IT : Where revenue rejected elaborate written objection filed by assessee against reasons recorded by Assessing Officer for initiating reassessment for disallowing claim of deduction under section 10B by merely saying that reasons already attributed were just and reasonable, reassessment would be unsustainable
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[2013] 38 taxmann.com 148 (Karnataka)
HIGH COURT OF KARNATAKA
Jeans Knit (P.) Ltd.
v.
Deputy Commissioner of Income-tax, Circle -11(5)*
RAM MOHAN REDDY, J.
WRIT PETITION NO. 13174 OF 2013 (T-IT)
JULY 23, 2013
Section 10B, read with section 147 of the Income-tax Act, 1961 - Export oriented undertaking [Reassessment] - Assessment year 2006-07 - Assessee, a 100 per cent export oriented unit claiming deduction under section 10B - As a result of a survey, Assessing Officer disallowed deduction for Assessment year 2007-08 on ground that assessee company was reconstructed from another company F - On this basis, a notice under section 148 was issued for assessment year 2006-07 for reassessment of escaped income - When asked for, revenue furnished reason that (i) assessee was using same business premises with company F, (ii) entire machinery had been shifted from F, (iii) petitioner were having same business of manufacture and export of jeans; and (iv) almost all employees, including technical and managerial, were shifted from F to petitioner-company; and, hence, assessee was formed by splitting up and reconstruction, and hence, deduction was not to be allowed - Assessee filed elaborate written objection, but same got rejected only by saying that reasons attributed to invoking of section 147 were just and reasonable - Whether since there was nothing to show that revenue had applied mind over elaborate reply made by assessee or on relevant material existed during survey, same did not conform to rule of law and, hence, would be unsustainable - Held, yes [Para 17] [In favour of assessee]
FACTS
| ■ | The assessee, a 100 per cent export oriented unit was engaged in manufacture and export of high fashion designer jeans. | |
| ■ | For assessment year 2006-07, the assessee filed return of income on 22-10-2007 and claimed deduction under section 10B which got accepted, hence, assessment attained finality. | |
| ■ | Thereafter, a survey was conducted and the assessee's return for assessment year 2007-08 was assessed after declining deduction under section 10B on the ground that during the survey it was revealed that the assessee was formed by reconstruction splitting of already existed company 'F'. | |
| ■ | The revenue issued notice under section 148 on 6-3-2012 for assessment year 2006-07 for reassessment of escaped income. | |
| ■ | Assessee requested to supply reason for initiating reassessment proceedings. | |
| ■ | The revenue furnished reason in its letter contending that assessee was formed by splitting and reconstruction by way of transfer of plant, machinery, premises and manpower of business of company 'F' as the assessee was using same business premises with company F; entire machinery had been shifted from F and petitioner are having the same business of manufacture and export of jeans and almost all employees including technical and managerial are shifted from F to petitioner-company. | |
| ■ | In response to this, the assessee filed an elaborate written objection, inter alia, contending how the reasons were arbitrary, irrational and therefore, the first respondent had no jurisdiction to initiate proceedings. | |
| ■ | On writ: |
HELD
| ■ | The recording of reasons is a part of fair procedure since reasons are the harbinger between the mind of maker of the decision in the controversy and the decision or conclusion arrived at to substitute subjectivity with objectivity. It is true that the order of affirmation of the reasons need not be by extracting the reasons elaborately but even then the arguments or submissions made, points urged have to be dealt with if not elaborately, at least briefly. Regard being had to the only reason assigned in the order being that of extracting section 147 of the Act and saying that reasons attributed to the invoking of section 147 are just and reasonable, there is nothing to show application of mind over the elaborate reply made by the assessee, more appropriately on relevant material as existed during the assessment year 2006-07 which the office while conducting a survey under section 133A had no knowledge of. Regard being had to the principles of law laid down by the Apex Court in the decisions noticed supra, it is needless to state that the Deputy Commissioner should have considered the plea of the petitioner, by applying the principles of law laid down in order to come to a conclusion either accepting the objections or rejecting the same. A mere statement rejecting the objections advanced by the assessee does not confirm to rule of law and on that score alone this petition deserves to be allowed in part. | |
| ■ | In the circumstances, there is a need for the Deputy Commissioner to consider all the pleas advanced by the assessee in the reply to the reasons and pass an order assigning reasons and findings strictly in accordance with law within a fortnight from today. [Para 17] |
CASES REFERRED TO
CIT v. Sri A. Nagappa [W.A. Nos. 928 of 1991, dated 19-3-1992] (para 9), Ganga Saran & Sons (P.) Ltd. v. ITO [1981] 130 ITR 1/16 Taxman 14 (SC) (para 9), Sheo Nath Singh v. Appellate Asstt. CIT [1971] 82 ITR 147 (SC) (para 10), Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188/62 Taxman 480 (SC) (para 11), Textile Machinery Corpn. Ltd. v. CIT [1977] 2 SCC 368 (para 11) and CIT v. Continental Engines Ltd. [2011] 338 ITR 290/201 Taxman 65 (Mag.)/12 taxmann.com 398 (Delhi) (para 12).
Nageshwar Rao and Arun Shrikumar for the Petitioner. E.S. Indrakumar and E.I. Sanmathi for the Respondent.
ORDER
1. Petitioner, a Company incorporated under the Companies Act, 1956 has called in question the legality and validity of the notice dated 06.03.2012, Annexure-A of the first respondent invoking Section 148 of the Income Tax Act, 1961 ('the Act' for short); the notices of even date 03.012013, Annexures-B and C invoking Sections 143(2) and 142(1) of the Act; to quash the order dated 06.03.2013, Annexure-E disposing of the objections of the petitioners filed on 11.02.2013 and notices of even date 06.03.2013 under Sections 143(2) and 142(1) of the Act, Annexures-E and F and for a writ of mandamus to stay all further proceedings pursuant to the notices, Annexures-E and F.
2. Facts briefly stated are: petitioner is a 100% export oriented unit engaged in manufacture and export of high-fashion designer jeans having its registered office in the State of Karnataka at Bangalore and assessed to tax.
3. For the assessment year 2006-07, petitioner filed a return, and a revised return of income on 22.10.2007 declaring NIL income while the computation of income showed net profit from business as Rs.45,37,37,724/- from out of which Rs.41,38,13,599/- was claimed as deduction for the first year under Section 10(B) of the Act. That return of income was accepted under Section 143(1) of the Act on 28 03.2009 computing gross total income and tax liability of the petitioner for the said assessment year. No notice of scrutiny was issued and therefore, return had attained finality.
4. The business premises of the petitioner when surveyed on 05.11.2009 invoking Section 133A of the Act, statements were obtained from some employees of the petitioner-company, pursuant to which, the assessment of petitioner's returns for the assessment year 2007-08 was completed under Section 143(3) of the Act on 30.12.2010 declining deductions under Section 10B of the Act, on the premise of the statement of the petitioner's employee who though retracted from his statement by filing an affidavit on 19.04.2010. An appeal preferred by the petitioner over the said assessment order was allowed and the deduction under Section 10B permitted, against which the revenue is in appeal before the Income Tax Appellate Tribunal.
5. The first respondent issued a notice under Section 148 of the Act on 06.03.2012, Annexure-A, calling upon the petitioner to file its return of income so as to assess income alleged to have escaped tax during the previous year i.e., relevant to assessment year 2006-07, to which the petitioner responded by letter dated 22.03.2012 stating that the revised return of income dated 22.10.2007 should be treated as return filed in response to the said notice for the relevant year, in addition to making a request for supply of copy of reasons for initiating reassessment proceedings for the assessment year 2006-07. The first respondent is said to have furnished the reasons in its letter dated 03.01.2013, Annexure-G alleging that the petitioner failed to fulfil the conditions required to claim deduction under Section 10B and hence ineligible for the deductions. According to the first respondent, the business premises used by the petitioner and belonging to Fibres and Fabrics International Private Limited (FFIPL' for short) was one and the same; entire machinery had been shifted from FFIPL to the petitioner; FFIPL and the petitioner are having the same business of manufacture and export of jeans and almost all employees including technical and managerial are shifted from FFIPL to petitioner-company. The first respondent issued notices under Sections 143(2) and 142(1) of the Act, Annexures B and C, on 03.01.2013, responded to on 12.02.2013 by filing written objections, inter-alia, contending that the reasons were arbitrary, irrational and therefore, the first respondent had no jurisdiction to initiate proceedings. In addition, it was submitted that for the assessment year 2007-08, the CIT(A) accepted the version of the petitioner and extended the benefit of deduction under Section 10B by rejecting the material gathered by the Assessing Officer during the course of survey. It is said that CIT(A) disagreed with the conclusion of the Assessing Officer that the petitioner company was formed by splitting or reconstruction of business of FFIPL, since there was neither split nor reconstruction by way of transfer of plant, machinery, premises and man power during the period relevant to assessment year 2006-07, the first year in which petitioner claimed deduction under Section 10B. Therefore, the petitioner's claim, that what happened subsequent to the assessment year 2006-07, more particularly, during the assessment year 2007-08 could not have formed a valid and legal basis or material for denying the deduction under Section 10B for the assessment year 2006-07.
6. The further assertion of the revenue that the decline in business turn over of FFIPL and increase in the business turn over of petitioner-company was an attempt to enjoy the benefits of Section 10B of the Act in order to avoid tax liability of sister concern, not based on facts and evidence, since a new unit can always be started for availing tax benefit and there being no bar under the statute, it is submitted the starting of the new undertaking by the petitioner and making profits could not support the allegation of the Assessing Officer as was confirmed by the CIT(A) in its order.
7. It is the allegation of the petitioner that the first respondent in a cavalier manner without applying his mind to the material on record and not noticing the law laid down by the Apex Court in the decision referred to in the reply statement, rejected the objections of the petitioner by order dated 06.03.2013, Annexure-D.
The first respondent having issued notice under Section 143(2) and 142(1) of the Act on 12.03.2013, Annexures-E and F, calling upon the petitioner to furnish various information and details, petitioner by representation dated 12.03.2013, Annexure-N sought time to furnish the information which was rejected by communication dated 13.03.2013, Annexure-P.
Hence this petition for the reliefs noticed supra.
8. Petition is opposed by filing statement of objections, inter-alia, contending that invoking of jurisdiction under Section 147 for reopening assessment for the assessment year 2006-07 was based on reasons, consequent upon survey under Section 133A conducted at the business premises of the petitioner, on 05.11.2009. In addition, it is stated that there is enough and more material in order to establish the reasons that the petitioner company is an outcome of reconstruction of FFIPL and therefore, the grounds set out in the memorandum of writ petition are not worthy of consideration.
9. Learned counsel for the petitioner submits that at the threshold, the order, Annexure-D of the first respondent has occasioned denial of justice, and that the reasons to reopen the assessment for the assessment year 2006-07 as furnished in the communication, Annexure-G being evasive and speculative, not being rational and relevant nexus to the formation of such a belief, calls for interference and places reliance upon the decision of the Division Bench of this Court in the case of CIT v. Sri. A Nagappa [W.A. No. 928/1991, dated 19.03.1992]. Learned counsel further places reliance upon the decision of the Apex Court in Ganga Saran & Sons (P.) Ltd., v. ITO [1981] 130 ITR 1/6 Taxman 14 to submit that the first respondent had no reason to believe that the income of the petitioner had escaped assessment by wrongly claiming deduction under Section 10B; that the belief that is to be entertained by the first respondent ought not to be arbitrary or irrational, but after an examination as to whether the reasons are relevant and have a bearing on the matters in regard to which first respondent is required to entertain the belief, before issuing notice under Section 147; if there was a rational and intelligible nexus between the reasons and the belief, so that, on such reasons, no one properly instructed on facts and laws could reasonably entertain the belief.
10. It is next submitted that words "reason to believe" when considered by Apex Court in Sheo Nath Singh v. Appellate Asstt. CIT [1971] 82 ITR 147, it was held that belief must be that of an honest and reasonable person based upon reasonable grounds and that the Income Tax Officer may act on direct or circumstantial evidence but not on mere suspicion, gossip or rumour and therefore the reasons assigned by the first respondent in Annexure-G are susceptible to suspicion, gossip and rumour, hence not sustainable.
11. Learned counsel places reliance upon the decision of the Apex Court in the case of Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188/62 Taxman 480in support of his submission that, "the transfer", to take out the new undertaking out of purview of sub-section (1) of Section 10B of the Act must be such that, but for transfer, the new undertaking could not have come into being. It is the further submission of the learned counsel that, in order to deny the benefit under Section 10B, the new undertaking must be formed by reconstruction of old business when the assets of the old business are transferred substantially to the new undertaking, by placing reliance on the decision of the Apex Court in the case of Textile Machinery Corpn. Ltd., v. CIT [1977] 2 SCC 368.
12. It is lastly submitted that mere fact that petitioner was getting some job works done from M/s FFIPL by itself and nothing more cannot deprive the petitioner of the benefit of deduction under Section 10B of the Act and places reliance upon the decision of the High Court of Delhi in the case of CIT v.Continental Engines Ltd. [2011] 338 ITR 290/201 Taxman 65 (Mag.)/12 taxmann.com 398.
13. Per Contra, learned Senior Counsel for the respondent-revenue seeks to sustain the order impugned as being well merited, fully justified not calling for interference, and that giving of reasons for initiation of proceedings under Section 147 is an out come of law declared by the Apex Court, extending an opportunity to submit a reply, hence the rejection of the reasons would not preclude the revenue from an adjudication and if the petitioner is aggrieved by any order passed thereon, may question the same in an appropriate legal proceeding. Learned Senior Counsel would not seriously oppose the observations of Apex Court in the decisions relied upon by the learned counsel for the petitioner. According to the learned Senior counsel there are a catena of decisions in support of the contention that proceedings under Section 147 of the Act when initiated on the basis of reasons supplied to the assessee, must be taken to its logical end, after adjudication, as the assessee would be extended reasonable opportunities to putforth his case against the reasons. Learned senior counsel, submits that the petition filed at a threshold stage of rejection of the objections to the notice furnishing reasons, pursuant to the notice under Section 147 deserves to be rejected. It is lastly submitted that the survey of the petitioner's premises in exercise of jurisdiction under Section 133A of the Act revealed the true identity of the petitioner-company i.e., it was a company reconstructed from out of M/s FFIPL and therefore, disentitled to the benefit of deduction under Section 10B of the Act.
14. Having heard the learned counsel for the parties, perused the pleadings and examined the order, Annexure-B, ex-facie what is patent is that the order suffers from reasons and findings, except for drawing conclusion.
15. It is elsewhere said that recording of reasons is a part of fair procedure since reasons are the harbinger between the mind of maker of the decision in the controversy and the decision or conclusion arrived at to substitute subjectivity with objectivity. It is true that the order of affirmation of the reasons need not be by extracting the reasons elaborately but even then the arguments or submissions made, points urged have to be dealt with if not elaborately, at least briefly. Regard being had to the only reason assigned in the order Annexure-D being that of extracting Section 147 of the Act and saying that reasons attributed to the invoking of Section 147 are just and reasonable, there is nothing to show application of mind over the elaborate reply made by the petitioner, more appropriately on relevant material as existed during the assessment year 2006-07 which the office while conducting a survey under Section 133A had no knowledge of. Regard being had to the principles of law laid down by the Apex Court in the decisions noticed supra, it is needless to state that the 1st respondent should have considered the plea of the petitioner, by applying the principles of law laid down in order to come to a conclusion either accepting the objections or rejecting the same. A mere statement rejecting the objections advanced by the petitioner does not confirm to rule of law and on that score alone this petition deserves to be allowed in part.
In the circumstances, there is a need for the 1st respondent to consider all the pleas advanced by the petitioner in the reply Annexure-M to the reasons Annexure-G and pass an order assigning reasons and findings strictly in accordance with law within a fortnight from today.
SBRegards
Prarthana Jalan
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