Amendment in Section 40(a)(ia) In Finance Act, 2012: Rerospective or Prospective
Ever since the insertion of provision of Section 40a(ia) ( "the section")through finance act, 2004, the subject of TDS has gained a lot of momentum in terms of anxiety from general public. Non deduction or even untimely deduction of tax results to disallowance or deferment of allowance of expenditure, which can lead to deep holes in the pockets of the assessees. Thus, even if a payee of income has duly paid its taxes but the payer does not deduct it, the payer becomes liable for not only interest and penalty but also for disallowance of expense. The subject has through the amendment of Finance Act, 2012 got some much needed relief.
Brief History
As per the original section if tax is not deducted or after deduction has not been paid before the expiry of the time prescribed under sub-section (1) of section 200 for the expenses in the form of interest, commission or brokerage, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub- contractor, the expense shall be disallowed.
The finance act, 2008 provided some relief to the tax payer. It extended the time limit upto which TDS could be deposited. It divided the payments into 2 categories: one relating to the payments before the month of march and the second relating to those payments on which tax was deductible in march. For the first category, tax could be deposited before the end of financial year and for the second category, tax could be deposited before the fling of return.
The finance act, 2010 brought in further relief by extending the time limit of payment of TDS for all transactions covered in the section upto due date of filing of return. The amendment was effective from April 1, 2010
The finance Act, 2012 has further rationalised the section and provided that where an assessee makes payment of the nature specified in the said section to a resident payee without deduction of tax and the payee:
(i) has furnished his return of income under section 139;
(ii) has taken into account such sum for computing income in such return of income; and
(iii) has paid the tax due on the income declared by him in such return of income, and furnishes a certificate to this effect from an accountant in such form as may be prescribed, then in that case for the purpose of allowing deduction of such sum, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee. This amendment will take effect from 1st April, 2013 and will, accordingly, apply in relation to the assessment year 2013- 14 and subsequent assessment years.
MAIN ISSUE
Now the main issue lies is the date from which the amendment shall be effective, i.e. whether it be given a retrospective effect from April 1, 2005, i.e. the date of applicability of the section or w.e.f. Finance Act, 2012.
Observations
It would be relevant to know that in catena of decisions by various benches of tribunal and Calcutta High Court in CIT v Virgin Creations it has been held that amendment by Finance Act 2010 would operate retrospectively. The Calcutta High Court, has held in the context of section 40(a)(ia) that the amendment is remedial in nature and designed to eliminate unintended consequences which may cause undue hardship to the taxpayers and is of clarificatory in nature and, therefore, has to be treated as retrospective with effect from 1st April, 2005. It is a well settled law that when a provision is inserted as a remedy to make the provision workable, it is required to be considered to be applicable retrospectively.
Hence in the absence of any higher court ruling or a contrary ruling, the amendment to section 40(a)(ia) made by Finance Act, 2010 is being applied retrospectively.
If the tax provisions are literally interpreted as per the plain meaning conveyed by the language in the provisions, the effect would be that for the earlier periods the expenditure would be denied if the tax has been not deducted, even if paid in to the Government treasury, which would lead to unjust enrichment.
Fiscal laws are expected to be strictly construed. The words must say what they mean and nothing more must be implied or read in to. Yet, the above rule of strict interpretation is not so absolute and gives way in exceptional circumstances. For instance, in the case of K.P. Verghese vs. ITO 131 ITR 597 (SC) the Supreme Court was concerned with the capital gains provisions of section 52[2] of the Income-tax Act. As per the language in the said provisions, if the market value of a capital asset transferred exceeded the value of sale consideration declared by the assessee by 15% or more, the Assessing Officer is entitled to take the market value as the sale consideration.
The issue was that whether these provisions can be invoked even if it was not proved that the assessee has understated his sale consideration.
The Supreme Court held as under:—
"The task of interpretation of statutory enactment is not a mechanical task. It is more than a mere reading of mathematical formulae because few words possess the precision of mathematical symbols. It is an attempt to discover the intent of the Legislature from the language used by it and it must always be remembered that language is at best an imperfect instrument for the expression of human thought and, as pointed out by Lord Denning, it would be idle to expect every statutory provision to be "drafted with divine prescience and perfect clarity".
The court held that if the provisions are literally interpreted and applied, it would manifest unjust results which may not be the intention of the lawmaker. The purpose of the section, being to prevent the leakage of capital gains understatement should be applied not merely when the FMV exceeds the sale price but also when there is understatement of sale price.
In numerous cases, the court has shifted its base to reasonable interpretation generally when the intent of law is not being met through literal interpretation.
Conclusion
The main intent of inserting the section was to make the assessee tax compliant and prevent bogus transactions. It was never meant to result into such hazardous results. It is also clear from the fact that the legislation allows deduction of expense in the subsequent years when the tax is deposited. TDS is only a mode of recovery, which was inserted for early tax collection. Once it is recovered it cannot be taxed again.
The memorandum explaining the Finance Ac, 2012 also states, "In order to rationalise the provisions of disallowance on account of non-deduction of tax from the payments made to a resident payee, it is proposed to amend section 40(a)(ia) to provide that where an assessee makes payment of the nature specified in the said section to a resident payee without deduction of tax and is not deemed to be an assessee in default under section 201(1) on account of payment of taxes by the payee, then, for the purpose of allowing deduction of such sum, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee."
It is clear from the language used, that it has been introduced as a remedy for the malady being faced by the tax payers and is clarificatory in nature. The provision is not intended for giving punitive action on non compliance and in my opinion should be treated as retrospective in effect. 2013-TIOL-68-HC-DEL-IT
IN THE HIGH COURT OF DELHI
WP(C) 13838/2009
REPLIKA PRESS PVT LTD AND ANR
Vs
ASSTT COMMISSIONER OF INCOME TAX
CIRCLE-15(1), NEW DELHI
CIRCLE-15(1), NEW DELHI
Badar Durrez Ahmed and R V Easwar, JJ
Dated: January 22, 2013
Appellant Rep by: Mr S Krishnan
Respondent Rep by: Mr Kamal Sawhney
Respondent Rep by: Mr Kamal Sawhney
Income Tax - Sections 10B, 147, 148 - Whether when the AO has dealt with the issue of inclusion of DTA sales in the export turnover, at the time of original assessment, the same can be again made a ground for reopening assessment - Whether the AO can change its opinion to reopen assessment, based on the opinion set out in the audit note - Whether audit personnel are allowed to give an interpretation of the statutory provisions of the Act.
The assessee is a 100 % EOU engaged in the business of export of printed books, which has been delivered as per instruction of the importer to parties situated outside India, as well as in India (i.e. constructive exports). The assessee filed it return of income in which the sales in the domestic tariff area ("DTA") was included in the export turnover and exemption u/s 10 B was claimed. A questionnaire was sought from the assessee in which the assessee replied that there were two different types of exports. The first kind was the physical export and the second was the constructive export. The assessee explained that those supplies in the DTA, which have been made on the instructions of the publishers abroad and for which the petitioner has received payment in convertible foreign exchange through normal banking channels, are in the nature constructive exports. Finally, the AO completed the assessment u/s 143(3) after having dealt with the issue of DTA supplies and the constructive turnover. However, the AO issued notice u/s 148 seeking reopening of the assessment on the ground that the assessee had included DTA supplies in the export turnover, which was not disclosed by the assessee, and thus the income had escaped assessment.
The assessee filed objections, which were rejected, and thus aggrieved, the assessee filed this writ petition before the High Court.
Having heard the parties, the High Court held that,
++ we may straightaway state that this is a clear case of change of opinion as also a case which was beyond the jurisdiction of the revenue audit which had pointed to the so-called discrepancies on points of law, particularly, on an interpretation of Section 10B of the said Act;
++ insofar as the change of opinion is concerned, it is writ large from the records of the case. The Assessing Officer had specifically raised a query with regard to the supplies made in the domestic tariff area and the petitioner / assessee had given a detailed reply to the same. The Assessing Officer, after considering the reply furnished by the assessee, framed the assessment order in which, as we have pointed out above, he made specific references to exports in the domestic tariff area and / or constructive exports. While computing the claim for exemption under Section 10B, the Assessing Officer has included the supply made in the domestic tariff area, both in the main body of the assessment order as also in Annexure-A thereto, which was the calculation of the deductions. Therefore, it is absolutely clear that the Assessing Officer had applied his mind to the very issue which is now sought to be raised under Section 147 of the said Act. That would mean that the present venture of invoking Section 147 is nothing but a mere change of opinion, which is impermissible in law, as is well settled by a long line of decisions. The second point of the petitioner is also well taken that an audit party could not have commented on a point of law and, particularly, on an interpretation of Section 10B of the said Act.
Assessee's writ allowed
JUDGEMENT
Per: Badar Durrez Ahmed (Oral):
1. This writ petition impugns the notice dated 24.02.2009 issued under Section 148 of the Income Tax Act, 1961 (hereinafter referred to as 'the said Act') seeking to re-open the assessment for the assessment year 2005-06.
2. The learned counsel for the petitioner submitted that the provisions of Section 147 have been wrongly invoked by the revenue inasmuch as the Assessing Officer is seeking to merely change his opinion which is not permissible in law. In order to examine this plea of the learned counsel for the petitioner, it would be necessary to refer to some facts.
3. The petitioner had filed its return of income for the relevant assessment year on 29.10.2005. In the said return under Schedule K, the petitioner claimed a sum of 2,61,41,144/- as being exempted under Section 10B of the said Act. The nature of income was described as a business income of a 100% export oriented unit. Alongwith the income tax return, the petitioner had given a break-up of the export turnover and the local turnover. The calculations for deduction under Section 10B for the assessment year 2005-06 were, inter alia, as under:-
| "CALCULATION OF DEDUCTION U/S 10B FOR THE ASSESSMENT YEAR 2005-2006 | ||
| A. | EXPORT TURNOVER | |
| FOB value of Export including DTA Supply | 134305284.00 | |
| Add: Income from Typesetting & Scanning | 3126484.00 | |
| Add: Exchange Fluctuation Gain | 842763.00 | |
| 188274511.00 | ||
| LOCAL TURNOVER | | |
| Sale | 30529807.00 | |
| Add: Sale of wastage | 2002090.00 | |
| B. | 32531897.00 | |
| TOTAL TURNOVER | | |
| Sale Export Turnover | 188274511.00 | |
| Add: Local Turnover | 32531897.00 | |
| C. | 220806408.00 | |
| PROFIT OF THE UNDERTAKING | | |
| Profit as per Computation of Assessable Income | 30868064.00 | |
| Business Profit | 30658064.00" | |
| (emphasis supplied) | ||
It should be noted that under export turnover, the petitioner clearly mentioned the FOB value of exports including DTA supply. DTA supply essentially meant supplies to the domestic tariff area. The printed books, which the petitioner was producing on behalf of its overseas publishers, were being supplied to parties in India on the instructions of the overseas publishers, wherever required. The payment in respect of the same was received from the overseas publishers in convertible foreign exchange.
4. Alongwith the return of income, was also annexed an annexure to the notes on accounts, where, also, the DTA sales were mentioned. What is more important is the fact that the Assessing Officer issued a questionnaire on 22.08.2007 in respect of the said assessment year 2005-06. Question No.11(b) of the questionnaire reads as under:-
"11(b). Please give a note on DTA supply and why it has been included in export turnover."
In response, the petitioner submitted a reply on 13.09.2007. As regards question No. 11(b), the reply given by the petitioner was as under:-
"11.(b) The summary of sales is as follows.
| 1. | Physical Export as per chart enclosed | 90030302 | |
| 2. | Constructive Export | 94274982 | |
| 3. | Typesetting & scanning | 3126464 | |
| 4. | Exchange Fluctuation Gain | 842763 | |
| (A)Export Turnover | 188274511 | ||
| 5. | Domestic Sales | 30529807 | |
| 6. | Wastage Sales | 2002090 | |
| (B) Local Turnover | 32531897 | ||
| (A) Export Turnover | 188274511 | ||
| (B) Local Turnover | 32531897 | ||
| Total Turnover (A) + (B) | 220806408 |
Brief Note on Constructive ExportsRegarding constructive Sales purchase order is received from overseas publishers.According to copy right act the ownership & copy rights of the title book vests with overseas publishers. The same facts are stated on the front Page of the book photocopy of a sample is enclosed. Since the assessee company does not own copy rights therefore the company is not the owner of the books, hence they cannot make any sales. The assessee company is following the delivery instructions of the Foreign publishers & that too after the permission is granted by the Development Commissioner, NEPZ Noida (UP). Since the purchase order is received from Foreign publishers, payment is also received in convertible Foreign Exchange through banking channel. Subsequently on the basis of the permission granted by Development Commissioner the Foreign Exchange is sent to overseas publishers in Foreign Currency by the people to whom the company has made supplies.Reliance is placed on the Hon'ble Supreme Court Judgment in the case of J.B. Boda & Co. Pvt. Ltd. Vs. Central Board of Direct Taxes, copy of the judgment is enclosed, where the Hon'ble Supreme Court has held that "A two way Traffic is unnecessary. To insist on a formal remittance first & thereafter to receive the commission from the Foreign reinsure, will be an empty formality & a meaningless ritual on facts of the case.""
5. The learned counsel for the petitioner pointed out that the summary of sales given in the aforesaid reply referred to two different types of exports. The first kind was the physical export and the second was the constructive export. The brief note, which has been reproduced above, explains as to what is meant by constructive exports. These are those supplies in the domestic tariff area which have been made on the instructions of the publishers abroad and for which the petitioner has received payment in convertible foreign exchange through normal banking channels.
6. After having received the reply from the petitioner to the detailed questionnaire and in particular to question No. 11(b), the Assessing Officer framed the assessment under Section 143(3) of the said Act on 04.10.2007. It will be seen that the Assessing Officer specifically dealt with the issue of constructive exports and DTA supplies. This will be apparent from paragraphs 4 and 8 of the assessment order, which read as under:-
"4. The assessee company is an export oriented unit engaged in the business of export of printed books which has been delivered as per instruction of the importer to parties situated outside India, as well as in India (i.e. constructive exports). It has also shown receipts in convertible foreign exchange, from export/transmission of customized electronic data by way of scanning and typesetting charges. During the year only the EOU has been in operation, as the domestic unit was stated to be closed down in A.Y.2004-05. The assessee has made domestic sales which has been shown as local turnover.""8. Export turnover as per section 10 13 Explanation 2(iii) has to be worked out exclusive of freight, telecommunication charges or insurance attributable to the delivery of articles or things or computer software outside India. The telecommunication charges incurred on transmitting the electronic data (i.e. typesetting and scanning charges) have to be excluded from the gross receipts. Assesee has taken a leased inter-net connection from BSNL through which type-set and scanned data files are uploaded to the foreign publisher. During the year the assessee has paid Rs.2,01,632/- to BSNL for this facility, a per reply dated 28.9.07. Accordingly, an amount of Rs.2,01,632/- is excluded from total export turnover shown at Rs.18,82,74,51 II- as per report in Form 56G. So the revised total export turnover would be Rs.18,80,72,879/- which is worked out as under:
| FOB value of exports including DTA (domestic tariff area) supply | Rs.184305284/- |
| Add: Income from typesetting & scanning | Rs. 3126464/- |
| Add: Exchange fluctuation gain | Rs. 842763/- |
| Less: Telecommunication charges paid to BSNL | Rs. 201632/- |
| Export Turnover | Rs.188072879/-" |
Along with the assessment order, was appended the calculation sheet which also had reference to the export turnover which reads as under:-
"Annexure-A
Calculation of deduction u/s 10B for the AY 2005-06
| Export turnover | Rs.188072879/- |
| Local turnover | Rs.32531897/- |
| Total turnover | Rs.220604776/- |
| Profit of the undertaking as per Computation of total income in para 10 | Rs.30808337/- |
| Deduction : (Business profit) Export turnover/ Total turnover. | |
| Deduction u/S 10B = Rs.26265128/-" |
It will be seen that the figure of export turnover exactly matches the figure of export turnover as indicated in paragraph 8 of the assessment order which includes the FOB value of exports including DTA (domestic tariff area) supplies. From the aforesaid, it is apparent that the Assessing Officer had applied his mind to the question of supply to the domestic tariff area made by the petitioner on instructions from the publishers abroad.
7. The impugned notice under Section 148 was followed by the supply of the purported reasons, which read as under:-
"2005-06Reasons: The assessment of M/s Replika Press Pvt. Ltd. For the assessment year 2005-06 was completed after scrutiny in October, 2007 at an income of Rs.149.66 lacs. The assessee, which had 100% export-oriented unit status, was engaged in the business of manufacturer and export of printed books. Audit noticed that the assessee was allowed deduction under section 106 for sales of printed books, which was delivered as per instruction of the foreign buyers to parties situated in India (sales Rs.9,42,74,982), Since the supply to Domestic Tariff Area (DTA) in India does not constitute export out of India, these sales also do not constitute export turnover of the assessee. In a similar case of Indian Delco (Pvt.) Ltd. Vs. DCIT [59 ITD 268], ITAT Delhi bench had rejected the claim of assessee for considering such domestic sales as export. Thus, the allowance of deduction under section 106 for DTA sales resulted in excess allowance of the deduction by Rs.1,31,65,878/-.On the facts and in the circumstances of the case as discussed above & for the reason of failure on the part of the assessee to disclose fully & truly all material facts necessary for assessment and in view of sub-clause (c) of Expl.2 below section 147, I have reason to believe that income of Rs.1,31,65,878/- chargeable to tax in A.Y.2005-06 has escaped assessment."
8. On going through the purported reasons, it is apparent that the assessment is being re-opened on the ground that the supply to domestic tariff area did not amount to exports. The learned counsel for the petitioner has contended that this would amount to a mere change of opinion and that it is also based on an audit note. The learned counsel for the petitioner also pointed out that the audit personnel could not comment on an interpretation of Section 10B of the Income Tax Act as that would be a comment on a point of law, which is not permissible in view of the Supreme Court decision in the case of Indian and Eastern Newspaper Society v. CIT: 119 ITR 996 (SC) = (2002-TIOL-870-SC-IT-LB).
9. For the sake of completing the facts, we may point out that the petitioner had filed his return pursuant to the notice and had also given his objections to the said notice which had been disposed of by an order dated 07.12.2009, rejecting the petitioner's objections. The said order dated 07.12.2009 is also impugned in this writ petition.
10. We have heard the counsel for the parties and we may straightaway state that this is a clear case of change of opinion as also a case which was beyond the jurisdiction of the revenue audit which had pointed to the so-called discrepancies on points of law, particularly, on an interpretation of Section 10B of the said Act.
11. Insofar as the change of opinion is concerned, it is writ large from the records of the case. The Assessing Officer had specifically raised a query with regard to the supplies made in the domestic tariff area and the petitioner / assessee had given a detailed reply to the same. The Assessing Officer, after considering the reply furnished by the assessee, framed the assessment order in which, as we have pointed out above, he made specific references to exports in the domestic tariff area and / or constructive exports. While computing the claim for exemption under Section 10B, the Assessing Officer has included the supply made in the domestic tariff area, both in the main body of the assessment order as also in Annexure-A thereto, which was the calculation of the deductions. Therefore, it is absolutely clear that the Assessing Officer had applied his mind to the very issue which is now sought to be raised under Section 147 of the said Act. That would mean that the present venture of invoking Section 147 is nothing but a mere change of opinion, which is impermissible in law, as is well settled by a long line of decisions. The second point of the petitioner is also well taken that an audit party could not have commented on a point of law and, particularly, on an interpretation of Section 10B of the said Act.
12. Therefore, on both points, the petitioner is liable to succeed. The impugned notice dated 24.02.2009 and all proceedings pursuant thereto, including the order dated 07.12.2009, are quashed and / or set aside. The writ petition is allowed, as above. There shall be no order as to costs.
2012-TIOL-1066-HC-AHM-IT
IN THE HIGH COURT OF GUJARAT
IN THE HIGH COURT OF GUJARAT
AT AHMEDABAD
Special Civil Application No. 17771 of 2003
VINAY PRINTING PRESS
Vs
ASSISTANT COMMISSIONER OF INCOME TAX
Akil Kureshi And Sonia Gokani, JJ
Dated : November 26, 2012
Appellant Rep by : Mrs Swati Soparkar, Adv
Respondent Rep. by : Mr M R Bhatt, Sr Adv with Mrs Mauna M BHatt, Adv
Respondent Rep. by : Mr M R Bhatt, Sr Adv with Mrs Mauna M BHatt, Adv
Income Tax - Sections 143(3), 148 - Whether when the documents have been properly analysed by the assessing authority during original assessment, the reassessment u/s 147 can be made on the basis that there was a failure on the part of the assessee to disclose truly and fully all material facts.
Assessee concern is engaged in printing business. During assessment, AO scrutinized the return filed and framed a scrutiny assessment u/s 143(3) computing total income at Rs.8,35,429/-. To reopen such scrutiny assessment, AO issued notice u/s 148 on the basis that the depriciation on windmills was wrongly allowed by the AO as the said asset was neither utilised for business purpose nor the assessee derived any income out of utilisation of wind mills. Thus, the claim of the assessee for depreciation u/s 32 was not justified. On receipt of such reasons, the petitioner had raised its objections and contended that the notice was illegal and without jurisdiction since there was no escapement of income and further that the assessee had fully and truly disclosed all material facts. The AO disposed of such objections vide communication. It was observed that the scrutiny assessment previously framed was sought to be reopened beyond the period of 4 years from the end of the relevant AY.
In an petition before HC, assessee's counsel had contended that there was no failure on the part of the assessee to disclose truly and fully all material facts. The asset was actually put to use. Electricity was generated and supplied to the Electricity Company but the payments were received subsequently. Therefore, the assertion of the AO that the asset was not put to use was also factually incorrect. It was lastly contended that the AO was persuaded by the Audit party to issue the notice and that the same would not be valid exercise of power, which was enjoyed by the AO himself. On the other hand, the Revenue's counsel opposed the petition and contended that the assessee having claimed the depreciation in the return, had not in any manner disclosed that the asset in question was never put to use during the relevant period. It was further submitted that the grounds regarding actual use of the asset and the audit objection were never raised before the AO.
Having heard the matter, the HC held that:
++ all material facts were disclosed in the return itself. If the AO was of the opinion that despite the purchase of the machinery, depreciation as claimed was not to be granted for whatever reason, in the original assessment, the same could have been disallowed. In fact, in the original assessment order, the AO disallowed operation of the depreciation claimed by the petitioner and gave reasons for his conclusions. He, however, made no disallowance towards the depreciation claimed by the petitioner. It is not a case where the Revenue could successfully contend that the income chargeable to tax had escaped assessment due to the reason of failure on the part of the assessee to disclose truly and fully all material facts. It was not as if that such claim of depreciation was tucked away somewhere in bulky voluminous return where the AO could, with due diligence, have discovered such claim. The Revenue, therefore, cannot fall back on Explanation 1 of the Proviso of Section 147 also, in this respect. In fact claim of depreciation was examined by the AO and partially disallowed with respect to other assets. we may record that the petitioner had never before the AO contended that the asset was actually put to use. The documents, on the basis of which it is sought to be canvassed before us that there was, in fact, electricity generation during the relevant period, were not placed before the AO either during the original assessment or in response to the notice of reopening. We would, therefore, also even otherwise not examine such factual aspect for the first time in this petition. Be that as it may, on the sole ground that for the reasons noted above, notice for reopening the assessment could not have been validly issued, we are inclined to allow this petition. Accordingly, impugned notice is quashed.
Assessee's petition allowed
JUDGEMENTs
Per : Akil Kureshi, J :
1. The petitioner assessee has challenged notice under Section 148 of the Income Tax Act,1961 ("the Act" for short) dated 29.1.2003.
2. The petition arises in following factual background:-
For the assessment year 1997-98, the petitioner filed its return of income on 29.10.1997 declaring total income of Rs.2,29,260/-. The Assessing Officer scrutinized such return and framed a scrutiny assessment under Section 143(3) of the Act computing total income at Rs.8,35,429/-.
To reopen such scrutiny assessment, Assessing Officer issued notice under Section 148 of the Act. On the request of the petitioner, the Assessing Officer supplied the reasons that he had recorded for reopening the assessment, which read as under:-
"In this case Assessing Officer allowed a depreciation of Rs.38,30,000/- on wind mills which was installed during the month of February/ March 97. On the other side the assessee had failed to show any income derived out of generation and distribution of electricity by utilising wind mills. Since the wind mills were neither utilised for business purpose nor the assessee derived any income out of utilisation of wind mills, the claim of the assessee for depreciation u/s. 32 was not justified. Thus there was a case of excess allowance of depreciation of Rs.38,30,000/-. In view of this fact, I have a reason to believe that there was an escapement of income of Rs.38,30,000/- on a/c of excess grant of depreciation claim."
3. Upon receipt of such reasons, the petitioner raised its objections, vide communication dated 17.11.2003 contending that the notice was illegal and without jurisdiction since there was no escapement of income and further that the assessee had fully and truly disclosed all material facts.
4. The Assessing Officer disposed of such objections vide communication dated 23.1.2004. The petitioner has, therefore, approached this Court.
5. From the record it thus emerges that scrutiny assessment previously framed is sought to be reopened beyond the period of 4 years from the end of the relevant assessment year. The ground on which the Assessing Officer desired to reopen the assessment is that the assessee had purchased wind-mill during the financial year relevant to the assessment year under consideration and claimed depreciation at the appropriate rate. According to the Assessing Officer the petitioner had neither used such wind-mill for its own business purpose nor had generated any electricity and earned income therefrom. In short, the objection of the Assessing Officer was that the claim of depreciation was made without putting the asset to use.
6. In view of the fact that the assessment is sought to be reopened beyond the period of 4 years, the additional requirement flowing from proviso to Section 147 of the Act, namely that the income chargeable to tax escaped assessment, due to the reason of the assessee failing to disclose truly and fully all material facts, must be satisfied. In view of such facts, counsel for the petitioner raised following contentions:-
1). That there was no failure on the part of the assessee to disclose truly and fully all material facts.2). That the asset was actually put to use. Electricity was generated and supplied to the Electricity Company but the payments were received subsequently. Therefore, the assertion of the Assessing Officer that the asset was not put to use is also factually incorrect.3). Counsel lastly contended that the Assessing Officer was persuaded by the Audit party to issue the notice. He contended that the same would not be valid exercise of power, which is enjoyed by the Assessing Officer himself.
7. Learned Counsel for the Revenue on the other hand opposed the petition contending that the assessee having claimed the depreciation in the return, had not in any manner disclosed that the asset in question was never put to use during the relevant period. She further submitted that the grounds regarding actual use of the asset and the audit objection were never raised before the Assessing Officer.
8. From the record, we find that in the return that the petitioner filed, income computed was Rs.2,29,260/-. In separate sheet contending the statement of depreciation, the petitioner had claimed depreciation on various assets including block of building, plant and machinery etc.
9. In particular, the assessee declared the addition in the asset after 20.9.1995 of an asset namely, wind-mill purchased at the cost of Rs.75.50 lakhs. Since such purchase was made after 30.9.1996, the assessee claimed 50% of the depreciation on Rs.38.30 lakhs. Thus all material facts were disclosed in the return itself. if the Assessing Officer was of the opinion that despite the purchase of the machinery, depreciation as claimed was not to be granted for whatever reason, in the original assessment, the same could have been disallowed. In fact, in the original assessment order, the Assessing Officer disallowed operation of the depreciation claimed by the petitioner and gave reasons for his conclusions. He, however, made no disallowance towards the depreciation of Rs.38.30 lakhs claimed by the petitioner.
10. We are of the view that this is not a case where the Revenue could successfully contend that the income chargeable to tax had escaped assessment due to the reason of failure on the part of the assessee to disclose truly and fully all material facts. Return that the petitioner filed runs into barely 3 or 4 pages. It was not as if that such claim of depreciation was tucked away somewhere in bulky voluminous return where the Assessing Officer could, with due diligence, have discovered such claim. The Revenue, therefore, cannot fall back on Explanation 1 of the Proviso of Section 147 of the Act also, in this respect. In fact claim of depreciation was examined by the Assessing Officer and partially disallowed with respect to other assets.
11. In view of the above, conclusion,we are not examining other contentions of the petitioner. Even otherwise we may record that the petitioner had never before the Assessing Officer contended that the asset was actually put to use. in the objection that the petitioner raised to the reasons recorded by the Assessing Officer, no such contention was pressed in service. The documents, on the basis of which it is sought to be canvassed before us that there was, in fact, electricity generation during the relevant period, were not placed before the Assessing Officer either during the original assessment or in response to the notice of reopening. We would, therefore, also even otherwise not examine such factual aspect for the first time in this petition. Be that as it may, on the sole ground that for the reasons noted above, notice for reopening the assessment could not have been validly issued, we are inclined to allow this petition. Accordingly, impugned notice is quashed. Rule is made absolute accordingly. No costs.
IT : Exemption under section 54EC is available even on short-term capital gains calculated as per section 50 on sale of depreciable assets held for more than 36 months
■■■
[2013] 29 taxmann.com 380 (Gujarat)
HIGH COURT OF GUJARAT
Deputy Commissioner of Income-tax, Circle 1(2), Baroda
v.
Himalaya Machinery (P.) Ltd.*
Akil Kureshi and Ms. Sonia Gokani, JJ.
Tax Appeal No. 271 of 2012†
November 27, 2012
Section 54EC read with sections 50 and 48, of the Income-tax Act, 1961 - Capital gains - Not to be charged on investment in certain bonds - Depreciable assets - Assessment year 2003-04 - Whether once there is transfer of long-term capital assets, exemption under section 54EC is available; fact that asset was such on which depreciation was allowed and, therefore, computation of short-term gain would be done as provided under section 50 by applying modifications in sections 48 and 49, would not disentitle same from availability of said exemption - Held, yes [Para 14] [In favour of assessee]
Circulars and Notifications: Circular No. 469, dated 23-9-1986
FACTS
Facts
• The assessee sold depreciable assets held for more than 36 months and calculated short-term capital gains as per section 50.
• The assessee claimed deduction under section 54EC by investing the gain in specified bonds.
• The Assessing Officer disallowed the exemption on the ground that it is available only in respect of long-term capital gain and not on any short-term capital gains.
• On appeal, the Commissioner (Appeals) deleted said addition on the ground that:
♦ The deeming fiction created under section 50 with respect to depreciable assets would be confined for the purpose of mode of computation of capital gains contained in sections 48 and 49 and would not cover the exemption under section 54EC.
♦ The assets transferred were held for more than 36 months and thus, the requirements of section 54EC were fulfilled.
• On appeal, the Tribunal confirmed the decision of the Commissioner (Appeals).
Issue Involved
• Whether exemption under section 54EC is available in respect of short-term capital gain calculated under section 50 on sale of depreciable assets held for more than 36 months?
HELD
• In case of transfer of capital asset forming part of block of assets in respect of which depreciation has been allowed, mode of computation and cost of acquisition shall be as per modifications provided in section 50. Thus, special provision made for computation of capital assets in respect of which depreciation has been allowed, is confined for the purpose of section 50 in relation to sections 48 and 49 only. [Para 12]
• Section 54EC provides for exemption from payment of capital gain subject to condition made therein be satisfied. [Para 13]
• It is true that under section 54EC, exemption would be made available in case of transfer of long-term capital assets. However, once such condition is fulfilled, by virtue of the fact that asset was such on which the depreciation was allowed and, therefore, computation would be done as provided under section 50, by applying modifications in section 48 and section 49 would not change the nature of capital asset or availability of exemption specified under section 54EC. [Para 14]
• Thus, the claim for exemption of section 54EC is valid and order of the Tribunal is to be upheld. [Para 18]
CASE REVIEW
CIT v. Assam Petroleum Industries (P.) Ltd. [2003] 131 Taxman 699 (Gau.) and CIT v. Ace Builders (P.) Ltd. [2006] 281 ITR 210/[2005] 144 Taxman 855 (Bom.) [Para 18] followed.
CASES REFERRED TO
CIT v. ACE Builders (P.) Ltd. [2006] 281 ITR 210/[2005] 144 Taxman 855 (Bom.) (para 4) and CIT v. Assam Petroleum Industries (P.) Ltd. [2003] 131 Taxman 699 (Gau.) (para 15).
K.M. Parikh for the Appellant.
ORDER
Akil Kureshi, J. - Revenue is in appeal against the order of Income Tax Appellate Tribunal ('ITAT' for short) dated 29.11.201. The following question is presented for our consideration:
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in deleting the disallowance of Rs.40,99,947/- u/s. 50 of the Act on account of assessee's claim for exemption u/s. 54EC on gain arising from the sale of depreciable assets being short term capital gain without appreciating that exemption u/s. 54EC was not allowable in the case of assets covered by the provisions of Section 50 of the Act, since these assets are in the nature of short term capital gain in view of C.B.D.T. Circular No. 469 dated 23.9.1986 ?"
The question arises in following factual background:
2. For the Assessment Year 2003-04, the assessee had filed a return of income in which the assessee had claimed short term capital gain of Rs.40,99,947/- arising from the sale of assets included in the block of assets. With respect to such gain, assessee had claimed the exemption u/s. 54EC of the Act, for having made investment in the specified bond.
3. The Assessing Officer previously accepted the assessment u/s. 143(1) of the Act. However, subsequently on the basis that such exemption was not available to the assessee and therefore income chargeable to tax has escaped assessment, issued notice u/s. 148 of the Act of reopening of the assessment. In the assessment framed by the Assessing Officer pursuant to such notice, he disallowed the claim of exemption of the assessee.
4. Assessee carried the matter in Appeal. CIT(Appeals) allowed the appeal holding that deeming fiction created u/s. 50 of the Act with respect to depreciable assets would be confined for the purpose of mode of computation of capital gains contained in Section 48 and 49 of the Act and would not cover the exemption u/s. 54EC of the Act. Finding that assets transferred were held for more than 36 months and that otherwise requirements of Section 54EC were fulfilled, CIT(A) deleted the addition, relying on the decision of Bombay High Court in case of CIT v. ACE Builders (P.) Ltd. [2006] 281 ITR 210/[2005] 144 Taxman 855.
5. Revenue carried the appeal before the Tribunal. Tribunal relying on assessee's own case in the earlier year, confirmed the decision of CIT(Appeals). Tribunal had in such decision relied on judgment of Bombay High Court in case of ACE Builders (P.) Ltd. (Supra). Therefore, Revenue has preferred this appeal.
6. Ld. Counsel for the Revenue vehemently contended that by virtue of Section 50 of the Act, sale of the assets by the assessee would be treated as short-term capital gain. Since the exemption u/s. 54EC of the Act is available only in respect of long-term capital gain, tribunal erred in allowing the benefit to the assessee. Ld. Counsel further submitted that language of Section 50 is unambiguous and any depreciable assets was if sold after 36 months would give rise to the short-term capital gains. In that view of the matter, according to the ld. Counsel, exemption of Section 54EC would not be available.
7. To appreciate the contention we may recapitulate the facts, before adverting to the statutory provisions. The assets in question are certain depreciable assets which formed part of the block assets of the assessee. The assessee had held such assets for a period of more than 36 months. During the year under consideration, assessee had sold such assets and made capital gains. Assessee had invested such amount in the specified bond as provided under section 54EC of the Act. In this factual background, the question that arises is whether the assessee's claim for exemption was valid ? We may peruse the relevant statutory provisions at this stage.
8. Part E of the Chapter IV of the Act pertains to Capital gains. Section 45 is a charging Section under which any profits or gains arising from the transfer of a capital asset effected in the previous year, would be chargeable to income-tax under the head "Capital gains" and shall be deemed to be the income of the previous year in which the transfer took place.
9. Section 48 provides mode of computation. Essentially it is provided that income chargeable under the head "Capital gains" shall be computed, by deducting from the full value of consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely (i) expenditure incurred wholly and exclusively in connection with such transfer; and (ii) the cost of acquisition of the asset and the cost of any improvement thereto.
10. Section 49 of the Act provides for cost with reference to certain modes of acquisition. Sub-section (1) of Section 49 provides for deeming cost of acquisition of capital assets in cases such as (i)on any distribution of assets on the total or partial partition of a Hindu undivided family; (ii) under a gift or will; (iii) by succession, inheritance or devolution etc. In such cases, it is provided that cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be.
11. Section 50 of the Act makes Special provision for computation of capital gains in case of depreciable assets and reads as under:
Notwithstanding anything contained in clause (42A) of Section 2, where the capital asset is an asset forming part of a block of assets in respect of which depreciation has been allowed under this Act or under the Indian Income tax Act, 1922 (11 of 1922) the provisions of sections 48 and 49 shall be subject to the following modifications :-
(1) where the full value of the consideration received or accruing as a result of the transfer of the asset together with the full value of such consideration received or accruing as a result of the transfer of any other capital asset falling within the block of the assets during the previous year, exceeds the aggregate of the following amount, namely -
(i) expenditure incurred wholly and exclusively in connection with such transfer or transfers;
(ii) the Written down value of the block of assets at the beginning of the previous year; and
(iii) the actual cost of any asset falling within the block of assets acquired during the previous year,
Such excess shall be deemed to be the capital gains arising from the transfer of short-term capital assets;
(2) where any block of assets ceases to exist as such, for the reason that all the assets in the block are transferred during the previous year, the cost of acquisition of the block of assets shall be the written down value of the block of assets at the beginning of the previous year, as increased by the actual cost of any asset falling within that block of assets, acquired by the assessee during the previous year and the income received or accruing as a result of such transfer or transfers shall be deemed to be the capital gains arising from the transfer of short-term capital assets.]
Upon perusal of Section 50 of the Act, it can be seen that in case of capital assets forming the part of block of assets in respect of which depreciation was allowed, provision of Section 48 and 49 shall apply subject to such modifications as are provided in clause (1) and (2) of Section 50 of the Act.
12. It would thus emerge that in case not falling under section 50 of the Act for computation of capital gains in case of transfer of the asset, mode of computation and the cost of acquisition of asset would be worked out by applying the provisions as contained in Section 48 and Section 49 respectively. However, in case of transfer of capital asset, forming part of block of assets in respect of which depreciation has been allowed, mode of computation and cost of acquisition shall be as per modifications provided in Section 50 of the Act. Thus, Special provision made for computation of capital assets in respect of which depreciation has been allowed, is confined for the purpose of Section 50 in relation to Section 48 and Section 49 only.
13. With this background, we may take notice of Section 54EC of the Act. Section 54EC pertains to Capital gain not to be charged on investment in certain bonds, relevant portion of which are as under:-
54EC. (1) Whether the capital gain arises from the transfer of a long-term capital asset (the capital asset to transferred being hereafter in this section referred to as the original asset) and the assessee has, at any time within a period of six months after the date of such transfer, invested the whole or any part of capital gains in the long-term specified asset, the capital gain shall be dealt with in accordance with the following provisions of this Section, that is to say -
(a) if the cost of the long-term specified asset is not less than the capital gain arising from the transfer of the original asset, the whole of such capital gain shall not be charged under Section 45;
(b) if the cost of the long-term specified asset is less than the capital gain arising from the transfer of the original asset, though much of a capital gain as bears to the whole of the capital gain the same proportion as the cost of acquisition of the long term specified asset bears to the whole of the capital gain, shall not be charged under section 45 :
Section 54EC thus provides for exemption from payment of capital gain subject to condition made therein be satisfied. Ld. Counsel for the Revenue would refer to the beginning words of sub-section (1) of Section 54EC which refer to capital gain arising from the transfer of a long-term capital asset and would contend that by virtue of Section 50 of the Act, such exemption would not be available in the cases of transfer of assets on which depreciation has been allowed.
14. We are afraid that such an interpretation would not be warranted. It is true that under section 54EC of the Act, exemption would be made available in case of transfer of long term capital assets. However, once such condition is fulfilled, by virtue of the fact that asset was such on which the depreciation was allowed and therefore, computation would be done as provided u/s. 50 of the Act by applying modifications in Section 48 and Section 49 would not change the nature of capital asset or availability of exemption specified under Section 54EC of the Act.
15. We may notice that Gauhati High Court in case of CIT v. Assam Petroleum Industries (P.) Ltd. [2003] 131 Taxman 699 had taken a similar view. In such decision, Court was concerned with the sale of an asset covered under section 50 of the Act and exemption from payment of capital gain of Section 54E of the Act. High Court ruled in favour of Assessee, making following observations :
"The essential requirements or ingredients to attract the provisions of Section 54E are (I) the capital gains has arisen from the transfer of a long term capital asset and not from any short term capital asset, (ii) the assessee has, within period of six months after the date of transfer invested or deposited any part or whole of the net consideration in any specified asset, if these essential conditions are complied by the assessee then he would be entitled for the exemption as specified under Section 54E of the Act, 1961. the assessee has to satisfy that the transfer in question of the asset is that of a long term capital asset. Secondly, that the amount received by him towards the transfer of long term capital asset has been invested or deposited in any specified asset which are mentioned in Section 54E partially or fully within a period of six months from the date of transfer. If these two conditions are satisfied by the assessee he shall be entitled for the benefit as provided under Section 54E of the Act. Section 54E is an independent provision, which is not controlled by Section 50 of the Act.
Section 50 is a special provision where the mode of computation of capital gains is substituted if the assessee has claimed the depreciation on capital assets. Section 50 nowhere says that depreciated asset shall be treated as short-term asset, whereas Section 54E has an application where long term capital asset is transferred and the amount received is invested or deposited in the specified assets as required under Section 54E. For application of section 54E the necessary pre-requisite condition and enquiry would be, whether the assessee has transferred long-term capital asset and whether the consideration so received is invested or deposited within the time limit in specified asset. Capital gain may have been received by the assessee on depreciable assets, if the conditions necessary under Section 54E are complied with by the assessee, he will be entitled to the benefit envisaged in Section 54E of the Income Tax Act.
16. We may notice that Section 54E of the Act also made similar provision of exemption of capital gain on transfer of capital assets along the line of Section 54EC of the Act with which we are concerned.
17. The decision of Gauhati High Court in case of Commissioner of Income Tax (Supra) was taken note of and followed by the Bombay High Court in case of ACE Builders (P.) Ltd. (Supra) in the context of assets which was covered under Section 50 of the Act. The claim of assessee was exempted u/s 54E of the Act was upheld the Bombay High Court are as under :
25. In our opinion, the assessee cannot be denied exemption under section 54E, because, firstly, there is nothing in Section 50 to suggest that the fiction created in Section 50 is not only restricted to Section 48 and 49 but also applies to other provisions. On the contrary, Section 50 makes it explicitly clear that the deemed fiction created in sub-sections (1) and (2) of Section 50 is restricted only to the mode of computation of capital gains contained in section 48 and 49. Secondly, it is well established in law that a fiction created by the Legislature has to be confined to the purpose for which it is created. In this connection, we may refer to the decision of the apex court in the case of State Bank of India v. D. Hanumantha Rao reported in [1998] 6 SCC 183. In that case, the Service Rules framed by the bank provided for granting extension of service to those appointed prior to July 19, 1969. The respondent therein who had joined the bank of July 1, 1972, claimed extension of service because he was deemed to be appointed in the bank with effect from October 26, 1965, for the purpose of seniority, pay and pension on account of his past service in the Army as Short Service Commissioned Officer. In that context, the apex court has held that the legal friction created for the limited purpose of seniority, pay and pension can not be extended for other purposes. Applying the ratio of said judgment, we are of the opinion that this fiction created under Section 50 is confined to the computation of capital gains only and can not be extended beyond that, thirdly Section 54E does not make any distinction between depreciable asset and non-depreciable asset and, therefore, the exemption available to the depreciable asset under Section 54E can not be denied by referring to the fiction created u/s.50. Section54E specifically provides that where capital gain arising on transfer of a long term capital asset is invested or deposited (whole or any part of the net consideration) in the specified asset, the assessee shall not be charged to capital gains therefore, the exemption under Section 54E of the income tax Act can not be denied to the assessee on account of the fiction created in Section 50.
26. It is true that Section 50 is enacted with the object of denying multiple benefits to the owners of depreciable assets. However, that restriction is limited to the computation of capital gains and not to the exemption provisions. In the other words, where the long term capital assets has availed of depreciation, then the capital gain has to be competed in the manner prescribed under section 50 and the capital gains tax will be charged as if such capital gains has arisen out of a short-term capital asset but if such capital gain is invested in the manner prescribed in section 54E, then the capital gain shall not be charged under section 45 of the Income-tax Act. To put it simply the benefit of Section 54E will be available to the assessee irrespective of the fact that the computation of capital gains is done either u/s. 48 and 49 or u/s. 50. The contention of the revenue that by amendment to Section 50 the long term capital assets has been converted into a short-term capital assets is also without any merits. As stated hereinabove, the legal fiction created by the statute is to deem the capital gain as a short-term capital gain and not to deem the asset as short-term capital asset. Therefore, it cannot be said that Section 50 converts a long term capital assets into a short-term capital asset.
18. Our view is thus supported by two decisions of different High Courts. Independently also, we are inclined to believe that assessee's claim for exemption of Section 54EC was valid and therefore, rightly upheld by the Tribunal. Hence, this Tax Appeal is dismissed.
IT/ILT : Deduction under Chapter VI-A cannot be allowed on enhancement made as per TPO's order
■■■
[2013] 29 taxmann.com 376 (New Delhi - Trib.)
IN THE ITAT NEW DELHI BENCH 'I'
Assistant Commissioner of Income-tax, Circle-2(1)
v.
Bechtel India (P.) Ltd.*
G.D. AGRAWAL, VICE-PRESIDENT
AND A.D. JAIN, JUDICIAL MEMBER
IT APPEAL NOS. 4338, 4339 & 4573 (DELHI) OF 2011
CROSS-OBJECTION NO. 374 (DELHI) OF 2011
[ASSESSMENT YEARs 2004-05 AND 2005-06]
DECEMBER 21, 2012
Section 92C, read with section 80HHE, of the Income-tax Act, 1961 - Transfer pricing - Computation of arm's length price - Comparables and adjustments - Assessment year 2004-05 - Whether proviso to section 92C(4) prohibits any deduction under Chapter VI-A to be allowed on enhancement made as per TPO's order - Held, yes - Whether therefore, no effect is to be given to addition made by Assessing Officer as per TPO's order while computing deduction under Chapter VI-A - Held, yes [Para 14] [In favour of assessee]
Section 80HHE of the Income-tax Act, 1961 - Deductions - Profits and gains from export of computer software - Assessment year 2004-05 - Whether reimbursement of expenses are to be reduced from total turnover for purpose of computing deduction under section 80HHE - Held, yes [Para 12] [In favour of assessee]
FACTS
• The assessee-company was engaged in the business of designing engineering projects.
• It had entered into international transaction with its AEs.
• The TPO had made certain additions in relation to said transaction.
• Based on addition made by TPO the Assessing Officer recomputed the deduction permissible under section 80HHE by increasing the total turnover; (i) by the amount of adjustment made by the TPO, and (ii) reimbursement of the expenses.
• On appeal, the Commissioner (Appeals) allowed the relief to the assessee.
• On revenue's appeal:
HELD
Issue relating to reimbursement of expenses
• As regards the issue relating to reimbursement of the expenses, this issue is covered in favour of the assessee by the decision of the ITAT in assessee's own case for the assessment years 2001-02 and 2002-03 in IT Appeal Nos. 4278 (Delhi) of 2005 and 1803 (Delhi) of 2006 wherein the Tribunal held that receipts on account of reimbursement of expenses cannot be included in total turnover for the purpose of computing deduction under section 80HHE. [Para 11]
• Respectfully following the above decision the finding of the Commissioner (Appeals) with regard to reduction of reimbursement of expenses from the total turnover is to be upheld. [Para 12]
Issue relating to addition made by Assessing Officer in total turnover by amount of adjustment made as per TPO's order
• From the proviso to section 92C(4), it is evident that no deduction in Chapter VI-A is to be allowed in respect of the income which is enhanced after the computation of income in the said section. Thus, the assessee is not entitled for deduction under Chapter VI-A in respect of the addition made as per the TPO's order. Despite the above specific provision, the Assessing Officer enhanced the total turnover by the addition made as per the TPO's order, which has the effect of reducing the deduction under section 80HHE. However, the finding of the TPO is that the international transaction of the assessee is not at arm's length and, therefore, by determining the arm's length price of the international transaction, he proposed the addition of Rs. 6,93,21,169. Though while considering other ground in the revenue's appeal this matter is set aside to the file of the Assessing Officer, however, even if some addition is required to be made by determining the ALP, the question is whether the same will have the effect of enhancing the total turnover. If at all the effect is to be given to the enhancement of income made by the TPO, it will have the impact of increasing the assessee's export turnover, then total turnover and finally, the total income. If all three are increased, obviously, the deduction claimed by the assessee under Chapter VI-A would increase. The proviso to section 92C(4) prohibits any deduction under Chapter VI-A to be allowed on the enhancement made as per the TPO's order. Therefore, the only logical conclusion that can be drawn is that no effect is to be given to the addition made by the Assessing Officer as per the TPO's order while computing deduction under Chapter VI-A. The Assessing Officer's view cannot be accepted that by the enhancement of income as per the TPO's order, only the total turnover would be increased and not the export turnover or the total income. In view of above, the order of the Commissioner (Appeals) on this point is also upheld. [Para 14]
Peeyush Jain for the Appellant. Rahul Mitra, Sandeep Chufla, Sandeep Rastogi and Ms. Neha Arora for the Respondent.
ORDER
ITA No.4338/Del/2011
1. This appeal by the Revenue is directed against the order of learned CIT(A)-XX, New Delhi dated 29th July, 2011 for the AY 2004-05.
2. Ground No.1 of the Revenue's appeal reads as under:-
"The ld.CIT(A) has erred on facts and in law in deleting addition of Rs. 6,93,21,169/- made on account of Arm's Length Price."
3. Though it was the Revenue's appeal, at the outset, it was stated by the learned counsel for the assessee that the assessee derives income from the business of designing engineering projects. That during the year under consideration, the Transfer Pricing Officer (TPO) has considered the assessee to be in the business of IT/IT-enabled services and accordingly, the assessee's transactions with the AE were benchmarked for determining the arm's length price. That the learned CIT(A) accepted the assessee's contention that the assessee derives income from engineering, drawing and design services and accordingly, he accepted that the assessee's international transactions were at arm's length price. The learned counsel submitted that in AY 2008-09, the TPO himself accepted that the assessee company is involved in the business of engineering, drawing and designing services. He, however, fairly pointed out that the CIT(A), while accepting the comparables given by the assessee in the field of engineering, drawing and design services, has not allowed any opportunity to the AO/TPO to rebut the comparables given by the assessee. He, therefore submitted that either the order of the learned CIT(A) should be sustained or the matter can be set aside to his file or even to the file of the TPO.
4. The learned DR, on the other hand, stated that on the facts of the assessee's case, it would be fair if the matter is set aside to the file of the TPO and he is directed to readjudicate the issue in the light of his own order for AY 2008-09.
5. In view of the above submission of both the parties, we set aside the orders of the authorities below on this point and restore the matter to the file of the Assessing Officer and direct him to again refer the matter to the TPO for determining the arm's length price afresh in the light of his order for AY 2008-09 treating the assessee company as involved in the business of engineering, design and drawing. Needless to mention that AO/TPO while readjudicating the issue will allow adequate opportunity of being heard to the assessee.
6. Ground No.2 of the Revenue's appeal reads as under:-
"The ld.CIT(A) has erred on facts and in law in deleting disallowance of Rs. 11,95,737/- on account of deduction u/s 80HHE of the I.T. Act."
7. At the time of hearing before us, it was pointed out by the learned counsel for the assessee that the Assessing Officer recomputed the deduction permissible under Section 80HHE by increasing the total turnover - (i) by the amount of adjustment made by the TPO and (ii) reimbursement of the expenses. He submitted that the TPO has enhanced the value of international transactions by Rs. 6,93,21,169/-. Therefore, if at all it was to be considered, it should have been considered by increasing the assessee's income and the export turnover. The total turnover cannot be increased without increasing the export turnover. The adjustment made by the TPO was in relation to the value of the international transactions, therefore, any increase therein will first increase the export turnover, then the total turnover and finally, the total income. The Assessing Officer cannot simply increase the total turnover by the said amount. He fairly pointed out that Section 92C(4) provides that no deduction under Chapter VI-A shall be allowed in respect of the amount of income by which the total income is enhanced as per the computation under Section 92C. Therefore, the Assessing Officer is not at all justified in enhancing the total turnover by the adjustment made under Section 92C. With regard to the increase of total turnover by reimbursement of expenses, it was pointed out by the learned counsel that this issue is covered in favour of the assessee by the decision of the Tribunal in assessee's own case for AY 2001-02 & 2002-03 vide ITA Nos.4278/Del/2005 and 1803/Del/2006. He, therefore, submitted that the order of the learned CIT(A) on this point is in accordance with law and therefore, the same should be sustained.
8. The learned DR, on the other hand, relied on the order of the Assessing Officer.
9. We have carefully considered the arguments of both the sides and perused the material placed before us. We find that the Assessing Officer, while computing deduction under Section 80HHE, increased the total turnover of the assessee. The working of the Assessing Officer under Section 80HHE is reproduced below for ready reference:-
"The deduction u/s 80HHE of the Act is recalculated as under.
| Export Turnover | Rs.42,41,01,636 | ||||
| Total turnover as per | |||||
| Form 10CCAF | 45,86,53,083 | ||||
| Add : | Reimbursement of expenses | 5,31,84,493 | |||
| As per TPO order | 6,93,21,169 | ||||
| Rs.58,11,58,745 | |||||
| Profit of the Business | Rs. 1,77,44,371 | ||||
| Deduction u/s 80HHE of the Act - 30% of Rs.1,77,44,37 x | Rs.58,11,58,745 | ||||
| = 30% of 1,32,54,313 = Rs.39,76,294." | |||||
10. From the above, it is evident that the Assessing Officer enhanced the total turnover by - (i) reimbursement of expenses and (ii) by the income enhanced by the TPO. The learned CIT(A) allowed the relief to the assessee, therefore, this appeal by the Revenue.
11. With regard to reimbursement of the expenses, we find that this issue is covered in favour of the assessee by the decision of ITAT in assessee's own case for AY 2001-02 & 2002-03 (supra) wherein the ITAT held as under:-
"13. We have considered the rival submissions and also perused the relevant material on record. It is observed that the reimbursement of expenses actually incurred by the assessee company on behalf of its clients was claimed by it from them as per the agreement and even the bills for such reimbursement were separately raised by it on the concerned customers as is evident from the details furnished by the learned counsel for the assessee at page Nos.25 to 27 of his paper book. The reimbursement so claimed was only to the extent of the expenses actually incurred by the assessee company on behalf of its clients and it is not even the case of the Revenue that any profit element was involved in such reimbursements. In the case of CIT v. Industrial Engineering Projects Pvt. Ltd. (supra), Hon'ble Delhi High Court has held relying on the decision of Hon'ble Supreme Court in the case of Tejaji Farasram Kharawalla (supra) that reimbursement of expenses can under no circumstances be regarded as a revenue receipt.
14. In the case of CIT v. Sudershan Chemical Industries Limited (supra), Hon'ble Bombay High Court has an occasion to consider a similar issue in the context of computation of deduction u/s 80HHC and it was held therein that the relevant provisions of Section 80HHC clearly show that the total turnover includes anything which has nexus with sale proceeds and excludes everything which has no such nexus. It was further held that turnover should be restricted only to such receipts which have an element of profit in it. As the provisions of Section 80HHC relevant in this context are analogous to the provisions of Section 80HHE as pointed out by the learned counsel for the assessee, we are of the view that the ratio of the decision of the Hon'ble Bombay High Court in the case of Sudershan Chemical Industries Limited (supra) is equally applicable to the issue involved in the present appeal and supports the case of the assessee. Keeping in view the said decision as well as the other judicial pronouncements referred to hereinabove and considering all the facts of the case, we hold that there was no infirmity in the impugned order of the learned CIT(A) in directing the AO not to include the receipts by the assessee on account of reimbursement of expenses in its turnover for the purpose of computing deduction u/s 80HHE. The same is, therefore, upheld and ground No.2 of the Revenue's appeal is dismissed."
12. Respectfully following the above decision of ITAT, we uphold the finding of the learned CIT(A) with regard to reduction of reimbursement of expenses from the total turnover.
13. With regard to addition made by the Assessing Officer in the total turnover by the amount of adjustment made as per TPO's order, we find that Section 92C(4) reads as under:-
"(4) Where an arm's length price is determined by the Assessing Officer under sub-section (3), the Assessing Officer may compute the total income of the assessee having regard to the arm's length price so determined :
Provided that no deduction under section 10A [or section 10AA] or section 10B or under Chapter VI-A shall be allowed in respect of the amount of income by which the total income of the assessee is enhanced after computation of income under this sub-section :"
14. From the proviso to Section 92C(4), it is evident that no deduction in Chapter VI-A is to be allowed in respect of the income which is enhanced after the computation of income in the said Section. Thus, the assessee is not entitled for deduction under Chapter VI-A in respect of the addition made as per the TPO's order. Despite the above specific provision, the Assessing Officer enhanced the total turnover by the addition made as per the TPO's order, which has the effect of reducing the deduction under Section 80HHE. However, the finding of the TPO is that the international transaction of the assessee is not at arm's length and, therefore, by determining the arm's length price of the international transaction, he proposed the addition of Rs. 6,93,21,169/-. Though while considering ground No.1 of the Revenue's appeal we have already set aside this matter to the file of the Assessing Officer, however, even if some addition is required to be made by determining the ALP, the question is whether the same will have the effect of enhancing the total turnover. If at all the effect is to be given to the enhancement of income made by the TPO, it will have the impact of increasing the assessee's export turnover, then total turnover and finally, the total income. If all three are increased, obviously, the deduction claimed by the assessee under Chapter VI-A would increase. The proviso to Section 92C(4) prohibits any deduction under Chapter VI-A to be allowed on the enhancement made as per the TPO's order. Therefore, the only logical conclusion that can be drawn is that no effect is to be given to the addition made by the Assessing Officer as per the TPO's order while computing deduction under Chapter VI-A. The Assessing Officer's view cannot be accepted that by the enhancement of income as per the TPO's order, only the total turnover would be increased and not the export turnover or the total income. In view of the above, we uphold the order of learned CIT(A) on this point also. Accordingly, ground No.2 of the Revenue's appeal is rejected.
C.O. No.374/Del/2011
15. At the time of hearing before us, it is stated by the learned counsel that in the cross-objection, the assessee has only supported the order of learned CIT(A) and no further relief is claimed, therefore, the assessee's cross-objection is treated as infructuous and dismissed as such.
ITA No.4339/Del/2011 & ITA No.4573/Del/2011
16. The only ground raised in the appeal of the Revenue reads as under:-
"The ld.CIT(A) has erred on facts and in law in restricting addition to Rs. 4,58,56,978/- as against the addition of Rs. 9,36,70,152/- made on account of Arm's Length Price."
17. In its appeal, the assessee has challenged the addition sustained by the learned CIT(A) i.e. Rs. 4,58,56,978/-. At the time of hearing before us, both the parties agreed that the facts of the year under consideration are identical to AY 2004-05 and, therefore, whatever view is taken in AY 2004-05 would be squarely applicable for AY 2005-06.
18. We have already considered the issue in AY 2004-05 in detail above and for the detailed discussion therein, we set aside the orders of the authorities below and restore the matter to the file of the Assessing Officer to be readjudicated as per our direction in AY 2004-05. Needless to mention that AO/TPO shall allow adequate opportunity of being heard to the assessee.
19. In the result, Revenue's appeal for AY 2004-05 is deemed to be partly allowed, assessee's cross-objection for AY 2004-05 is dismissed and Revenue's appeal as well as assessee's appeal for AY 2005-06 are deemed to be allowed for statistical purposes.
IT : Under section 131 and in particular under sub-section (1A) thereof, mere suspicion that income is concealed or is likely to be concealed is sufficient to trigger the exercise of powers under section 131(1) for making any inquiry or investigation relating thereto. By contrast, search and seizure authorization under section 132(1) of the Act can be granted only on satisfaction that in consequence of information in possession of the competent authority has reason to believe that the circumstances mentioned in clauses (a) to (c) to sub-section (1) have arisen
FACTS
• Petitioner No. 1 - a company. Petitioner No. 2 - Director of Petitioner No. 1 company.
• Company decided to enter into a new venture of manufacturing and selling wholesale jewellery of 22 carat gold to jewellery show rooms situated across the country.
• For the purpose of such venture, the petitioner was required to prepare sample jewellery and exhibit them to different showroom owners doing the business of retail selling of jewellery so that the petitioners could get bulk orders from such jewellers.
• To be able to prepare such large collection of sample jewellery, the Company required sizeable quantity of gold weighing nearly 25 kilos.
• Since purchasing such gold would have required a huge capital investment on the part of the Company, the petitioners contacted one Meghji Girdhar HUF (hereinafter to be referred to as 'MG-HUF') to take such quantity of gold on lease to be used as stock in trade of the Company.
• The lease agreement was entered into on 14th June 2012, under which, according to the petitioners, petitioner No.1 Company received 25 kilos of 24 carat gold from MG-HUF on lease at the rate of 1.5% per annum on the valuation of the gold given on lease, the valuation to be done as on 31st March of every year.
• Such gold was thereafter, distributed to different goldsmiths engaged in the activity of preparing gold ornaments. Since the gold in question was of 24 carat purity, it required mixture of alloys to convert into 22 carat purity before ornaments could be made.
• Such addition of alloys was to be done by the goldsmiths. As per the petitioners, out of the total 25 kilos of gold, 22.038 kilos was thus distributed for preparation of different shape of ornaments.
• After adding alloys, the gold ornaments weighing 23955.390 grams of 22 carat was received back by the petitioners from the goldsmiths. Out of such jewellery, petitioner No.2 along with four other persons, who were either office bearers or employees of the Company or relative of petitioner No.2 decided to travel from Ahmedabad to Chennai carrying such gold jewellery for showing to retail outlet owners at Chennai, hoping to get bulk orders in future.
• They were carrying gold ornaments weighing total 23915.800 grams. At the Airport, the security authorities detected such large quantity of gold ornaments in possession of petitioner No.2 and the co-passengers.
• They, therefore, alerted the Income Tax officials who were present at the Airport.
• When the flight landed at Chennai, all the five passengers were detained. Their statements were recorded.
• Simultaneously, inquiries were also conducted at the business premises of petitioner No.1 company. Statements of various persons were recorded. Income Tax Authorities also carried out inquiries with Karta of MG-HUF at Neemuch. On the basis of such materials collected and the survey report received by the Chennai Officials, search authorization was issued.
• Pursuant to such authorization, the respondents seized the entire quantity of gold jewellery under a seizure panchnama dated 26th July 2012.
• The petitioners made a detailed representation dated 27.7.2012 to the respondents contending, inter alia, that the gold jewellery consists of stock in trade of petitioner No.1 company. In view of section 132 of the Act, in any case, such stock in trade cannot be seized. The same may, therefore, be released. Such request, however, was rejected by the respondents by the impugned order dated 10.8.2012.
• The petitioners have, therefore, filed the present petition challenging the very validity of the search and seizure operation as also the order passed by the respondents rejecting the request of the petitioners to release gold jewellery which, according to them, was the stock in trade.
HELD
• Under section 131 and in particular under sub-section (1A) thereof, mere suspicion that income is concealed or is likely to be concealed is sufficient to trigger the exercise of powers under section 131(1) for making any inquiry or investigation relating thereto.
• By contrast, search and seizure authorization under section 132(1) of the Act can be granted only on satisfaction that in consequence of information in possession the competent authority has reason to believe that the circumstances mentioned in clauses (a) to (c) to sub-section (1) have arisen.
• In particular, clause (c) with which we are concerned, requires that the reason to believe should be that person is in possession of the money, bullion, jewellery or other valuable article or thing which represents either wholly or partly income or property which has not been or would not be disclosed for the purpose of the Act.
• The onus placed on the competent authority to arrive at a satisfaction with respect to above factors thus is much greater than one required for exercise of powers under sub-section (1A) of section 131 of the Act.
• The record shows that petitioner No.2 along with co-passengers was carrying gold ornaments along with the certificate issued by petitioner No.1 Company, that such gold ornaments were stock in trade of the Company, that such ornaments were being carried to Chennai and Kolkata for showing samples to the prospective customers.
• Detailed statement of petitioner No.2, one of the Directors of petitioner No.1 Company was recorded at Chennai itself. In such statement, he at the very outset, gave the version that 25 kilos of gold was received by petitioner No.1 Company from MG-HUF.
• Statements of various goldsmiths which were recorded by the Income Tax Authorities also supported the version of the petitioners. The records and the books of accounts maintained by petitioner No.1 Company also matched this version. Vouchers were maintained in detail evidencing the outgoing gold to different goldsmiths and the incoming of the duly prepared gold ornaments from such gold so distributed. Each time, 24 carat gold was shown to have been given, the ornaments were of 22 carat gold by adding necessary quantity of alloys. The entries of gold distributed to various goldsmiths matched perfectly with the entries of gold ornaments received from such persons after adding alloys for conversion of gold from 24 carat to 22 carat. The so called discrepancies pointed out by the Revenue in such documents really do not exist.
• Respondents fail to notice that the gold ornaments would weight marginally more than the weight of gold from which they are made due to addition of alloys. They also failed to see that such increase in weight was uniform in all cases. Accounts were also maintained regarding labour charges to be paid to different agencies.
• It can therefore not be stated that there was sufficient information in possession of the Director of Income Tax to have reason to believe that such jewellery had not been or would not be disclosed for the purpose of the Act.
■■■
[2013] 29 taxmann.com 299 (Gujarat)
HIGH COURT OF GUJARAT
LKS Bullion Import & Export (P.) Ltd.
v.
Director General of Income-tax
AKIL KURESHI AND Ms. HARSHA DEVANI, JJ.
SPECIAL CIVIL APPLICATION NOS. 11593 and 11281 OF 2012
OCTOBER 30, 2012
S.N. Soparkar and P.A. Mehd for the Petitioner. M.R. Bhatt and Mrs. Mauna M. Bhatt for the Respondent.
JUDGMENT
Akil Kureshi, J. - Rule. Learned advocate Mrs. Mauna Bhatt waives service of rule on behalf of the respondents.
2. Petitioners have challenged the validity of search and seizure operations initiated by respondents against petitioner No. 1 Company. The petitioners have also prayed for quashing of order dated 10.8.2012 as at Annexure O to the petition, under which the request of the petitioners for release of gold ornaments, being stock in trade came to be rejected by the Deputy Director of Income Tax, Chennai.
3. The petition arises in following factual background.
4. Petitioner No. 1 is a company. Petitioner No. 2 is its Director. According to the petitioners, the Company is engaged in the business of wholesale trading in bullion since over 10 years. In the recent past, the Company decided to enter into a new venture of manufacturing and selling wholesale jewelery of 22 carat gold to jewelery show rooms situated across the country. For the purpose of such venture, the petitioner was required to prepare sample jewelery and exhibit them to different show-room owners doing the business of retail selling of jewelery so that the petitioners could get bulk orders from such jewelers. To be able to prepare such large collection of sample jewelery, the Company required sizeable quantity of gold weighing nearly 25 kilos. Since purchasing such gold would have required a huge capital investment on the part of the Company, the petitioners contacted one Meghji Girdhar HUF (hereinafter to be referred to as 'MG-HUF') to take such quantity of gold on lease to be used as stock in trade of the Company. It is the case of the petitioners that the said MG-HUF is engaged in the business of leasing out large quantity of gold which it owns. The Directors of the petitioner Company were acquainted with the members of MG-HUF. It was agreed between the parties that 25 kilos of 24 carat gold would be leased to petitioner No. 1 Company on agreed terms and conditions. The lease agreement was entered into on 14th June 2012, under which, according to the petitioners, petitioner No. 1 Company received 25 kilos of 24 carat gold from MG-HUF on lease on rent at the rate of 1.5% per annum on the valuation of the gold given on lease, the valuation to be done as on 31st March of every year. Such gold was leased for a minimum period of one year and could not be returned before such period unless the lessor agreed. It is also the case of the petitioners that the gold was handed over to the petitioners at Ahmedabad on 14th June 2012 by and in presence of karta of the family MG-HUF Shri Gunwantlal Godawat and his son Ravindra Godawat. It is also the case of the petitioners that such gold was thereafter, distributed to different goldsmiths engaged in the activity of preparing gold ornaments. Since the gold in question was of 24 carat purity, it required mixture of alloys to convert into 22 carat purity before ornaments could be made. Such addition of alloys was to be done by the goldsmiths. As per the petitioners, out of the total 25 kilos of gold, 22.038 kilos was thus distributed for preparation of different shape of ornaments. After adding alloys, the gold ornaments weighing 23955.390 grams of 22 carat was received back by the petitioners from the goldsmiths. Out of such jewelery, petitioner No. 2 along with four other persons, who were either office bearers or employees of the Company or relative of petitioner No. 2 decided to travel from Ahmedabad to Chennai carrying such gold jewelery for showing to retail outlet owners at Chennai, in the process hoping to get bulk orders in future.
5. What happened hereafter is more or less undisputed. On 25.7.2012, petitioner No. 2 along with four other co-passengers were to board Ahmedabad- Chennai Spicejet flight SG 281 with the scheduled departure time of 5.50 a.m. They were carrying gold ornaments weighing total 23915.800 grams. At the Airport, the security authorities detected such large quantity of gold ornaments in possession of petitioner No. 2 and the co-passengers. They, therefore, alerted the Income Tax officials who were present at the Airport. The Income Tax Authorities, however, did not detain petitioner No. 2 or any other co-passengers. While the passengers were mid-air, Income Tax Authorities started inquiring into the source of the gold. When the flight landed at Chennai, all the five passengers were detained. Their statements were recorded. Simultaneously, inquiries were also conducted at the business premises of petitioner No. 1 company. Statements of various persons were recorded. Income Tax Authorities also carried out inquiries with Karta of MG-HUF at Neemuch. On the basis of such materials collected and the survey report received by the Chennai Officials, search authorization was issued. For such purpose, Deputy Director of Income Tax (Investigation), Air Intelligence Unit, Chennai recorded a satisfaction note on 26th July 2012. Such satisfaction note was placed before the Additional Director of Income Tax, Investigation, Chennai who placed his notings on the same date agreeing that warrant of authorization under section 132 of the Income Tax Act ('the Act' for short) be issued and the gold jewelery be seized. The entire record was thereafter placed before the DGIT(Invest.), Chennai who approved the proposed actions. Pursuant to such authorization, the respondents seized the entire quantity of gold jewelery under a seizure panchnama dated 26th July 2012. The petitioners made a detailed representation dated 27.7.2012 to the respondents contending, inter alia, that the gold jewelery consists of stock in trade of petitioner No. 1 company. In view of section 132 of the Act, in any case, such stock in trade cannot be seized. The same may, therefore, be released. Such request, however, was rejected by the respondents by the impugned order dated 10.8.2012. The petitioners have, therefore, filed the present petition challenging the very validity of the search and seizure operation as also the order passed by the respondents rejecting the request of the petitioners to release gold jewelery which, according to them, was the stock in trade.
6. The case of the Department, on the other hand, is that petitioner No. 1 along with co-passengers was carrying gold jewelery without proper documents. Statements of petitioner No. 2 and others were recorded on 25.7.2012. Statement of karta of MG-HUF, Shri Gunwantlal Godawat was also recorded on 25.7.2012. Survey reports were received from Ahmedabad and Neemuch authorities of Income Tax. On the basis of such statements recorded and the survey reports received, large number of discrepancies were noticed in the theory of the gold ornaments being prepared from the gold received by the petitioners from MG-HUF. From the affidavits filed on behalf of respondent Nos.1 to 3 dated 18th September 2012 and by respondent No. 5 dated 14th September 2012, we notice that principally the case of the Department is that agreement dated 14th June 2012 between MG-HUF and petitioner NO. 1 Company does not inspire confidence since it is undated, that the agreement only records that gold shall be delivered, means, at the time of execution of the agreement, the gold was not actually delivered, the gold was handed over without any security, no witnesses have signed the agreement, the rate of return is extremely low at 1.5% per annum, there is nothing to connect the gold from which ornaments were prepared to the gold allegedly possessed by MG-HUF and that the original lease deed was found in the possession of the lessee and not the lessor. On such basis, it is contended that MG-HUF has only provided an entry of having supplied the gold. The case of the Department also is that the stock statement of books of petitioner No. 1 are not reliable. The seized gold ornaments, therefore, cannot be treated as stock in trade. It is the case of the Department that the vouchers prepared by petitioner No. 1 Company for handing over the gold to the goldsmiths do not carry the signatures of the recipients. There are other anomalies with respect to the quantity of gold handed over and received back as also with respect to labour charges paid, inward and outward registers do not match and only 22 kilos out of total 25 kilos of gold was used for ornaments and balance of the gold was not physically found during the survey. Principally on such basis, the respondents have sought to oppose the petition contending that after sufficient material was available at the command of the competent authority, satisfaction note was prepared suggesting authorization of search and seizure. Such satisfaction note was perused and approved by the higher authorities as required, only upon which search authorization was issued.
7. Learned Senior Advocate Shri Soparkar for the petitioners vehemently contended that the requirements of section 132(1) of the Act were not satisfied. The authority could not have formed a belief that the person in possession of jewelery had not or would not disclose it for the purpose of the Act. He submitted that the entire stock was duly reflected in the books maintained by petitioner No. 1 Company. Detailed vouchers were prepared evidencing the handing over of different quantities of gold to different goldsmiths for preparation of ornaments. Vouchers and records were also maintained recording receipt of fully prepared gold ornaments from such gold. He further submitted that all such records and documents were found by the Income Tax Authorities during survey operations. He further submitted that statements of all the goldsmiths to whom such gold was given for preparation of ornaments were recorded who had all supported the petitioners' version. Counsel further submitted that a detailed statement of petitioner No. 2 was recorded at Chennai shortly after his landing there at the Airport. In such statement, he had given detailed account of the manner in which such gold was received and ornaments were prepared and the purpose for which he was carrying such ornaments with him to Chennai from Ahmedabad. Counsel pointed out that petitioner No. 2 was carrying with him a certificate dated 24.7.2012 issued by the Director of petitioner No. 1 Company stating that gold ornaments weighing 23915.800 grams of 22 carat gold comprising of gold bali, chains, pendants, etc. were given to petitioner No. 2 and other co-passengers for carrying such jewelery to Chennai and Kolkata on approval basis for obtaining orders. Such certificate further stated that the jewelery is not for being sold but is only given as samples.
7.1 Counsel further submitted that MG-HUF possessed large quantity of gold which was borne out from the record. Previously, there was litigation with respect to such gold. Ultimately, the High Court of Rajasthan by the judgment dated 28th May 1997, ordered release of seized gold of the said MG-HUF which would establish that MG-HUF did own and possess sufficient quantity of gold to be able to part with 25 kilos therefrom for leasing it to the petitioners.
7.2 Counsel further submitted that Karta of MG-HUF Shri Gunwantlal Godawat had personally travelled to Ahmedabad to hand over such gold to the petitioners. His son Ravindra Godawat had also visited Ahmedabad on 14th June 2012 and in presence of both these persons such gold was handed over to the petitioners. The Department confirms the movement of Karta of MG-HUF, Gunwantlal Godawat. With respect to Ravindra Godawat, whatever minor discrepancies in his movements, they have been sufficiently explained in the rejoinder filed by the petitioners pointing out that he had travelled to Ahmedabad via Pune. His mobile phone locations would establish this fact. In any case, some minor discrepancies with respect to the travel schedule of either of the two members of MG-HUF would not clothe the Department with jurisdiction to authorize search and seizure operations.
7.3 Counsel further submitted that the books maintained by the petitioner Company scrupulously matched with the quantity of gold handed over to different goldsmiths for preparation of gold ornaments. Outgoing quantity matched perfectly with the total weight of gold ornaments when converted from 24 carat gold into 22 carat gold by addition of alloys. He submitted that in view of the disclosure of the gold in the books of accounts of the Company, it cannot be stated that the petitioners had not or would not have disclosed such gold for the purpose of the Act.
7.4 Counsel lastly submitted that in any case, the gold ornaments form stock in trade of petitioner No. 1 Company. In view of proviso to sub-section (1) of section 132, gold ornaments which form stock in trade of petitioner No. 1 company could not have been seized. He submitted that the theory of the Department that such ornaments were the personal property of petitioner No. 2 is wholly invalid. There is nothing on record to suggest that petitioner No. 2 owned such large quantity of gold ornaments of different shapes and sizes or that petitioner No. 2 was required to carry such huge quantity of gold ornaments personally to Chennai without any reason or occasion. Counsel also highlighted that while travelling by air carrying gold ornaments in such large quantity, the petitioners would certainly have anticipated that such ornaments would be detected by the security officials while x-raying the baggage. It would, therefore, be naïve to believe that petitioner No. 2 hoped to carry such gold ornaments without being detected.
7.5 Counsel relied on several decisions of the Supreme Court as well as various High Courts, reference to which would be made at an appropriate stage later.
8. On the other hand, learned Senior Counsel Shri Manish Bhatt for the Department, at the outset, contended that this Court has no territorial jurisdiction to entertain this petition. He submitted that petitioner No. 2 and other co-passengers along with gold ornaments were detained at Chennai Airport. Their statements were recorded at Chennai. After collecting full material, the Authorities at Chennai had initiated search and seizure operations. The gold ornaments were seized at Chennai. According to him, therefore, no part of the cause of action can be stated to have arisen within the territorial jurisdiction of this Court. This petition, therefore, according to him, would not be maintainable before the Gujarat High Court.
8.1 He vehemently opposed the petition on merits also contending that after collecting sufficient material through survey and recording of statements of various persons under section 132 of the Act and taking into account the survey reports, search was authorized. He submitted that there were large number of discrepancies in the theory of the gold being received from MG-HUF for the purpose of preparing gold ornaments. He further submitted that the competent authority having taken into account such discrepancies, prepared a satisfaction note which was placed before the higher authorities who approved the search and seizure operations, upon which the authorization was issued, ultimately leading to the seizure of gold ornaments under a panchnama.
8.2 Counsel highlighted various anomalies and discrepancies which, according to him, were crucial and enabled the competent authority to form an opinion that requirements of section 132(1)(c) of the Act were fulfilled and that therefore, search and seizure operation was necessary. According to the counsel, the lease agreement suffers from various infirmities, which we have already noted earlier. Counsel also highlighted that there was no identification of the gold which was handed over to the petitioners by MG-HUF. In turn, it was not possible to connect the gold ornaments ultimately prepared by different goldsmiths with the gold received by the petitioner from said MG-HUF. Counsel pointed out that there were discrepancies and anomalies in the books of accounts maintained by petitioner No. 1 Company. All the accounts were prepared by one person, apparently with a view to covering the gold movement in case of being detected. The payments of labour charges for preparation of ornaments was made simultaneously on 27.7.2012 after the search operations. The passengers could not give details of the prospective customers at Chennai. It would be highly improbable that a person would carry such sizeable quantity of gold ornaments without any previous contacts of any of the jewelers at Chennai.
8.3 Counsel relied on the following decisions of this Court in support of his contention that at this stage, the court has to examine only the prima facie satisfaction of the competent authority that search and seizure operation was necessary.
(1) In the case of Neesa Leisure Ltd v. Union of India, 338 ITR 460 (Guj.)
(2) In the case of Dipin G. Patel v. Director General of Income Tax, 339 ITR 636 (Guj).
Counsel also relied on the decision of the Apex Court in the case of Rajendran Chingaravelu v. R.K. Mishra, Addl. CIT, 320 ITR 1 (SC) to contend that the search and seizure was validly authorized.
9. Having thus heard the learned counsel for the parties and having perused the materials on record, we would first like to deal with the contention with respect to the territorial jurisdiction of the Court. In this regard, we are conscious that petitioner No. 2 was detained at Chennai Airport along with the co-passengers. Gold was seized at Chennai. Search authorization has also been issued by the Director of Income Tax, Chennai. However, to vest jurisdiction in this court to entertain the petition it is not necessary that the entire cause of action must have arisen within the local limits of the court. If it is pointed out that part of the cause of action has arisen within the territorial jurisdiction, in terms of Article 226(2) of the Constitution, the petition would be maintainable. In this respect, we may recall that once petitioner No. 2 and co-passengers were detained at Chennai Airport, detailed inquiry was carried at the business premises of petitioner No. 1. During such inquiry, statement of son of petitioner No. 2 was recorded and documents and other records of the Company were seized. Survey report was prepared and submitted to the Chennai Income Tax Authorities. Simultaneously, similar actions were taken at Neemuch where the Karta of MG-HUF was stationed. Only thereafter and upon taking into account the survey reports and other materials, authorization was issued. Thus, it cannot be stated that the entire cause of action had arisen at Chennai. Part of cause of action can certainly stated to have arisen within the local limits of this Court. In this respect, we may refer to the decision of the Apex Court in the case of Rajendran Chingaravelu v. R.K. Mishra, Addl. CIT, 320 ITR 1 (SC). In such case, the petitioner had withdrawn sizeable amount from his bank account at Hyderabad with an intention to purchase property at Chennai. He traveled from Hyderabad to Chennai on 15th June 2007 carrying such cash. At Hyderabad Airport, he disclosed that he was carrying Rs. 65 lacs in cash along with the Bank's certificate certifying the source of withdrawal. He was allowed to board the flight. When he reached Chennai, the Income Tax Officials intercepted him. He was questioned about such large amount of cash that he was carrying. His defence that he had the certificate of the Bank having withdrawn such amount was not accepted. He was subjected to detailed interrogation and search and the money was seized, but later on released. For the harassment that he faced, he filed writ petition at Andhra Pradesh High Court. The High Court dismissed the petition for want of territorial jurisdiction. He carried the matter to the Supreme Court. In this background, the Supreme Court held and observed as under :
"5. The first question that arises for consideration is whether the Andhra Pradesh High Court was justified in holding that as the seizure took place at Chennai (Tamil Nadu), the appellant could not maintain the writ petition before it. The High Court did not examine whether any part of cause of action arose in Andhra Pradesh. Clause (2) of Article 226 makes it clear that the High Court exercising jurisdiction in relation to the territories within which the cause of action arises wholly or in part, will have jurisdiction. This would mean that even if a small fraction of the cause of action (that bundle of facts which gives a petitioner, a right to sue) accrued within the territories of Andhra Pradesh, the High Court of that State will have jurisdiction. In this case, the genesis for the entire episode of search, seizure and detention was the action of the security/intelligence officials at Hyderabad Airport (in Andhra Pradesh) who having inspected the cash carried by him, alerted their counterparts at the Chennai Airport that appellant was carrying a huge sum of money, and required to be intercepted and questioned. A part of the cause of action therefore clearly arose in Hyderabad. It is also to be noticed that the consequential income tax proceedings against him, which he challenged in the writ petition, were also initiated at Hyderabad. Therefore, his writ petition ought not to have been rejected on the ground of want of jurisdiction."
The Delhi High Court also in case of Ajit Jain (supra) Considered the objection of the respondents therein with respect to the territorial jurisdiction and the Court observed as under :
"Before parting with the case we may also deal with the aforenoted two preliminary objections raised by the respondents with regard to the territorial jurisdiction of this court and the availability of alternative remedy to the petitioner of appeal to the Income-tax Appellate Tribunal against the block assessment. As regards the first objection, the question to be considered is whether in the instant case any cause of action, wholly or in part, has arisen within the territorial jurisdiction of this court, for if the cause of action arises within the jurisdiction of this court, the writ issued by the court can extend and run beyond its territorial jurisdiction. Explaining the expression "cause of action" within the meaning of article 226(2) of the Constitution, in State of Rajasthan v. Shaika Properties, AIR 1985 SC 1289, the Supreme Court held that the cause of action is a bundle of facts which, taken with the law applicable to them gives the plaintiff a right to relief. In the instant case, we are of the view that the petitioner being a regular assessee in New Delhi, survey operation under section 133A of the Act having been conducted by the authorities at Delhi and the entire action of the search ultimately culminating in the block assessment under Chapter XIV B by the Assessing Officer based in New Delhi, not only a part of cause of action but substantial cause of action arose within the territorial jurisdiction of this court. Accordingly, we reject the objection."
10. Counsel for the Revenue relied on the decision of the Apex Court in the case of Union of India v. Adani Exports Ltd., AIR 2002 SC 1260. In the said case, however, facts were that the petitioner company had claimed the benefit of duty exemption passbook scheme which was denied by the Madras Customs Authorities. Export and import of which credit was claimed had also been made from Madras. The petition was filed in the Gujarat High Court. The Apex court held that merely because the assessee carried business at Ahmedabad and that export orders were received and placed from Ahmedabad would not give cause of action to file the petition at Ahmedabad. It was observed that in order to confer jurisdiction on the High Court to entertain writ petition, the High Court must be satisfied from the facts pleaded in support of cause of action that those facts do constitute a cause so as to empower the Court to decide a dispute which has at least in part arisen within its jurisdiction. It can thus be seen that the question of jurisdiction in the said case was decided against the petitioner on facts which were vitally different.
11. Now, adverting to the facts of the case, we find that the sequence of events is not seriously in dispute. To briefly summarise, petitioner No. 2 along with co-passengers carried gold ornaments of more than 23 kilos by air from Ahmedabad to Chennai. The fact that he was carrying such ornaments was detected by the Income Tax Authorities at Ahmedabad Airport itself. The passengers were allowed to board the flight. At Chennai, the Income Tax Authorities recorded the statements of petitioner No. 2 and other co-passengers. Enquiries were made at the business premises of petitioner No. 1 at Ahmedabad and with the Karta of MG-HUF at Neemuch. After collecting materials, satisfaction note was prepared by the competent authority which was duly approved by the two higher authorities before search and seizure operations were authorized. Pursuant to such authorization, the entire quantity of gold ornaments was seized under panchnama dated 26th July 2012.
12. Both sides have presented various factors for and against their cases. In particular, learned counsel for the Revenue has highlighted what, according to him, were the material contradictions and anomalies in the statements of various persons as also in the lease deed entered into between petitioner No.1 and MG-HUF on 14th June 2012 under which allegedly 25 kilos of gold was handed over by MG-HUF to petitioner No.1 Company. He also placed reliance on other factors.
13. To our mind, it is not necessary to deal with such contentions and counter contentions. We would prefer to focus our attention on the factors recorded by the Deputy Director of Income Tax, Chennai in his satisfaction note dated 26.7.2012. It cannot be disputed and it has not been disputed that any material collected subsequent to recording of satisfaction note and issuance of authorization of search and seizure cannot be pressed in service for supporting authorization to search. Further, the different factors and discrepancies sought to be highlighted by the Department, through affidavits filed before us and through oral submissions made by the counsel also independently would be of no consequence unless and until the genesis of such discrepancies are found in the satisfaction note. It may be to explain or expand particular factors already noted by the competent officer in his satisfaction note that such factors can be highlighted before us. In short, we have focused our attention to the different aspects noted by the Deputy Director of Income Tax in his satisfaction note dated 26th July 2012 to ascertain whether it can be stated that the requirements of section 132(1)(c) of the Act are satisfied. We may recall that sub-section (1) of section 132 of the Act empowers the officers mentioned therein to authorize an appropriate officer to carry out search and seizure operations if in consequence of information in his possession he has reason to believe that any of the requirements contained in clause (a) to (c) of sub-section (1) of section 132 are satisfied. Since we are concerned with clause (c) of sub-section (1) of section 132, we may reproduce the same as under :
"132. (1) Where the Director General or Director or the Chief Commissioner or Commissioner or Additional Director or Additional Commissioner or Joint Director or Joint commissioner in consequence of information in his possession has reason to believe that --
| (a) & (b)** | ** | ** |
(c) any person is in possession of any money, bullion, jewellery or other valuable article or thing and such money, bullion, jewellery or other valuable article or thing represents either wholly or partly income or property which has not been or would not be disclosed for the purposes of the Indian Income Tax Act, 1922 (11 of 1922) or this Court (hereinafter in this section referred to as the undisclosed income or property".
For the purpose of exercising powers under sub-section (1) of section 132 of the Act, therefore, the competent authority had to have in consequence of information in his possession, reason to believe that the person in possession of jewelery represents either wholly or partly income or property which has not been or would not be disclosed for the purpose of the Act. In the satisfaction note, the Deputy Director of Income Tax, referred to the background under which the passengers who had landed at Chennai came to be interrogated and their statements were recorded leading to initiation of survey operations under section 133A of the Act at the business premise of petitioner No.1 Company, during which statements of Shri Dipen Soni, son of petitioner No.2 was recorded. Such statements reveal that the gold was received from MG-HUF of Neemuch under an agreement between MG-HUF and petitioner No.1 Company.
14. It is recorded that such lease agreement was found in possession of the lessee instead of the lessor. Further, that there was no security for leasing out 25 kilos of gold "which makes transaction suspicious". It is further recorded that there was no material evidence to prove that the jewelery in question had been actually manufactured from the bullion received from MG-HUF. He recorded that it is highly unlikely that such large quantity of gold jewelery was brought only as samples. The passengers could not give details of customers they were like to meet in Chennai. He further highlighted that it is not possible to establish co-relation between the gold allegedly received from MG-HUF and the gold used for preparation of the ornaments which was found at Chennai Airport. On the basis of above observations, he recorded that "it is clear that the persons do not have an intention to disclose the jewelery of 23915 grams found in the Airport to the Department". On the basis of such conclusion, he suggested that the Director of Income Tax, if satisfied to issue a warrant of authorization for seizing the same by conducting a search and seizure operation under section 132 of the Act.
15. Such satisfaction note was placed before the Additional Director of Income Tax who approved the suggestion noting that in view of the report received from the Additional DIT Unit II, Ahmedabad and the contents of the note of the Deputy Director, Chennai, it is clear that the jewelery found with Shri L.K. Soni at Chennai represents unaccounted assets.
16. Such notes were placed before the Director of Income Tax, Chennai who recorded his reasons for issuance of warrant of authorization under section 132 of the Act. His reasons primarily were that the gold was leased without any security which is against the normal trade practice and human conduct. According to him, the lease transaction was, therefore, not to be considered as genuine. His other reason was that there was no co-relation between the gold used in preparation of the ornaments with that received allegedly by petitioner No.1 from MG-HUF.
17. To our mind, on the basis of the record and the reasons noted by the authority, it was not possible to come to the conclusion that the petitioners had not or would not have disclosed the jewelery for the purpose of the Act. We may recall that for authorization of search operations under section 132(1)(c) of the Act, it is required that the competent authority in consequence of the information in his possession has reason to believe that the jewelery, bullion, etc. which represents either wholly or partly income or property has not been or would not be disclosed for the purpose of the Act. The record shows that petitioner No.2 along with co-passengers was carrying gold ornaments along with the certificate issued by petitioner No.1 Company, that such gold ornaments were stock in trade of the Company, that such ornaments were being carried to Chennai and Kolkata for showing samples to the prospective customers. Detailed statement of petitioner No.2, one of the Directors of petitioner No.1 Company was recorded at Chennai itself. In such statement, he at the very outset, gave the version that 25 kilos of gold was received by petitioner No.1 Company from MG-HUF. Statements of various goldsmiths which were recorded by the Income Tax Authorities also supported the version of the petitioners. The records and the books of accounts maintained by petitioner No.1 Company also matched this version. Vouchers were maintained in detail evidencing the outgoing gold to different goldsmiths and the incoming of the duly prepared gold ornaments from such gold so distributed. Each time, 24 carat gold was shown to have been given, the ornaments were of 22 carat gold by adding necessary quantity of alloys. We have perused such documents. We find that the entries of gold distributed to various goldsmiths matched perfectly with the entries of gold ornaments received from such persons after adding alloys for conversion of gold from 24 carat to 22 carat. The so called discrepancies pointed out by the Revenue in such documents really do not exist. Respondents fail to notice that the gold ornaments would weight marginally more than the weight of gold from which they are made due to addition of alloys. They also failed to see that such increase in weight was uniform in all cases. Accounts were also maintained regarding labour charges to be paid to different agencies. It can therefore not be stated that there was sufficient information in possession of the Director of Income Tax to have reason to believe that such jewelery had not been or would not be disclosed for the purpose of the Act.
18. There were some discrepancies highlighted by the Department particularly with respect to the agreement dated 14th June 2012. It was argued that such agreement was found in possession of the petitioners and not in possession of the lessee. It was further argued that the co-relation between the gold actually used in preparation of the ornaments and the one which was available with MG-HUF could not be established.
19. To our mind, these factors would not be sufficient to clothe the authorities with the power to issue search authorization under section 132(1)(c) of the Act. Prima facie, the petitioners had pointed out that MG-HUF owned and possessed sizeable quantity of gold, part of such quantity had become subject of legal controversy and the Rajasthan High Court through a judgment dated 28.5.1997 had released such gold in favour of MG-HUF. Out of such quantity of gold, 25 kilos was leased out to the petitioners. The Department's doubt about the source of gold of MG-HUF, even if it is genuine, cannot cast any shadow on the question whether the petitioners would or would not have disclosed the same for the purpose of the Act. Further, the contention that the identity of the gold could not be established also, to our mind, is not a sufficient factor. Once the gold was, as claimed by the petitioners, received from MG-HUF and the same was distributed among different goldsmiths for preparation of ornaments, we fail to see how the exact identity of the gold or co-relation thereof could be maintained or established. It was pointed out by the petitioners that the gold received from MG-HUF was 24 carat purity. For preparation of the ornaments, the same had to be mixed with alloys and converted into 22 carat purity. In addition to expecting an unreasonable requirement of establishing the identity of the very same gold being used for preparation of ornaments, we also otherwise see no relevance for the purpose of authorization of search. When it was pointed out that the petitioners had maintained voluminous records right from the beginning and when such record was found from the premises of petitioner No.1 Company, immediately upon the survey operation being conducted, we do not see how the competent authority could form a reasonable belief that such gold jewelery had not been or would not be disclosed for the purpose of the Act.
20. We may notice that section 131 of the Act which pertains to the power regarding discovery, production of evidence, etc. gives wide powers to the Department. Under sub section (1) of section 131, various officers of the Income Tax have been, for the purpose of the Act, clothed with the powers as vested in a court under the Code of Civil Procedure for discovery and inspection and enforcing attendance of any person including any officer of a banking company and examining him on oath, compelling production of books of accounts and other documents and issuing commissions. Under sub-section (1A) of section 131, the Director General or Director or Joint Director or Assistant Director or Deputy Director or the authorized officer referred to under sub-section (1) of section 132, if has reason to suspect that any income has been concealed or is likely to be concealed by any person or class of persons within his jurisdiction, then for the purpose of making any inquiry or investigation relating thereto, it would be competent for him to exercise powers conferred under sub-section (1) notwithstanding that no proceedings with respect to such person or class of persons are pending before him or any other Income Tax Authority.
21. It can be immediately noticed that under sub-section (1A) of section 131, the officers mentioned therein have very wide powers of discovery and inspection and enforcing attendance or compelling production of documents and issuing commissions for the purpose of making any inquiry or investigation even when no proceedings are pending before him, if he has reason to suspect that any income has been concealed or is likely to be concealed by any person or class of persons. Thus, under section 131 and in particular under sub-section (1A) thereof, mere suspicion that income is concealed or is likely to be concealed is sufficient to trigger the exercise of powers under section 131(1) for making any inquiry or investigation relating thereto. By contrast, search and seizure authorization under section 132(1) of the Act can be granted only on satisfaction that in consequence of information in possession of the competent authority has reason to believe that the circumstances mentioned in clauses (a) to (c) to sub-section (1) have arisen. In particular, clause (c) with which we are concerned, requires that the reason to believe should be that person in possession of the money, bullion, jewelery or other valuable article or thing which represents either wholly or partly income or property which has not been or would not be disclosed for the purpose of the Act. The onus placed on the competent authority to arrive at a satisfaction with respect to above factors thus is much greater than one required for exercise of powers under sub-section (1A) of section 131 of the Act.
22. In the case of L.R. Gupta v. Union of India, 194 ITR 32, a Division Bench of the Delhi High Court in connection with section 132(1) of the Act observed as under :
"The basis of the exercise of the jurisdiction under section 132(1) has to be the formation of a belief and the belief is to be formed on the basis of receipt of information by the authorising officer.
The expression "information" must be something more than a mere rumour or a gossip or a hunch. There must be some material which can be regarded as information which must exist on the file on the basis of which the authorising officer can have reason to believe that action under section 132 is called for for any of the reasons mentioned in clauses (a), (b) or (c). When the action of issuance of an authorization under section 132 is challenged in a court, it will be open to the petitioner to contend that, on the facts and information disclosed, no reasonable person could have come to the conclusion that action under section 132 was called for. The opinion which has to be formed is subjective and, therefore, the jurisdiction of the court to interfere is very limited. A court will not act as an appellate authority and examine meticulously the information in order to decide for itself as to whether action under section 132 is called for. But the court would be acting within its jurisdiction in seeing whether the act of issuance of an authorisation under section 132 is arbitrary or mala fide or whether the satisfaction which is recorded is such which shows lack of application of mind of the appropriate authority. The reason to believe must be tangible in law and if the information or the reason has no nexus with the belief or there is no material or tangible information for the formation of the belief, then in such a case, action taken under section 132 would be regarded as bad in law."
| ** | ** | ** |
"Sub-clause (c) refers to money, bullion or jewellery or other valuable articles which, either wholly or partly, should have been income of an assessee which has not been disclosed for the purpose of the Act. The said sub-clause pertains only to movable and not immovable assets. Secondly, it pertains to those assets which, wholly or partly, represent what should have been his income. The expression income "which has not been, or would not be disclosed for the purposes of the Income-tax Act" would mean that income which is liable to tax but which the assessee has not returned in his income-tax return or made known to the Income-tax Department. The sub-clause itself refers to this as "undisclosed income or property". In our opinion, the words "undisclosed" in that context, must mean income which is hidden from the Department. Clause (c) would refer to cases where the assessee knows that the movable asset is income or represents income which is taxable but which asset is not disclosed to the Department for the purpose of taxation. Those assets must be or represent hidden or secreted funds or assets. Where, however, the existence of the money or asset is known to the Income-tax Department and where the case of the assessee is that the said money or valuable asset is not liable to be taxed, then in our opinion, the provisions of sub-clause (c) of section 132(1) would not be attracted. An assessee is under no obligation to disclose in his return of income all the moneys which are received by him which do not partake of the character of income or income liable to tax. If an assessee receives, admittedly, a gift from a relation or earns agricultural income which is not subject to tax, then he would not be liable to show receipt of that money in his income-tax return. Non-disclosure of the same would not attract the provisions of section 132(1)(c). It may be that the opinion of the assessee that the receipt of such amount is not taxable may be incorrect and, in law, the same may be taxable but where the Department is aware of the existence of such an asset or the receipt of such an income by the assessee, then the Department may be fully justified in issuing a notice under section 148 of the Act, but no action can be taken under section 132(1)(c). An authorisation under section 132(1) can be issued if there is a reasonable belief that the assessee does not want the Income tax Department to know about the existence of such income or asset in an effort to escape assessment. Section 132(1)(c) has been incorporated in order to enable the Department to take physical possession of those movable properties or articles which are or represent undisclosed income or property. The words "undisclosed income" must mean income which is liable to be taxed under the provisions of the Income-tax Act but which has not been disclosed by an assessee in an effort to escape assessment. "Not disclosed" must mean the intention of the assessee to hide the existence of the income or the asset from the Income-tax Department while being aware that the same is rightly taxable."
23. In the case Vindhya Metal Corpn. v. C.I.T. 156 ITR 233 (All.), a Division Bench of the Allahabad High Court examined the case where the person was found in possession of cash of Rs. 4,63,000/- while he was travelling by train. Such amount was seized by the Railway Police and the Commissioner of Income Tax was informed about it. Search and seizure operation was carried out. The High Court held that mere fact that the person who was in possession of large amount of cash and he did not have document regarding his ownership or that his name was not found in the list of income tax assessee could not be treated as sufficient information leading to a reasonable mind to infer that the amount would not be disclosed for the purpose of the Act. It was observed that there was nothing before the Commissioner to suggest that the said amount, in fact, was wholly or in part, income of any person connected with the said person so as to induce a belief that if called upon, he would not have disclosed it for the purpose of the Act.
24. In the case of CIT v. Vindhya Metal Corporation, 224 ITR 614 (SC), the Apex Court upheld the decision of the Allahabad High Court in the case Vindhya Metal Corporation (supra).
25. In the case of Ajit Jain v. Union of India, 242 ITR 302 (Delhi), a Division Bench of the Delhi High Court quashed the search and seizure authorization observing that even assuming that the amount found from the person was not reflected in the books of accounts of the Company, mere possession of such amount by the petitioner could hardly be said to constitute information which could be treated as sufficient by a reasonable person. It is pointed out that such decision of the Delhi High Court came to be approved by the Supreme Court in the case of Union of India v. Ajit Jain, 260 ITR 80.
26. In the case of Dr. Mrs. Anita Sahai v. Director of Income Tax, 266 ITR 597 (All.), search and seizure operations were quashed observing that search and seizure can not be fishing expedition. Before search is authorized, the Director must on the relevant material have reason to believe that the assessee has not and would not have disclosed his income.
27. On the basis of the above decisions, it emerges that mere possession of money, bullion, jewelery or such valuable article or thing per-se would not be sufficient to enable the competent officer to form a belief that the same had not been or would not be disclosed for the purpose of the Act. What is required is some concrete material to enable a reasonable person to form such a belief. It is, of course, true that such belief is a matter of subjective satisfaction of the competent authority. Such subjective satisfaction, however, must be formed on the basis of the material on record and objective assessment of such material and cannot be on the basis of a mere suspicion or apprehension that the income had not been or would not be disclosed for the purpose of the Act.
28. The decisions referred to by the counsel for the Revenue were rendered in different fact situations. In the case of Neesa Leisure Ltd (supra) a Division Bench of this Court upheld the search operations when it was found that there was sufficient material enabling the competent authority to form such a belief. So also were the facts in case of Dipin G. Patel (supra) wherein, the Division Bench having perused the satisfaction note and further notes recorded by the higher Income Tax Authorities was of the opinion that the authorization was not based on isolated material that cash was found from the petitioner's premises. But such authorization was based on additional information which was adequately sufficient for the purpose of satisfying the statutory requirements.
29. In the result, the petition is allowed. Search and seizure operation is declared illegal and it is hereby quashed. Consequently, seizure of the gold ornaments under panchnama dated 26th July 2012 is also quashed. In view of the above findings, we do not go into the question whether the jewelery was stock in trade of petitioner No.1 Company and therefore even in face of valid search and seizure, the same could not have been seized in terms of proviso to section 132 of the Act. Rule is made absolute accordingly.
30. Before closing, we may record that the learned counsel for the Revenue had placed for our perusal the satisfaction note and the connected notings of the different levels of the officers before the search operation was authorized. Along with such documents, he also supplied the copies of the statements and survey reports. Copies thereof may be retained in a sealed cover by the Registry.
31. In view of the above order, counsel for the petitioners did not press the Civil Application and the same stands disposed of accordingly.
32. At this stage, counsel for the Revenue requested that the judgment be stayed for a reasonable period to enable the Department to carry the decision in appeal. Learned counsel for the petitioner opposed such a request contending that Diwali festivals are approaching and if the petitioners are deprived of their jewelery during such festival season, irreparable loss would be caused to their business. He highlighted that the jewelery being the stock in trade, in any case, even if the search and seizure is valid, the jewelery cannot be seized. Considering the facts and circumstances, request of the counsel for the Revenue to stay the judgment is refused. The jewelery seized under the panchnama dated 26th July 2012 shall be released latest by 8th November 2012.
IT : Where issue relating to deduction under section 10B in respect of assessee's unit was specifically examined during original assessment and allowed with some modifications, Assessing Officer could not re-open such assessment without placing tangible material to disprove such claim
■■■
[2013] 29 taxmann.com 325 (Delhi)
HIGH COURT OF DELHI
Moser Baer India Ltd.
v.
Deputy Commissioner of Income-tax*
S. RAVINDRA BHAT AND R.V. EASWAR, JJ.
WP (C) NO. 7677 OF 2011
DECEMBER 6, 2012
Section 10B, read with section 147 of the Income-tax Act, 1961 - Export oriented undertaking of - Reassessment - Assessment year 2004-05 - In original assessment assessee declared profit in respect of its two units and claimed deduction under section 10A/10B but on account of loss situation it claimed nil deduction in respect of its third unit and had also submitted Forms 56F/56G along with return - Assessing Officer specifically examined said claim in detail and allowed deduction with some modifications - Subsequently on 23-7-2010 i.e. after expiry of four years from end of relevant assessment year, Assessing Officer reopened assessment by invoking proviso to section 147 on ground that assessee acted incorrectly in not setting off losses of one eligible unit against profits of another eligible unit - Whether since 'reason to believe' note was silent as to what tangible materials had persuaded revenue to invoke extraordinary powers under proviso to section 147, reopening was unjustified - Held, yes [Para 16] [In favour of assessee]
FACTS
Facts
• For the assessment year 2004-05 the assessee had computed and declared income in respect of its 3 units. All the three were 100 per cent Export Oriented Units (EOU).
• In respect of the two units the assessee declared profit and claimed deduction under section 10A.
• However, in respect of the third unit the assessee declared loss and did not claim any deduction. The required report in Form 56G in respect of said unit was also enclosed.
• In the assessment order the Assessing Officer noted the claim for deduction and discussed the assessee's justification and thereafter formed the opinion that aggregation of scrap sales amounting to Rs. 11,94,474 and Rs. 4,64,24,305 had to be reduced from the eligible income derived from EOU, the total of those two amounts worked out to Rs. 4,76,18,779 which was disallowed from the deductions under section 10B. The book profit was assessed at Rs. 141,56,63,623.
• Subsequently, the Assessing Officer reopened the assessment by issuing notice under section 148 on 23-7-2010.
• The Assessing Officer stated that the assessee had claimed and was allowed deduction in respect of two units. However, the loss of third unit was not reduced from the profit of other two units.
• The Assessing Officer therefore, held that the assessee had claimed excess exemption under section 10B of Rs. 50,72,19,040. This had resulted in over assessment of loss of Rs. 50,72,19,040 involving potential tax effect of Rs. 18,19,65,133. Further, the assessee had paid tax under section 115JB and excess allowance of exemption under section 10B had resulted in underassessment of book profit of Rs. 50,72,19,040 involving tax effect of Rs. 5,18,92,728.
Argument of assessee
• The assessee contended that the notice for re-assessment was issued on 23-7-2010 i.e. more than 5 years from the relevant assessment year. Therefore as per section 147 no reassessment of income is permissible as 4 years have lapsed from the end of the relevant assessment year i.e. 2004-05. The proviso to section 147 allows reassessment after expiry of 4 years from the end of the relevant assessment year only where there is failure on the part of the assessee to disclose fully and truly all material facts and since in the instant case assessee had disclosed all facts reassessment was not permissible after expiry of 4 years from the end of the relevant assessment year.
• The assessee also argued that at time of original assessment Assessing Officer did not think of setting off the loss of third unit with the other two units and, therefore, the reassessment on a mere change of opinion was invalid.
Argument of revenue
• The revenue argued that assessee was not correct in not setting off of losses of one eligible unit against the profits of another eligible unit, which was contrary to the scheme of section 10B. This clearly constituted failure on the part of the assessee to make full and true disclosure, which necessitated reopening of assessment under section 147/148.
Issue for consideration
• Whether reopening of assessment was justified?
HELD
Reasons to believe note is silent that assessee had withhold particulars leading to escapement of income
• The primary duty of the Assessing Officer, while invoking his power under section 147/148 is to be satisfied, on the basis of something on the record ("reasons to believe") that the assessee had withheld particulars, which led to income escaping assessment. The Assessing Officer's reasoning appears to be that the assessee acted incorrectly in not setting off losses of one eligible unit against profits of another eligible unit. However, the "reasons to believe" note, which initiated the reassessment proceeding, is silent as to what were the materials which persuaded the revenue to invoke the extraordinary powers under proviso to section 147. The Assessing Officer can re-open assessment under section 147, only if there is 'tangible material' to show that income has escaped assessment. The Assessing Officer is not allowed to arbitrarily re-open assessment. [Para 16]
Issue of deduction under sections 10A/10B was specifically examined by Assessing Officer during original assessment
• In the present case, the original return of the assessee was subjected to scrutiny assessment, under section 143(3). The assessee was apparently closely questioned on various aspects, including its claim for treatment of the three units, under sections 10A/10B. In response to a query raised by the revenue, the assessee furnished information regarding the units eligible for deduction under section 10A/10B. In the reply the assessee listed all three units as units eligible for claiming deduction. The issue of deduction under sections 10A/10B was specifically examined by the Assessing Officer during the original assessment. Furthermore, Form 56F/56G was also submitted along with the return of income and in the forms the assessee had specifically claimed deduction under sections 10A/10B in respect of profits of two units whereas NIL deduction for the third unit. Furthermore, in a Note, appended to the return of income, the assessee specifically disclosed at Point 1(c) that, the claim for benefit under sections 10A/10B, in respect of the third unit was eligible for claiming ex-holiday benefits under section 10B. No deduction under section 10B was claimed in view of a loss situation. The Report in Form 56G for the said unit too was enclosed. The assessee filed an approval letter from the competent authority regarding eligibility of the units for deduction under sections 10A/10B, approval letters regarding all three units were submitted. [Para 17]
Tangible material should have to exist on record for reopening assessment
• In the above background of facts, when there was intensive examination in the first instance in respect of the issue, which was the basis for reopening of assessment, it was necessary for the Assessing Officer to indicate, what other material, or objective facts, constituted reasons to believe that the assessee had failed to disclose a material fact, necessitating reassessment proceedings. That is precisely the 'tangible material' which have to exist on the record for the 'reasons' to believe bearing a 'live link with the formation of the belief'. When the assessment is completed, as in the present instance, under section 143(3), after the Assessing Officer goes through all the necessary steps of inquiring into the same issue, the reasons for concluding that reassessment is necessary, have to be strong compelling, and in all cases objective tangible material. This Court discerns no such tangible materials which have a live link that can validate a legitimate formation of opinion, in this case. It is not enough that the Assessing Officer in the previous instance followed a view which no longer finds favour, or if the latter view is suitable to the revenue; those would squarely be change in opinion. Perhaps, in given fact situations, they can be legitimate grounds for revising an order of assessment under section 263; but not for reopening it, under proviso to section 147. [Para 18]
Conclusion
• As a result of the above discussion, it is held that the impugned notice, under proviso to section 147, and consequent reassessment proceedings, are beyond jurisdiction. They are unsustainable, and are hereby quashed. [Para 19]
CASES REFERRED TO
Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191 (SC) (para 11), ITO v. Lakhmani Mewal Das [1976] 103 ITR 437 (SC) (para 12), CIT v. Kelvinator of India Ltd. [2010] 187 Taxman 312 (SC) (para 13), CIT v. Himatasingike Seide Ltd. [2006] 286 ITR 255/156 Taxman 151 (Kar.) (para 15) and Sword Global (I) (P.) Ltd. v. ITO [2010] 122 ITD 103 (Chennai) (para 15).
Ajay Vohra and Ms. Kavita Jha for the Petitioner. Sanjeev Sabharwal and Puneet Gupta for the Respondent.
JUDGMENT
S. Ravindra Bhat, J. - The petitioner (hereinafter referred to as "assessee") by these writ proceedings claims a direction for quashing the impugned notice dated 23.07.2010 issued by the first respondent under Section 148 of the Income Tax Act proceedings as well as further orders including the order dated 07.09.2011 dismissing its objections. The assessee filed its income tax return for assessment year 2004-2005 declaring a loss of Rs. 83,36,69,556/- under the normal provisions of the Act, it declared a book loss under Section 115 JB to the tune of Rs. 99,53,40,660/-. The assessee had computed and declared income in respect of its 3 units. All the three are 100% Export Oriented Units (EOU). The first one located at 66 Noida Special Economic Zone (NSEZ) yielded profit of Rs. 10,65,03,063/- in respect of which deduction under Section 10A was claimed. For the second unit (another EOU) at A-164, Sector 80, Noida, the profit of Rs. 2,24,72,84,842/- was declared and a deduction under Section 10B was claimed for this entire amount. In respect of the third unit i.e. 100% EOU at 66 Udyog Vihar, Greater Noida, the assessee declared loss of Rs. 50,53,96,992/- and did not claim any deduction. In the concerned form i.e. 56G, as against the column seeking particulars regarding eligibility for deduction under Section 10A, the assessee declared "Nil". The assessee later filed a revised return of income and declared Rs. 86,29,74,037/- under normal provisions of the Act and stated that it had inadvertently omitted to claim deduction on previously incurred expenses. In the revised return it made the following claims for deductions under Sections 10A and 10B respectively :
| Particulars of the Unit | Profit/(Loss) (In Rs.) | Remarks |
| 66, NSEZ, Noida | 10,65, 03,063 | Deduction u/s 10A claimed |
| A-164, Sector-80, Noida | 2,21,68, 52,725 | Deduction u/s 10B claimed |
| 66, Udyog Vihar, Greater Noida | (50, 75, 39, 374) | No deduction claimed - In Form 56G, amount eligible for deduction u/s 10A declared at NIL |
2. It is averred that the petitioner annexed note 1(c) to its return detailing reasons why it was not claiming any deductions under Section 10B in respect of the EOU at 66 Udyog Vihar, Greater Noida. The reasons stated by it was as follows:
"No deduction under section 10B of the Act has been claimed in view of a loss situation. The required report in Form 56G in respect of said unit is enclosed."
3. The revised return of the income of the assessee was selected for scrutiny and assessment was completed under Section 143(3) of the Income Tax Act by an order dated 29.12.2006 at a loss of Rs. 89,11,28,550/-. Apparently the A.O. applied his mind and made detailed enquiry into various aspects after framing the assessment order.
4. In the assessment order the A.O. noted the claim for deduction and discussed the assessee's justification and thereafter formed the opinion that aggregation of scrap sales amounting to Rs. 11,94,474 and Rs. 4,64,24,305 had to be reduced from the eligible income derived from the EOU, the total of those two amounts worked out to Rs. 4,76,18,779/- which was disallowed from the deductions under Section 10B. The book profit was assessed at Rs. 141,56,63,623/-.
5. After completion of assessment, on 23.07.2010, the assessee was issued with a notice under Section 148 by the first respondent stating that he had reasons to believe that the assessee's income had escaped assessment and consequently, proposed to re-assess the income. The petitioner requested that its revised return of income filed earlier on 30.03.2006 could be treated as return in response to the notice under Section 148 and further requested for a copy of the reasons recorded by the first respondent to re-open the assessment. On 27.06.2011 the first respondent furnished a copy of the reasons recorded under Section 147, for re-opening the assessment. The reasons are as follows :
"(i) While making the assessment order under section 143 (3) the income from other sources and short term capital gains of Rs. 8,54,39,339/- was not added in the total income. The mistake resulted in over assessment of loss of Rs. 8,54,39,339/- involving potential tax of Rs. 3,06,51, 369/-.
(ii) The assessee had claimed and was allowed deduction of Rs. 227,57,37,009/- u/s 10A & 10B in respect of two units. However, the loss of Rs. 50,75,39,374/- of third unit was not reduced from the profit of other two units. Thus the assessee has claimed excess exemption u/s 10B of Rs. 50,72,19,040/-. This has resulted in over assessment of loss of Rs. 50,72,19,040/- involving potential tax effect of Rs. 18,19,65,133/-. Further the assessee has paid tax u/s 115JB and excess allowance of exemption u/s 10B has resulted in underassessment of book profit of Rs. 50, 72, 19, 040/- involving tax effect of Rs. 5,18,92,728/-."
6. The petitioner objected to re-opening of the assessment contending that no grounds were validly made out; the first respondent rejected the objections on 15.07.2011. That action was impugned in a writ petition (i.e. WP(C) No.5183/2011). By an order dated 02.08.2011 this Court set aside the rejection of the petitioner's objection (by the first respondent's order 15.07.2011) and directed the latter to hear the objections afresh and pass fresh order dealing with them. The petitioner again approached the first respondent through letter dated 24.08.2011 objecting to assumption of jurisdiction contending inter alia that as regards the question of short term capital gains mentioned in the reasons i.e. of pertaining to the sum of Rs. 8,54,39,339/- the mistake had been rectified by the A.O. through order dated 22.07.2010, i.e. one day prior to the issuance of notice under Section 148 and that as regards the other issue, it really amounted to change of opinion and there was no new information received by the first respondent to proceed to continue with re-assessment proceedings.
7. The first respondent by his letter/order dated 27.09.2011 rejected the assessee's contention. The relevant part of the order is as follows :
"8. In the submissions made on behalf of the assessee company, the AR of the assessee, in his letter dated 24.08.2011 has also submitted that the assessee has three units eligible for claim of deduction under section 10A/10B of the Act. These are (i) 66, NSEZ, Noida, (ii) A-164, Sector-80, Noida & (iii) 66, Udyog Vihar, Greater Noida. Deductions under section 10A/10B of the Act were claimed in respect of units at 66, NSE2 and A-164. Sector-80, which had profits. Since third Unit at 66, Udyog Vihar, Greater Noida had suffered losses, no deduction under Sections 10A/10B of the Act was admissible nor claimed in respect of such units. The factum that the assessee had three units which were eligible for deduction u/s 10A/10B of the Act, the fact of deduction being awaited qua profits of two units only, without setting off the losses suffered in the third unit, was duly disclosed in the return of income. It has further been submitted by the AR of the assessee that even assuming for the sake of the argument, though not conceding that the profits of the eligible units have to be set off by the losses suffered in the third eligible unit and deduction under sections 10A/10B of the Act quantified with reference to the aggregate profit of all the units, it was not the duty of the assessee to suggest, the inference to be drawn from the primary facts, viz. that the assessee had three units eligible for deduction under section 10A/10B of the Act, out of which two units had derived profits while the third unit had suffered losses. It is also been submitted that while claiming deduction qua this stand alone profits of the eligible unit(s) and ignoring losses suffered by the third eligible unit, the assessee could not been said to have made in correct computation of reduction under Sections-10A/10B of the Act.
9. I have carefully considered these submissions made on behalf of the assessee company. The issue under consideration is the computation of deduction allowable under section 10B of the IT Act, 1961. For this purpose, a reference to sub-section 4 to 8 of section 10B of the IT Act, considered necessary. The provisions of clause (ii) of sub-section 6 of section 10B provide for carry forward and set off of losses pertaining to the 100% export oriented units eligible for deduction under the said section. When the facts of the present cases are analyzed in the light of the provision of sub-sections (3) to (8) of sub-section 10B, more particularly clause (ii) of sub-section 6, the losses of eligible units are to be set off against the profits of such eligible unit. Reliance is placed on the ratio laid down by the Hon'ble Karnataka High Court in the case of CIT v. Himatasingike Seide Ltd. 286 ITR 0255 and of Hon'ble ITAT Chennai in the case of Sword Global (I) P Ltd. v. ITO 306 ITR (AT) 286. Therefore, the assessee was not correct in not setting off of losses of one eligible unit against the profits of another eligible unit, which is against the scheme of the provisions of section 10B of the IT Act.
10. In view of the above, in pursuant to the directions of the Hon'ble High Court of Delhi, the assessee's objection to initiation of proceedings under section 147 and issuance of notice under section 148 stands disposed off. The assessee is now, therefore, again requested to comply with the proceedings initiated under section 147/148 in their case for the year under consideration."
8. The Petitioner argued that the Respondents' reason for re-opening assessment, as given in letter dated 27.06.2011, was two fold, i.e.:
1. The income from other source and short term capital gains of Rs. 8,54,39,339 was not added in the total income.
2. The loss of the third unit was not reduced from the profit of the other two units which resulted in excess exemption u/s 10A/10B.
Counsel submitted that the first reason for re-opening assessment does not exist as the Income Tax Office by order dated 22.07.2010 rectified the assessment to correct the aforesaid mistake; the mistake was rectified before issuance of Section 148 notice dated 23.07.2010. As far as the second reason goes, the Assessing Officer at the time of the original assessment was fully aware that NIL deduction was claimed in respect of the Udyog Vihar Unit therefore re-opening of assessment on that ground is bad in law. The Petitioner submitted that at the time of the original assessment the Petitioner submitted the return of income wherein Petitioner had claimed deductions u/s 10A/10B in respect of two units whereas NIL deduction was claimed in respect of the third unit. Further, the return of income was accompanied by Form 56F/56G wherein the Petitioner had specifically claimed deduction u/s 10A/10B in respect of profits of two units whereas NIL deduction for the third unit. Further, in a note dated 12.01.2005, (filed along with the return), the Petitioner specifically disclosed at Point 1(c) that,
"1. Claim of benefit u/s 10A/10B of the Income-tax Act, 1961 ("the Act")
(c) 66, Udyog Vihar, Greater Noida- The said unit is registered as a 100% Export Oriented Unit (on November 28, 2001) and is accordingly eligible for claiming tax-holiday benefits u/s 10B of the Act. No deduction u/s 10B of the Act has been claimed in view of a loss situation. The required Report in Form 56G in respect of the said unit is enclosed."
9. It is also urged that in response to a query raised by Respondent No.1, the Petitioner by letter dated 21.02.2005 furnished information regarding the units eligible for deduction u/s 10A/10B. In the reply the Petitioner listed all 3 units as units eligible for claiming deduction. The issue of deduction u/s 10A/10B was specifically examined by the Assessing Officer during the original assessment. Many queries regarding deduction u/s 10A/10B were raised by the Respondent No.1 and the same were replied to by the Petitioner. The Assessing Officer after having gone through the return of income filed, replies to the queries and the notes annexed to the return of income reached the conclusion that the Petitioner was entitled to deduction u/s 10A/10B as claimed subject to certain modifications. As a result, the re-assessment proceedings are bad in law and impermissible as being barred by limitation. In this regard, it is contended that Section 147empowers the assessing officer to reassess the income chargeable to tax if he has reason to believe that the income for such assessment year has escaped assessment. However the proviso to Section 147 restricts the powers of the assessing officer to initiate reassessment proceedings beyond 4 years from the end of the relevant assessment year unless the income has escaped assessment due to the failure of the assessee to disclose fully and truly all material facts necessary for assessment. The proviso to Section 147 permits action after expiry of 4 years from the end of the relevant assessment year, only if
"… 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 to disclose fully and truly all material facts necessary for his assessment for that assessment year."
In the present case the notice for re-assessment was issued on 23.07.2010 i.e. more than 5 years from the relevant assessment year. Therefore as per section 147 no reassessment of income is permissible as 4 years have lapsed from the end of the relevant assessment year i.e. 2004-05. The proviso to section 147 allows reassessment after expiry of 4 years from the end of the relevant assessment year only where income chargeable to tax has escaped assessment "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." It is argued that in this case there was no failure on the part of the Petitioner to disclose fully and truly all material facts therefore no reassessment of income of Petitioner is permissible after expiry of 4 years from the end of the relevant assessment year.
10. It was contended that in the present case all material facts were disclosed and the Petitioner submitted various documents relating to the deductions available under Section 10A/10B. The Petitioner submitted that:
i. The return of income wherein deduction was claimed from two units and NIL deduction was claimed from the third unit (Udyog Vihar unit).
ii. Form 56F/56G was also submitted along-with the return of income. In the forms the Petitioner had specifically claimed deduction u/s 10A/10B in respect of profits of two units whereas NIL deduction for the third unit.
iii. In a Note dated 12.01.2005, appended to the return of income, Petitioner specifically disclosed at Point 1(c) that, the claim for benefit under Sections 10A/10B of the Act, in respect of 66, Udyog Vihar, Greater Noida- (registered as a 100% Export Oriented Unit on November 28, 2001) was eligible for claiming tax-holiday benefits u/s 10B of the Act. No deduction under Section 10B of the Act was claimed in view of a loss situation. The Report in Form 56G for the said unit was enclosed. Further on 27.12.2006 the Petitioner filed approval letter from the competent authority regarding eligibility of the units for deduction u/s 10A/10B; approval letters regarding all three units were submitted.
11. It was emphasized that the Assessing Officer after examining the return of income, documents accompanying the return of income, Form 56F/56G, notes and various other documents submitted in the course of the original assessment accepted the deduction claimed u/s 10A/10B after some modification. The Assessing Officer applied his mind and after taking into consideration all documents on record passed an assessment order dated 29.12.2006 wherein he specifically altered the deduction claimed u/s 10A/10B. At the time of the original assessment, the Assessing Officer was aware that there were three units which were eligible for claiming deduction under Sections 10A/10B. The Assessing Officer was also aware of the fact that NIL deduction was claimed with respect to one unit. Therefore the reassessment under Section 147 is unjustifiable. The petitioner relied on Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191 (SC) to the effect that:
"11. Does the duty however extend beyond the full and truthful disclosure of all primary facts? In our opinion, the answer to this question must be in the negative. Once all the primary facts are before the assessing authority, he requires no further assistance by way of disclosure. It is for him to decide what inferences of facts can be reasonably drawn and what legal inferences have ultimately to be drawn. It is not for somebody else - far less the assessee - to tell the assessing authority what inferences, whether of facts or law, should be drawn. Indeed, when it is remembered that people often differ as regards what inferences should be drawn from given facts, it will be meaningless to demand that the assessee must disclose what inferences - whether of facts or law - he would draw from the primary facts.
12. If from primary facts more inferences than one could be drawn, it would not be possible to say that the assessee should have drawn any particular inference and communicated it to the assessing authority. How could an assessee be charged with failure to communicate an inference, which he might or might not have drawn?"
12. Further, Section 147 does not allow reopening of a completed assessment merely on change on opinion. The Assessing Officer does not have the power to review the previous assessment order. The Assessing Officer has to have "reason to believe" that the income has escaped assessment. In this connection, reliance was placed on the judgment of the Supreme Court in ITO v. Lakhmani Mewal Das [1976] 103 ITR 437 to the following effect:
"7. Another requirement is that before notice is issued after the expiry of four years from the end of the relevant assessment years, the Commissioner should be satisfied on the reasons recorded by the Income-tax Officer that it is a fit case for the issue of such notice. We may add that the duty which is cast upon the assessee is to make a true and full disclosure of the primary facts at the time of the original assessment. Production before the Income-tax Officer of the account book or other evidence from which material evidence could with due diligence have been discovered by the Income-tax Officer will not necessarily amount to disclosure contemplated by law. The duty of the assessee in any case does not extend beyond making a true and full disclosure of primary facts. Once he has done that his duty ends. It is for the Income-tax Officer to draw the correct inference from the primary facts. It is no responsibility of the assessee to advise the Income-tax Officer with regard to the inference which he should draw from the primary facts. If an Income-tax Officer draws an inference which appears subsequently to be erroneous, mere change of opinion with regard to that inference would not justify initiation of action for reopening assessment."
13. It is lastly urged that the Supreme Court while upholding the view of the Full Bench of this Court, in CIT v. Kelvinator of India Ltd. [2010] 187 Taxman 312 (SC) observed that,
"6. On going through the changes, quoted above, made to Section 147 of the Act, we find that, prior to Direct Tax Laws (Amendment) Act, 1987, re-opening could be done under 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 from 1st April, 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 re-open the assessment. Therefore, post-1st April, 1989, power to re-open 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 re-open assessments on the basis of "mere change of opinion", which cannot be per se reason to re-open. We must also keep in mind the conceptual difference between power to review and power to re-assess. The Assessing Officer has no power to review; he has the power to re-assess. But re-assessment has to be based on fulfilment of certain pre-condition and if the concept of "change of opinion" is removed, as contended on behalf of the Department, then, in the garb of re-opening the assessment, review would take place. One must treat the concept of "change of opinion" as an in-built test to check abuse of power by the Assessing Officer. Hence, after 1st April, 1989, Assessing Officer has power to re-open, 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 re-introduced the said expression and deleted the word "opinion" on the ground that it would vest arbitrary powers in the Assessing Officer. We quote herein below the relevant portion of Circular No. 549 dated 31st October, 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 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."
14. In the present case the Assessing Officer passed the assessment order knowing that there were three units eligible for deduction u/s 10A/10B and that only 2 of the 3 units had claimed deduction; the third unit claimed NIL deduction. The Assessing Officer passed the assessment order and specifically altered the deduction claimed u/s 10A/10B. At the time of the original assessment the Assessing Officer did not think of setting off the loss of the third unit with the other two units and therefore the reassessment on a mere change of opinion is invalid.
15. Counsel for the revenue relied on the reasons given by the AO in rejecting the Petitioner's contentions. It was argued that the fact that the assessee had three units which were eligible for deduction under Sections 10A/10B of the Act, the fact of deduction being awaited in respect of profits of two units only, without setting off the losses suffered in the third unit, was not as clearly disclosed in the return of income as is sought to be argued by the petitioner. Counsel for the revenue argued that the issue under consideration was the computation of deduction allowable under Section 10B of the Act. For that purpose, he relied on Section 10-B (6) (ii) which provided for carry forward and set off of losses pertaining to the 100 % export oriented units eligible for deduction under the said section. When the facts of the present cases were seen in the light of the provision of sub-sections (3) to (8) of sub-section 10B, more particularly Section 10-B (6) (ii) the losses of the units were to be set off against the profits of such eligible unit. It was contended that this view was supported by the decisions relied on by the AO, i.e. CIT v. Himatasingike Seide Ltd. [2006] 286 ITR 255/156 Taxman 151 (Kar.) and of the Chennai Bench of the Tribunal in Sword Global (I) (P.) Ltd v. ITO [2010] 122 ITD 103. Therefore, the assessee was not correct in not setting off of losses of one eligible unit against the profits of another eligible unit, which is contrary to the scheme of Section 10B. This clearly constituted failure on the part of the assessee to make full and true disclosure, which necessitated re-opening of assessment, under Sections 147/148.
16. The primary duty of the AO, while invoking his power under Sections 147/148 is to be satisfied, on the basis of something on the record ("reasons to believe") that the assessee had withheld particulars, which led to income escaping assessment. The AO's reasoning appears to be that the assessee acted incorrectly in not setting off losses of one eligible unit against the profits of another eligible unit. However, the "reasons to believe" note, which initiated the reassessment proceeding, is silent as to what were the materials which persuaded the revenue to invoke the extraordinary powers under proviso to Section 147 of the Act. Now, Kelvinator of India Ltd. (supra) is authority that the Assessing Officer can re-open assessment under Section 147 of the Act, only if there is 'tangible material' to show that income has escaped assessment. The Assessing Officer is not allowed to arbitrarily re-open assessment. This aspect had been emphasized much earlier, in Lakhmani Mewal Das that
"The expression 'reason to believe' does not mean a purely subjective satisfaction on the part of the Income Tax Officer. The reason must be held in good faith. It cannot be merely a pretence. It is open to the court to examine whether the reasons for the formation of the belief have a rational connection with or a relevant bearing on the formation of the belief and are not extraneous or irrelevant for the purpose of the section."
17. In the present case, the original return of the assessee was subjected to scrutiny assessment, under Section 143(3). The assessee was apparently closely questioned on various aspects, including its claim for treatment of the three units, under Sections 10-A/10B of the Act. In response to a query raised by Respondent No.1, the Petitioner by letter dated 21.02.2005 furnished information regarding the units eligible for deduction u/s 10A/10B. In the reply the Petitioner listed all three units as units eligible for claiming deduction. The issue of deduction under Sections 10A/10B was specifically examined by the Assessing Officer during the original assessment. Furthermore, Form 56F/56G was also submitted along-with the return of income. In the forms the Petitioner had specifically claimed deduction u/s 10A/10B in respect of profits of two units whereas NIL deduction for the third unit. Furthermore, in a Note (dated 12.01.2005), appended to the return of income, the writ petitioner specifically disclosed at Point 1(c) that, the claim for benefit under Sections 10A/10B of the Act, in respect of 66, Udyog Vihar, Greater Noida- was eligible for claiming tax-holiday benefits under Section 10B of the Act. No deduction under Section 10B of the Act was claimed in view of a loss situation. The Report in Form 56G for the said unit to was enclosed. On 27.12.2006 the Petitioner filed an approval letter from the competent authority regarding eligibility of the units for deduction u/s 10A/10B; approval letters regarding all three units were submitted.
18. In the above background of facts, when there was intensive examination in the first instance in respect of the issue, which was the basis for re-opening of assessment, it was necessary for the AO to indicate, what other material, or objective facts, constituted reasons to believe that the assessee had failed to disclose a material fact, necessitating reassessment proceedings. That is precisely the "tangible material" which have to exist on the record for the "reasons" (to believe" bearing a "live link with the formation of the belief" as spelt out in Kelvinator. When the assessment is completed, as in the present instance, under Section 143 (3), after the AO goes through all the necessary steps of inquiring into the same issue, the reasons for concluding that reassessment is necessary, have to be strong, compelling, and in all cases objective tangible material. This court discerns no such tangible materials which have a live link that can validate a legitimate formation of opinion, in this case. It is not enough that the AO in the previous instance followed a view which no longer finds favour, or if the latter view is suitable to the revenue; those would squarely be change in opinion. Perhaps, in given fact situations, they can be legitimate grounds for revising an order of assessment under Section 263; but not for re-opening it, under proviso to Section 147.
19. As a result of the above discussion, it is held that the impugned notice, under proviso to Section 147, and consequent reassessment proceedings, are beyond jurisdiction. They are unsustainable, and are hereby quashed. The writ petition is allowed in these terms, without any order as to costs.
__._,_.___
No comments:
Post a Comment