as against the present practice of observing 'mourning' once one gets posted as DR in the Tribunal or CIT (Judicial). Given the dynamism of the present Member (A &J), let's also hope that the practice of using the non-negotiable filter of framing only substantial question of law continues to be strengthened to further reduce the number of requests for filing SLPs. In fact, there is a need for major reforms at the end of Supreme Court Registry also, which should allow bunching of SLPs to facilitate faster disposal of cases. Similarly, it should also publicise FAQs on whether when a bunch of cases are disposed of by remand, only one appeal can be filed or separate appeals are required to be filed in each case in the bunch before the HC. And this can be achieved by simply providing one more column in the SLP memo. Such procedural reforms at the SC Registry level would go long way in making life easier and disposal faster by our Apex Court.
Tax Arrears - A Tale of Close Nexus with Taxman's Career!
A history was made on Tuesday when the Apex Court of India ruled that the Essar Oil's Vadinar Refinery was not eligible for deferred sales tax incentive scheme of the Gujarat Government, and the company was required to pay sales tax since 2006 when it had commenced commercial production. The tax liability as per the information given to the Bombay Stock Exchange by the company itself, is whopping Rs 6300 Crore (See today's Breaking News), which is to be paid to the Sales Tax Department in instalments. By all standards this is a back-breaking liability for any company in any sector. Essar Oil and Essar Energy's stocks suffered huge hammering after this news spread worldwide. The London Stock Exchange-listed Essar Energy owns 87% of equity of Essar Oil.
So far as the State Government is concerned, it was always a tax arrear. The State of Gujarat was indeed lucky in its protracted battle, which yielded huge revenue for the exchequer. But if we train our eyes towards the Central Govt's tax arrears, the picture truly looks gloomy and depressing. It is very rare that either of the two revenue arms of the Union Govt ever got such a huge success to their accounts. It is certainly not to say that they often fight shy of filing SLPs in the Supreme Court. They rather file more than the taxpayers in the country but they often do not know how to defend their largely poor cases. SLPs are routinely filed, and our High Courts and the Supreme Court sometimes feel compelled to express their frustration with the repetitive and routine cases. But this is also not to say that the Revenue never wins important cases. One such case is that of Pernod Ricard India (popularly known as 'Seagram') in which the Customs won Rs 40 Cr duty evasion case in liquor import. Although the decision was given in July 2010 but the CBEC has predictably not capitalised on the full implications of this decision for the entire liquor import sector. In the case of Seagram alone, it is estimated that the differential duty would be in the region of Rs 1100 Crore but for the lack of import records, partly manual, the provisional assessments have not been finalised. If one takes into account the interest part, the liability would be more. But recovery of tax is an art, which is unfortunately alien to the Customs topbrass and also the CBEC. The total implication of this decision for the entire sector is believed to be about Rs 2000 Cr if imports done by other importers during the same period of 2001 to 2010 is taken into account.
What goes to establish the conspicuous absence of art of tax recovery in both the Revenue Boards - the CBEC and the CBDT, is the ever-flourishing tally of tax arrears. As per the latest count, it has crossed Rs 80,000 for the CBEC, and Rs 2.5 lakh Crore for the CBDT. The combined figure is almost 50% of the total revenue targets given to them by the Finance Minister. Given the fact that the glaring fiscal deficit is staring in the face of the Finance Minister, the mounting arrears surely add salt to the woes. There can be two aspects of these arrears - first, what is the quality of arrears; and second, whether efforts commensurate with the size of the task are being made or not.
So far as the question relating to quality goes, even a staunch revenue defender finds himself on back foot! A good number of cases locked in litigation are of pathetic quality. They are made for the sake of creating records, and of course, for making some 'fast bucks'. No homework is done, and a poorly drafted show cause notice with gaping holes is issued. Worse, the Commissioners under whose charge such cases are made, are required to adjudicate them. Should he drop the case or confirm? A child-like guess is - confirmed. Naturally, no system should be naive enough to believe that poor cases should be dropped when the vigilance is truly vigilant!
Then comes the non-existent regard for the judicial process in the Department. Most officers proudly prefer taking no note of Tribunal's decisions in cases going against the Revenue. They simply feign having no eyeballs for CESTAT or ITAT's decisions. They even go against High Courts' decisions in many cases if one goes by the strictures being passed against the Department.
If one tries to look for reasons for such glaring scorn for the judicial process in the country, one may come across equally glaring disregard for their own Revenue Boards. A simple scanning of various Board's instructions may tell the tale that the field formations have not been paying even remote attention to their topbrass directions. In fact, I remember one incident where a Board Member was addressing the senior revenue officials of his Zone and was furious over non-implementation of the Board's directions. The Member apparently was emphatic in coaxing the officers to follow the rules, Board's directions and on top of all, the principles of natural justice. All listened to him with rapt attention but as soon as he was given a warm send-off to New Delhi, the Chief Commissioner, shadowed by his large army of subordinates, turned towards them and curtly advised - ''The Member is there only for four more months in the Department, and we have to live within this system for many more years. Therefore, you do nothing different from your predecessors'.'' The message was loud and clear - keep ignoring the rule and principle-reminding instructions and do whatever is required to safeguard the 'traditions'!
But, the larger question is - why such an attitude prevails in the Department? And the answer indeed lies in the discriminatory or discretion-exhibiting transfer policy. All transfer orders issued by the Boards are scrutinised with not a pinch of salt but a fistful of salt! No officer in the field believes that a fair exercise was done before issuing the transfer order. Too many exceptions are created out of whims and not the rules framed for sanctioning exceptions. Lobbying and sycophancy - the twin instruments - command good premium in North Block. If one has no godfather, that officer is destined to be posted farther from metros and good charge. In fact, such whims are not confined only to general transfer orders. They are also practised and evidently look more visible when it comes to overseas posting or postings in the Boards. Take the recent example of CBDT's transfer order shifting and posting officers in the Directorates of TP and International Taxation. Those who have been doing quite well for the Revenue were moved out before their terms could be completed. There are many who are good at specific skills but they would not get a chance to work in these Directorates as posting to them is truly a launching pad for eligibility to foreign posting. Similarly, if one completes one's metro tenure by spending years in sensitive charge in the field formations, a little protocol to the Board Members would make space for deputation in the Boards. It is not that the Board posts are not circulated. It is only that the candidates are chosen even before circulating the posts.
All such irregularities are practised regularly, and without any interruptions. In this backdrop, if the field officers perceive the Boards as villain, they may not be faulted. But such paranoia has a cascading effect. It spills over most of the official works these officials do, and their scorn for the Boards hardens them to trash their instructions. Such culture of paranoia and dissatisfaction tend to goad them to ignore other institutions as well. And thus, Tribunals and others also get the same treatment. In such a fashion, avoidable litigation becomes a hobby, which richly contributes to tax arrears.
What is called for to remedy this pejorative scenario is that quasi judicial function must be bifurcated from the administrative aspect of the department. A separate institution must be built with the necessary infrastructure so that adjudicators could function independently. A good amount of relief can be granted to the taxpayers at this level alone. Only genuine cases should move upto the Tribunal and then to HCs and the Apex Court. This way, our judicial system can be de-choked. As regards the mounting arrears, un-recoverables should be identified every two years and written off. Again, this should be done by an independent panel as the field officers would not take the responsibility for the fear of vigilance cases later. A good chunk of arrears can be liquidated if a simple fact is taken on record that the defaulters have disappeared for good, and they cannot be traced now. Unnecessarily burdening the tax recovery officers would reduce their efficiency to make good of potential cases. In nutshell, a good number of innovative steps are required if the surging mountain of tax arrears is to be arrested!
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