Asn v. G.s. Kulkarni, Jj. 16 July 2014

IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTION WRIT PETITION NO.1226 OF 2005 ICICI Securities Limited.….Petitioner. vs. The Asstt. Commissioner of Income Tax 3(2)Mumbai and ors.….Respondents. Mr. J. D. Mistry, Sr. Advocate along with Mr. B.D.Damodaran i/by M/s. Kanga & Co. for the Petitioner.Mr. Suresh Kumar for the Respondent. CORAM : M.S. SANKLECHA AND G.S. KULKARNI, JJ. 16 July 2014 DATE : PC: This petition under Article 226 of the Constitution of India challenges a notice dated 16 March 2004 issued by respondent No.1(Assessing Officer) under Section 148 of the Income Tax Act, 1961 (“the Act”) seeking to reopen the assessment for A.Y. 1997-98. This petition was admitted on 27 June 2005. 2)The petitioner is inter alia engaged in various non banking financial activities. On 27 November 1997, the petitioner filed its return of income for A.Y. 1997-98 disclosing total income of Rs.5.22 crores. The Assessing Officer by an order dated 31 December 1999 passed under Section 143(3) of the Act determined the total income at Rs.49.82 lacs . 3)On 16 March 2004, the Assessing Officer issued a notice under section 148 of the Act seeking to reopen the assessment for the A.Y.1997-98. 4) On 10 March 2005, the reasons recorded for issuing the notice were communicated to the petitioners. They read as under : “The assessee has requested for grant of credit to TDS of Rs.32,71,118/- on interest of Rs.1,32,30,000/-. The securities in question were sold by the assessee ex-interest to Hindustan Steel Ltd contributory Provident Fund. The assessee claims credit for TDS without offering the interest income for taxation in their hands. Therefore, omission on the part of the assessee to offer the interest of Rs.1,32,30,000/- to tax for A.Y.1997-98 which has escaped assessment. It is proposed to reopen the assessment u/s 147 of the I.T.Act.” 5)On 16 March 2005 and 18 March 2005 the petitioner filed its objections to the reasons communicated on 10.3.2005. In particular, the petitioners pointed out that the impugned notice is result of the petitioner having filed an application under Section 119(2)(b) of the Act seeking condonation of delay in making an application for refund of the Tax Deducted at Source (TDS) of Rs.32,71,118/- in respect of A.Y. 1997-98. The reason for the above application and the consequent impugned notice arose on following facts:- a)On 10 January 1996 petitioner sold to Hindustan Steel Ltd.- Contributory Provident Fund. (Hindustan Steel) 14% Government of India 2005 Securities (Securities) issued by the Reserve Bank of India (R.B.I.); b)The interest on securities was payable on 8 December 1995 and 8 June 1996; (c)For the A.Y. 1996-97, the petitioner had offered to tax income on the sale of securities to Hindustan Steel and also the interest attributable for the period 9 December 1995 to 1O January 1996 on the securities. (d)In spite of the sale of securities, the petitioner's name was continued to be shown as holder of securities in the record of RBI till 8 June 1996.This even after the above transfer was duly informed to the R.B.I. (e)This resulted in the petitioner receiving interest of Rs.1,32,300,000/- from R.B.I. being payable on 8 June 1996. The R.B.I. deducted tax at source to the extent of Rs.32,71,118/- on the above interest; (f)However, as the above interest belonged to Hindustan Steel the petitioner paid the entire amount of Rs.1,32,30,000/-i.e. inclusive of TDS to Hindustan Steel by a demand draft dated 19 July 1996. This was on the basis of the CBDT Circular dated 30 March 1967 which provided that in such cases, the entire amount is to be paid over to the beneficial owner of the Share/Securities by the registered holder. This is so, as the tax will be payable by the beneficial owner of the income and the registered share holder can apply for the refund of the TDS under Section 237 of the Act; (e)This resulted in the petitioner receiving interest of Rs.1,32,300,000/- from R.B.I. being payable on 8 June 1996. The R.B.I. deducted tax at source to the extent of Rs.32,71,118/- on the above interest; (f)However, as the above interest belonged to Hindustan Steel the petitioner paid the entire amount of Rs.1,32,30,000/-i.e. inclusive of TDS to Hindustan Steel by a demand draft dated 19 July 1996. This was on the basis of the CBDT Circular dated 30 March 1967 which provided that in such cases, the entire amount is to be paid over to the beneficial owner of the Share/Securities by the registered holder. This is so, as the tax will be payable by the beneficial owner of the income and the registered share holder can apply for the refund of the TDS under Section 237 of the Act; (g)However, the TDS Certificate was received by the petitioner later in the form of duplicate certificate. Thus the petitioner could not claim the refund within the period provided under Section-239 of the Act; (h)In view of the delay in receiving the TDS Certificate and applying for refund, the petitioner on 2 January 2001 made an application to CBDT under Section 119(2)(b) of the Act, seeking condonation of delay in filing the claim for refund of Rs.32,71,118/-. The same was under process and as late as 6 February 2003, the petitioner had furnished various information called for and were awaiting an order admitting their claim for refund of Rs.32,71,118/-on merits. (i)However, no order was received from the CBDT either accepting or rejecting its application. However, the impugned notice dated 16 March 2004 was received from the Assessing Officer. Thus, it is the petitioner's case that the impugned notice dated 16 March 2004 is not sustainable as no income chargeable to tax had escaped assessment nor was there any failure on its part to disclose truly and fully all material facts necessary for its assessment for A.Y. 1997-98. 6)By an order dated 5 April 2005 the Assessing Officer rejected the petitioner's objections to reopening of the assessment. It inter alia holds that there was a failure on the part of the assessee to disclose all the material facts necessary for assessment in as much as the petitioner had not disclosed the receipt of interest in the assessment proceedings for A.Y. 1997-98. This fact became known to Revenue when the petitioner had filed an application to the CBDT on 2 January 2001 under Section 19(2) (b) of the Act seeking admission of their claim for refund of the TDS of Rs.32,71,118/-. Besides, he holds that there is reason to believe that income liable to tax has escaped assessment as the CBDT circular dated 30 March 1967 being relied upon by the petitioner is inapplicable in view of the amendment to Section 199 of the Act by the Finance Act 1968 with retrospective effect from1 April 1962.Thus taking a prima facie view that the income chargeable to tax has escaped assessment. 7)On the aforesaid facts, Mr. J.P. Mistry learned Senior Counsel in support of the petition submits as under : i) The impugned notice is hit by the proviso to section 147 of the Act in as much as there has been no failure on the part of the petitioner to disclose material facts necessary for its assessment. It is the petitioner's case that an amount of Rs.1,32,30,000/- was not its income and never claimed to be its income. Therefore, it was not a fact necessary to be disclosed for the purpose of its assessment. ii) There is no reason to believe that the income chargeable to tax has escaped assessment for the simple reason that the income of Rs.1,32,30,700/- is undisputedly not the petitioner's income. 7)On the aforesaid facts, Mr. J.P. Mistry learned Senior Counsel in support of the petition submits as under : i) The impugned notice is hit by the proviso to section 147 of the Act in as much as there has been no failure on the part of the petitioner to disclose material facts necessary for its assessment. It is the petitioner's case that an amount of Rs.1,32,30,000/- was not its income and never claimed to be its income. Therefore, it was not a fact necessary to be disclosed for the purpose of its assessment. ii) There is no reason to believe that the income chargeable to tax has escaped assessment for the simple reason that the income of Rs.1,32,30,700/- is undisputedly not the petitioner's income. (iii) The entire reasons as recorded for the purpose of reopening has proceeded on misunderstanding of law. The petitioner can be only charged to tax on income which is earned by it or which belongs to it. In this case, admittedly interest income belongs to Hindustan Steel on the securities sold to them on 10 January 1996. The entire proceedings seeking to reopen the assessment for A.Y. 1996-97 is a counter blast to the petitioner's application to the CBDT to condone the delay in their application for refund of the TDS amount of Rs.32,71,118/-. Therefore, it is submitted that the petition be allowed. 8)As against above, Mr. Suresh Kumar learned counsel for the revenue in support of the impugned notice submits as under :- a) The proviso to Section 147 of the Act will be applicable inasmuch as there was a failure on the part of the petitioner to disclose the receipt of interest income for the A.Y. 1997-98. This fact came to light only on the petitioner making a claim for refund of TDS. Consequently, there was failure on the part of the petitioner to disclose facts necessary for assessment of the petitioner. b) The Board Circular dated 30 July 1967 relied upon by the petitioner no longer holds the field as Section 199 of the Act has been amended to provide the credit of TDS would be given to the beneficial owner and not to the registered owner of shares. c) At this stage, the revenue has only to have reason to believe that income chargeable to tax has escaped assessment and not a cast iron case. Therefore, this Court should not interfere as the petitioner would have ample opportunity during the assessment proceedings to justify its stand. 9) We have considered the rival submissions. The petitioner's assessment for the subject A.Y. 1997 1998 was completed under section 143 (3) of the Act by an order dated 31 December 1999. The impugned notice is issued on 16 March 2004. Therefore, notice has been issued beyond the period of 4 years from the end of the relevant assessment year. It is well-settled that where the assessment which is completed under Section 143(3) of the Act is sought to be reopened beyond the period of 4 years, from the end of the relevant assessment year, then Assessing Officer acquires jurisdiction to issue notice for reopening only on the satisfaction of the following two conditions :- a) failure on the part of the assessee to make a full and true disclosure necessary for its assessment ; and (b) such failure to make a full and true disclosure leads to a reason to believe that the income chargeable to tax has escaped assessment. a) failure on the part of the assessee to make a full and true disclosure necessary for its assessment ; and (b) such failure to make a full and true disclosure leads to a reason to believe that the income chargeable to tax has escaped assessment. 10)We shall whilst keeping the above jurisdictional requirement in mind examine the facts arising herein for our consideration. On 10 January 1996 the petitioner sold securities to Hindustan Steel. These securities are issued by the R.B.I. and interest is payable on 8 December 1995 and 8 June 1996 by the R.B.I. The petitioner received half-yearly interest payable on 8 June 1996 in respect of securities which were already sold to Hindustan Steel. The petitioner received the interest as the change of ownership was not recorded till 8 June 1996 in the R.B.I. records. On 19 July 1996 the petitioner paid over the gross amount of interest received from the R.B.I. on securities (including TDS amount ). This was done by the petitioner as in fact the entire income belonged to Hindustan Steel i.e. the beneficial owner of the shares. Besides this was also in accordance with the CBDT circular dated 30 March 1967. The above circular provided that the registered holder would not be charged to tax but would be entitled to refund of the TDS. However, as there was a delay in receiving TDS Certificate from the R.B.I. the petitioner could not claim the refund from the R.B.I. under Section 237 of the Act within the period of limitation provided in Section 239 of the Act. In view of the above, on 2 January 2001 the petitioner applied under Section 119 (2) (b) of the Act to the CBDT seeking condonation of the delay under Section 239 of the Act and a direction to the Assessing Officer to consider its claim for refund of TDS amounting to Rs.32,71,118/- on merits under Section 237 of the Act. Consequent to the above, inquiries were made by CBDT to which the petitioner responded. In particular, the petitioner in its letter dated 18 January 2003 in response to the query dated 6 February 2003 by the CBDT once again pointed out that the complete transaction which had taken place and also the fact that on the sale of securities to Hindustan Steel the profit had been offered to tax. However, it appears that thereafter there has been no further movement with regard to the petitioner's claim for refund of TDS with the CBDT. We are informed it is still pending. However, the Assessing officer issued the impugned notice dated 16 March 2004 seeking to re-open the assessment for A.Y. 1997-98 on the basis that the refund of TDS on the ground that interest income has escaped assessment. 11)Normally, we would not have entertained such a petition and would have directed the petitioner to satisfy the Assessing officer in re-assessment proceedings in respect of non-receipt of income in respect of which credit for TDS is being claimed by the petitioner. However, in the present facts it is seen that it was as far as back as on 2 January 2001 that the petitioner had made an application to the CBDT seeking condonation of delay and consideration of its application for refund of the TDS of Rs.32,71,118/-, on merits . In its application the petitioner had clearly pointed out the complete nature of the transaction including the fact that the gross amount (including TDS amount) had been paid over by them to Hindustan Steel. Thus, indicating that there has been no interest income to the petitioner from the securities during the A.Y. 1997-98. Further reliance was placed upon the Circular dated 30.3.1967. The CBDT has even after having made queries and granting a hearing to the petitioner has not yet rejected the petitioner's application dated 2 January 2001 for refund or found that the facts stated therein are in any manner incorrect. The application before the CBDT is still pending. In the aforesaid circumstances, according to us it is very clear that there is no interest income earned by the petitioner on the sale of securities. These securities had been sold in the immediately preceding assessment year i.e. A. Y. 1996-97 to Hindustan Steel. Therefore, the aforesaid interest income which belongs to Hindustan Steel cannot be brought to tax in the hands of the petitioner. The sina qua non to tax income is earning of income either actual or notional or deemed. In the present facts, it is very clear that the petitioner has not earned the income as owner and/or holder of securities which had been already sold to Hindustan Steel. The petitioner had received the interest amount in its capacity as a registered holder and/or as a transferor for Hindustan Steel. Thus, we conclude that no income as interest on account of securities has been earned by the petitioner in respect of the interest received on 8 June 1996 on the securities which were already sold to Hindustan Steel. 12) In the above view there is no reason for us to consider the issue of applicability of the Circular of the CBDT or Section 199 of the Act and the appropriate interpretation of Section 199 of the Act. 13) Besides as the assessment being sought to be reopened by the impugned notice dated 16 March 2004 is beyond a period of four years from the end of A.Y. 1997-98, the proviso to Section 147 of the Act would apply. Therefore, there must be a failure on the part of an assessee to fully and truly disclose true and correct material facts necessary for assessment of the assessee. In the peculiar facts of this case, the interest income received on the securities on 8 June 1996 was never claimed as the the petitioner's income is also borne out by its communication dated 2 January 2001 to the CBDT in its application under Section 19(2)(b) of the Act, the occasion to disclose the same never arose. This is so as it was not necessary for the petitioner's assessment. In these circumstances, there was no occasion for the petitioner to disclose receipts which was not its income and therefore, not necessary for its assessment. It therefore, cannot be said that there was failure on the part of the petitioner to make a full and true disclosure for the purposes of its assessment. Thus, there could be no reason to believe that income chargeable to tax has escaped assessment. 14)In the above view, we set aside the impugned notice dated 16 March 2004 and order dated 5 April 2005 disposing of the petitioner's objections to the reasons in support of the impugned notice dated 16 March 2004 seeking to reopen the assessment for A.Y. 1997-98. 15) Accordingly, Writ Petition is allowed. No order as to costs. (G.S.KULKARNI, J) (M.S.SANKLECHA,J)