Atlas Cycles (Haryana) Limited v. Deputy Commissioner Of Income Tax

IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH CWP No. 10390 of 2010Date of Decision: 2.12.2010 Atlas Cycles (Haryana) Limited Versus Deputy Commissioner of Income Tax ....Petitioner. ...Respondent. CORAM:-HON'BLE MR. JUSTICE ADARSH KUMAR GOEL.HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: Mr. Ashim Aggarwal, Advocate for the petitioner. Mr. I.P. Singh, Advocate for the respondent. AJAY KUMAR MITTAL, J. 1.This order shall dispose of Civil Writ Petition Nos. 10390,10391 and 10392 of 2010 relating to the assessment years 2003-04,2004-05 and 2005-06, respectively as according to learned counsel forthe parties common questions of law and facts are involved therein. Forbrevity, the facts are being taken from CWP No. 10390 of 2010 in whichCivil Miscellaneous No.12673 of 2010 had been filed for amendment ofthe writ petition. 2.In the amended petition filed under Articles 226/227 of theConstitution of India, the petitioner seeks issuance of writ of certiorarifor quashing the impugned notice dated 3.3.2010 (Annexure P-1)issued under Section 148 of the Income Tax Act, 1961 (in short “theAct”), notice dated 11.5.2010 (Annexure P-2) issued under Section 143(2) of the Act and order dated 23.8.2010 (Annexure P-3) passed bythe respondent disposing of the objections to the validity of initiatingreassessment proceedings in respect of the return of income for theassessment year 2003-04. 3.The brief facts for adjudication as narrated in the petitionare that the petitioner is a Public Limited Company and is engaged inthe business of manufacture and sale of bicycle, bicycle parts and steeltubes. It filed its return for the assessment year 2003-04 on 1.12.2003declaring an income of Rs.3,60,30,500/-. The return was accompaniedby the audited financial results, tax audit report under Section 44AB,audit report under Section 80HHC and deductions under Section 80-IBof the Act. The assessee claimed deduction of Rs.10,77,813/- underSection 80HHC and Rs.3,57,44,297/- under Section 80-IB of the Act.The Assessing Officer vide order dated 28.3.2006 computed the incomeof the petitioner at Rs.3,81,08,270/-. The Assessing Officer apart frommaking minor disallowance, allowed deduction of Rs.10,46,375/- underSection 80HHC, Rs.3,57,44,297/- under Section 80-IA andRs.7,19,250/- under Section 80G of the Act. Feeling aggrieved, theassessee went in appeal and the Commissioner of Income Tax(Appeals) [in short “the CIT(A)”] vide order dated 1.3.2007 partlyallowed the appeal. Against the order of the CIT(A), the revenueapproached the Income Tax Appellate Tribunal (for brevity, “theTribunal”) by filing an appeal, who vide order dated 19.2.2009dismissed the appeal. Subsequently, the respondent issued a noticedated 3.3.2010 under Section 148 of the Act asking the petitioner to fileits return of income for the assessment year in question as certain income had escaped assessment. The reasons recorded read thus:- “The assessee filed its return of income for the A.Y.2003-04 on 01.12.2003, declaring income ofRs.3,60,30,500/-, along with profit and loss account,balance sheets and audit report in form – CD, thesame was processed u/s 143(1) at the returnedincome of Rs.3,60,30,500/- on 17.02.2004. The casewas taken up in scrutiny and the assessment wascompleted u/s 143(3) vide order dated 28.03.2006 ata total income of Rs.3,81,08,270/-. It is noticed that income had escaped assessment. The reasons recorded read thus:- “The assessee filed its return of income for the A.Y.2003-04 on 01.12.2003, declaring income ofRs.3,60,30,500/-, along with profit and loss account,balance sheets and audit report in form – CD, thesame was processed u/s 143(1) at the returnedincome of Rs.3,60,30,500/- on 17.02.2004. The casewas taken up in scrutiny and the assessment wascompleted u/s 143(3) vide order dated 28.03.2006 ata total income of Rs.3,81,08,270/-. It is noticed that theassesseecompanyhasinvestedRs.2,50,00,000/- in bonds of Central Bank of India.The income earned from the said investment doesnot form the part of total income being exemptedfrom tax. The assessee has also declared borrowedfund of Rs.35,34,06,759/- on which interestamounting to Rs.3,54,79,130/- was charged to its P/Laccount. The assessee has invested its interestbearing funds in non-trade investment as mentionedabove, the income of which is exempted from tax anddoes not form part of total income. Hence, theprovision of section 14A of IT Act are applicable inthis case and interest attributable to this investmentis liable to be added in the declared income. Keeping in view the facts, as stated above, I havereasons to believe that the income to the extent of interest attributable to Rs.2,50,00,000/- which comesto Rs.2,51,050/- (taken on average base) hasescaped assessment. It has also been noticed that the company has givenan interest free advance/loan to Sh. Arun Kapooramounting to Rs.8,00,75,723/-. Sh. Arun Kapoor is arelated person under the provision of the IT Act. Theinterest attributable on the loan given to Sh. Kapoorcomes to Rs.80,41,210/- (taken on average base) isliable to be disallowed, since the company has paidits interest on borrowed funds. Hence, I have reasons to believe that interest ofRs.82,92,260/- debited to P/L account attributable tothe investment made by the assessee in bonds, theincome of which does not form the part of totalincome and interest attributable to loan advanced toSh. Arun Kapoor, has escaped assessment andtherefore the provisions of section 147 of IT Act areattracted. And also re-assess, any other income found to haveescaped assessment, during the course ofreassessment u/s 148 of the IT Act. Necessary approval for issue of notice u/s 148 hasbeen accorded by the worthy Commissioner ofIncome Tax vide its F. No. CIT/Judl./6460 dated25.02.2010. In view of the above, issue notice u/s 148 of the ITAct for the A.Y. 2003-04.” A perusal of the above reasons recorded clearly spells outthat proceedings for reassessment had been initiated as, according tothe assessing officer, following income had escaped assessment:- (a)The assessee had declared borrowed funds ofRs.35,34,06,759/- on which interest amounting toRs.3,54,79,130/- had been charged to profit & loss account.Therefore, in view of Section 14A of the Act, interestattributable to investment in interest bearing funds in non-trade investments is liable to be added in the declaredincome. (b)Income to the extent of Rs.2,51,050/- (taken onaverage basis) as interest attributable to Rs.2,50,00,000/-as investment in bonds of Central Bank of India. (c)Interest attributable amounting to Rs.80,41,210/- oninterest free advance/loan of Rs.8,00,75,723/- to Sh. ArunKapoor. 4.The petitioner-company filed its reply to the show causenotice stating that the return filed earlier may be treated as a return inresponse to the notice issued under Section 148 of the Act. Thepetitioner-company on 19.4.2010 filed objections. The respondent videorder dated 23.8.2010 rejected the said objections and had alreadyissued notice dated 11.5.2010 under Section 143(2) of the Act for re-assessment proceedings. Hence, the present writ petition. 5.Learned counsel for the assessee stressed that the (b)Income to the extent of Rs.2,51,050/- (taken onaverage basis) as interest attributable to Rs.2,50,00,000/-as investment in bonds of Central Bank of India. (c)Interest attributable amounting to Rs.80,41,210/- oninterest free advance/loan of Rs.8,00,75,723/- to Sh. ArunKapoor. 4.The petitioner-company filed its reply to the show causenotice stating that the return filed earlier may be treated as a return inresponse to the notice issued under Section 148 of the Act. Thepetitioner-company on 19.4.2010 filed objections. The respondent videorder dated 23.8.2010 rejected the said objections and had alreadyissued notice dated 11.5.2010 under Section 143(2) of the Act for re-assessment proceedings. Hence, the present writ petition. 5.Learned counsel for the assessee stressed that the proceedings having been initiated after expiry of four years from the endof the assessment year in respect of which assessment had beenframed under Section 143(3) of the Act and there being no allegation ofnon disclosure of facts fully and truly in the original return, thereassessment proceedings are vitiated. He relied upon followingjudgments in support of his submissions:- (i)Duli Chand Singhania vs. ACIT, [2004] 269 ITR 192(P&H).(P&H). (ii)Mahavir Spinning Mill Ltd. v. CIT, [2004] 270 ITR 290(P&H)(P&H) (iii)Haryana Acrylic Manufacturing Pvt. Ltd. v. CIT,[2009] 308 ITR 38 (Del).[2009] 308 ITR 38 (Del). (iv)JSRS Udyog Ltd. v. ITO, [2009] 313 ITR 321 (Del). (v)D.T. and T.D.C. Ltd. v. ACIT, [2010] 324 ITR 234 (Del). 6.He further submitted that all primary facts had beendisclosed in the return filed and the petitioner had specifically claimeddeduction under Section 36(1)(iii) of the Act. According to learnedcounsel in view of Apex Court decision in Calcutta Discount Co. Ltd. v.CIT, [1960] 41 ITR 191 (SC),the reopening was not justified. 7.The notice for assessment was sought to be challenged byplacing reliance on the judgment of this Court in CIT v. Hero Cycles Ltd.31 DTR 301 (P&H)on the ground that Section 14A was not attracted tothe present case. Mere change of opinion and no new material hascome to light after framing of original assessment under Section 143(3)of the Act were the other grounds of challenge to the reassessment proceedings. Further where an assessment is made under Section143(3) of the Act, the presumption is that every issue arising in theassessment proceedings has been considered. Support has beendrawn from the following decisions:- (a)Commissioner of Income Tax v. Foramer France 264ITR 566 (SC).ITR 566 (SC). (b)CIT v. Kelvinator India Limited, 228 CTR 488 (SC).(c)Jindal Photo Films Vs. CIT, 234 ITR 170 (Del).(c)Jindal Photo Films Vs. CIT, 234 ITR 170 (Del). (d)CIT Vs. Kelvinator of India Limited 256 ITR 1 (Del)(FB).(FB). (e)M/s Transworld International Inc. v. JCIT, 273 ITR242 (Del).242 (Del). (f)United Electrical Co. Pvt. Ltd. v. CIT, 258 ITR 317(Del).(Del). (g)KLM Royal Dutch Airlines v. Assistant Director ofIncome Tax, 292 ITR 49 (Del).Income Tax, 292 ITR 49 (Del). (h)Techspan India Pvt. Ltd. v. ITO, 283 ITR 212 (Del). (i)Satnam Overseas Ltd. v. Addl. CIT 33 DTR 81 (Del). (j)CIT v. Goetze India Ltd., 229 CTR 167 (Del). (k)CIT v. Mittal Castings, 124 Taxman 16 (Del). (l)Sheth Bros v. JCIT, 251 ITR 270 (Guj). (m)Delhi Farming & Const. v. ACIT, 240 ITR 127 (Del). (n)Andhra Bank Ltd. v. CIT, 225 ITR 447 (SC). (o)Bapalal and Company v. JCIT, 289 ITR 37 (Mad). 8.Learned counsel while placing reliance upon the followingjudgments submitted that proceedings cannot be initiated without anyfresh material:-judgments submitted that proceedings cannot be initiated without anyfresh material:- (i)Bappalal & Exports v. JCIT, 289 ITR 37 (Mad). (ii)Shipra Srivastava v. ACIT, 319 ITR 221 (Del). (iii)CIT v. Batra Bhatta Company, 174 Taxman 444 (Del). (iv)Carlton Overseas Pvt. Ltd. v. ITO, 318 ITR 295 (Del). (v)Aventis Pharma Ltd. v. ACIT, 37 DTR 353 (Bom). (vi)Pancharatna Cement Pvt. Ltd. v. Union of India and (k)CIT v. Mittal Castings, 124 Taxman 16 (Del). (l)Sheth Bros v. JCIT, 251 ITR 270 (Guj). (m)Delhi Farming & Const. v. ACIT, 240 ITR 127 (Del). (n)Andhra Bank Ltd. v. CIT, 225 ITR 447 (SC). (o)Bapalal and Company v. JCIT, 289 ITR 37 (Mad). 8.Learned counsel while placing reliance upon the followingjudgments submitted that proceedings cannot be initiated without anyfresh material:-judgments submitted that proceedings cannot be initiated without anyfresh material:- (i)Bappalal & Exports v. JCIT, 289 ITR 37 (Mad). (ii)Shipra Srivastava v. ACIT, 319 ITR 221 (Del). (iii)CIT v. Batra Bhatta Company, 174 Taxman 444 (Del). (iv)Carlton Overseas Pvt. Ltd. v. ITO, 318 ITR 295 (Del). (v)Aventis Pharma Ltd. v. ACIT, 37 DTR 353 (Bom). (vi)Pancharatna Cement Pvt. Ltd. v. Union of India and others, 317 ITR 259 (Gau). 9.Learned counsel for the assessee further placed relianceon the following judgments to contend that the existence of tangible andrelevant material is pre-requisite for the formation of belief:- I.ACIT v. Rajesh Jhaver Stock Brokers Pvt. Ltd., 291ITR 500 (SC).ITR 500 (SC). II.United Electrical Co. Ltd. v. CIT, 258 ITR 317 (Del).III.CIT v. Kelvinator of India Ltd., 320 ITR 561 (SC).III.CIT v. Kelvinator of India Ltd., 320 ITR 561 (SC). IV.Ashok Kumar Sen v. ITO, 132 ITR 707 (Del). 10.According to the learned counsel, reason to believe is notthe same thing as reason to suspect and, reasons are justiciable andplaced reliance on the following judgments in support of hissubmission:- (i)CIT v. Indian Oil Corporation, 159 ITR 956 (SC). (ii)CIT v. Paramjit Kaur, 311 ITR 38 (P&H). (iii)ITO v. Madnani Engineering Works Limited, 118 ITR1 (SC).1 (SC). (iv)ITO v. Lakhmani Mewal Das, 103 ITR 437 (SC). 11.Learned counsel for the revenue, on the other hand, submitted that after transposition of Explanation 2 as Explanation I toSection 147 by Taxation Laws (Amendment) Act, 1987 w.e.f. 1.4.1989,since there was no discussion in the assessment order passed by theAssessing Officer relating to the grounds for reopening, it could not besaid that there was true and full disclosure made by the assessee. Itwould not amount to either change of opinion or mere suspicion or lackof application of mind as argued by learned counsel for the assessee.Learned counsel for the revenue has placed reliance upon the judgmentof Allahabad High Court in EMA India Ltd. v. Assistant Commissionerof Income Tax [2009] 226 CTR (All) 65and a recent judgment of thiscourt in CWP No. 13806 of 2010 (R.N. Gupta & Co. Ltd. v. ACIT)decided on 30.11.2010 in support of his submissions. He furthersubmitted that the judgments relied upon by the learned counsel for theassessee has no relevancy with respect to the controversy asExplanation I to Section 147 of the Act was not under consideration inany of those judgments. 12.We have heard learned counsel for the parties. 13.The primary issue in these petitions is whether in view ofExplanation 1 to Section 147 of the Act, could the mere production ofdocuments and other evidence before the Assessing Officer during theregular assessment proceedings, amount to true and full disclosurewithin the meaning of Section 147 of the Act. 14.The said issue came up for consideration before this Courtin a recent judgment dated 30.11.2010 in M/s R.N. Gupta & Co. Ltd'scase (supra), wherein, it was held as under:- “8.The question that arises for determination in this petition is whether the assessee is entitled to challengevalidity of initiation of reassessment proceedings underSection 147 of the Act after expiry of four years on theground of lack of jurisdiction with the Assessing Officereven where the assessee had produced the entire materialduring assessment proceedings though there was nospecific reference to that material during originalassessment proceedings. 14.The said issue came up for consideration before this Courtin a recent judgment dated 30.11.2010 in M/s R.N. Gupta & Co. Ltd'scase (supra), wherein, it was held as under:- “8.The question that arises for determination in this petition is whether the assessee is entitled to challengevalidity of initiation of reassessment proceedings underSection 147 of the Act after expiry of four years on theground of lack of jurisdiction with the Assessing Officereven where the assessee had produced the entire materialduring assessment proceedings though there was nospecific reference to that material during originalassessment proceedings. 9.In our opinion, the answer to the said question is inthe negative. The legislature by Direct Tax Laws(Amendment) Act, 1987 effective from 1.4.1989 hadsubstituted Section 147 of the Act. The provisionscontained in Explanation I now were earlier underExplanation 2. There has been transposition without anymaterial change. 10.It would be appropriate to reproduce Section 147along with Explanation I which reads thus:- “147. Income escaping assessment.-If the AO hasreason to believe that any income chargeable to taxhas escaped assessment for any assessment year,he may, subject to the provisions of ss. 148 to 153,assess or reassess such income and also any otherincome chargeable to tax which has escapedassessment and which comes to his noticesubsequently in the course of the proceedings underthis section, or recompute the loss or the depreciation allowance or any other allowance, asthe case may be, for the assessment year concerned(hereinafter in this section and in ss. 148 to 153referred to as the relevant assessment year): Provided that where an assessment under sub-s. (3)of s. 143 or this section has been made for therelevant assessment year, no action shall be takenunder this section after the expiry of four years fromthe end of the relevant assessment year, unless anyincome chargeable to tax has escaped assessmentfor such assessment year by reason of the failure onthe part of the assessee to make a return under s.139 or in response to a notice issued under sub-s. (1)of s. 142 or s. 148 or to disclose fully and truly allmaterial facts necessary for his assessment, for thatassessment year. Explanation 1- Production before the AO of accountbooks or other evidence from which materialevidence could with due diligence have beendiscovered by the AO will not necessarily amount todisclosure within the meaning of the foregoingproviso.“ 11.Section 147 of the Act empowers the AssessingOfficer to assess or reassess income chargeable to taxwhere he has reason to believe that income for anyassessment year has escaped assessment. However, the said provision does not authorize the Assessing Officer totake recourse to reassessment proceedings where afterhaving adopted a particular opinion during originalassessment proceedings, on second thought, he wishes toconclude otherwise. In other words, change of opinion isno ground for initiating reassessment proceedings.According to the explanation, the duty cast upon assesseeto disclose truly and fully all material facts does not getdischarged by mere production of the account books orother documents. Even where, the Assessing Officer couldhave with due diligence deduced the truth if he had beencircumspect, still it will amount to non-disclosure of materialfacts within the meaning of Section 147 of the Act. Thefiction created by the said explanation is to ensure that theAssessing Officer who is to act fairly and reasonably for thepublic exchequer as well as the tax payers cannot beimputed knowledge and consciousness to the entire bulkyrecord produced by the assessee during assessmentproceedings unless there has been conscious deliberationswith regard to such an issue in the assessment order.” 15.Answering identical question, the Allahabad High Court inEMA India Ltd's case (supra) observed :- 15.Answering identical question, the Allahabad High Court inEMA India Ltd's case (supra) observed :- “3.2. Explanation 1 to proviso to s. 147 is explicit and clearon the point. The Explanation gives a quietus to contentionthat where account books or other evidence has beenproduced, there is no duty on the assessee to disclose further facts, which on due diligence could be discovered bythe AO. Nor will the assessee be able to contendsuccessfully that by disclosing certain evidence, he shouldbe deemed to have disclosed other evidence, which mighthave been discovered by the assessing authority if he hadpursued investigation on the basis of what has beendisclosed. The position remains that so far as the primaryfacts are concerned, it is the assessee's duty to disclose allof them including particular entries in account books,particular portions of documents, and documents, and otherevidence which could have been discovered by theassessing authority, from the document and other evidencedisclosed. 3.3In other words, the mere production of evidencebefore the AO is not enough and there may be an omissionor failure to make a full and true disclosure if some materialfor the assessment lies embedded in that evidence whichthe assessee can uncover but does not. However, if it bemerely a question of interpretation of evidence, theassessee cannot be subjected to s. 147, merely becausethe AO miscarried in his interpretation of evidence. 3.4To put it differently, if material evidence is not writlarge on the document but is embedded in somevoluminous records/books of account requiring a carefulscrutiny and delving deep into it to notice the necessarymaterial, it is quite possible that having regard to the nature of the documents, material evidence cannot be discoveredfrom such records despite due diligence and the casewould attract application of the said Expln. 1 to hold thatmere production of the books of account or the documents,etc. without pointing out the relevant entries therein, doesnot amount to disclosure within the meaning of s. 147(a) ofthe Act [See, Rakesh Aggarwal vs. Asstt. CIT (1997) 137CTR (Del) 65: (1996) 221 ITR 492 (Del) 499]. 3.5The assessee does not discharge his duty by merelyproducing the books of account or other evidence. He hasto further bring to the notice of the AO particular items inthe books of account or portions of document which arerelevant. Even if it is assumed that, from the booksproduced, the AO could have found out the truth, he is noton that account precluded from exercising the power toreassess the escaped income [see, Kantamani VenkataNarayana & Sons vs. Addl. ITO (1967) 63 ITR 638 (SC);Sowdagar Ahmed Khan vs. ITO (1968) 70 ITR 79 (SC);ITO & Ors. vs. Lakhmani Mewal Das 1976 CTR (SC) 220:(1976) 103 ITR 437 (SC), 445]. 3.6.The fact that the AO could have found out the correctposition by further probing the matter does not exoneratethe assessee from the duty to make a full and truedisclosure of the material facts.” 16.Applying the aforesaid principles to the facts of the presentcase, it cannot be held that there was true and full disclose made by the assessee. A perusal of the assessment order, no where suggests thatthe Assessing Officer had dealt with the issues on which reassessmentis sought to be made while determining the taxable income of theassessee. Once it is held that mere production of account books andthe documents where from the Assessing Officer could have gatheredthe details of escaped income, would not amount to true and fulldisclosure within the meaning of Section 147 of the Act, necessarily, it isto be held that the action taken by the Assessing Officer beyond 4 yearsshall be within limitation. 16.Applying the aforesaid principles to the facts of the presentcase, it cannot be held that there was true and full disclose made by the assessee. A perusal of the assessment order, no where suggests thatthe Assessing Officer had dealt with the issues on which reassessmentis sought to be made while determining the taxable income of theassessee. Once it is held that mere production of account books andthe documents where from the Assessing Officer could have gatheredthe details of escaped income, would not amount to true and fulldisclosure within the meaning of Section 147 of the Act, necessarily, it isto be held that the action taken by the Assessing Officer beyond 4 yearsshall be within limitation. 17.Learned counsel for the assessee was unable todemonstrate that in the light of Explanation I to Section 147 of the Act,the record produced by the assessee during the original assessmentproceedings would amount to full and true disclosure under the saidAct. Nothing could be pointed out with reference to the originalassessment order that the assessing authority had specifically dealtwith these issues at the time of framing original assessment. Theplethora of judgments on which reliance has been placed by learnedcounsel for the assessee do not come to the rescue of the assessee asnone of them was dealing with interpretation of Explanation 1 to Section147 of the Act. Therefore, none of the grounds of challenge relating toinitiation of reassessment proceedings raised on behalf of the assesseecarry any material substance and advance the case of the petitioner anyfurther. However, the merits of the controversy relating to additions tobe made shall be gone into by the Assessing Officer at the time offinalisation of reassessment proceedings. 18.In view of the above, there is no merit in these writ petitions and the same are hereby dismissed. (AJAY KUMAR MITTAL) JUDGE December 2, 2010gbs (ADARSH KUMAR GOEL)JUDGE