Commissioner Of Income-Tax, Coimbatore v. Elgi Finance Ltd., Coimbatore

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 14.3.2006. CORAM: THE HONOURABLE MR.JUSTICE R.BALASUBRAMANIANANDTHE HONOURABLE MR.JUSTICE P.P.S.JANARTHANA RAJA Commissioner of Income-tax,Coimbatore.... Appellant Vs. Elgi Finance Ltd.,Coimbatore.... Respondent Appeals under Section 260A of the Income-tax Act, 1961, againstthe order of the Income-tax Appellate Tribunal, Madras 'B' Bench,dated 12.12.2002 in ITA No.355 & 356/Mds/2002 for the assessmentyears 1992-93 & 1993-94 against IT Appeal Nos. 60 & 61/2001 orderdt. 30.1.2002 for the assessment year 1991-92, 1992-93 on the fileof the Office of the Commissioner of Income Tax (Appeas) I,Coimbatore and PAN/GIR No.AAACE-1992-93 4564-E Order dt.30.3.2001for the assessment years 1993-94 on the file of theAddl.Commissioner of Income Tax Spl. Range -I, Coimbatore. JUDGMENT (Judgment of the Court was delivered by P.P.S.JANARTHANA RAJA, J.) The present Appeals are filed by the Revenue under Section 260Aof the Income-tax Act (hereinafter referred to as 'the Act'),against the order passed by the Income-tax Appellate Tribunal,Madras 'B' Bench, dated 12.12.2002 in ITA No.355 & 356/Mds/2002.These appeals came up before this Court and this Court admitted theappeals on 17.10.2003 and formulated the following Substantial https://hcservices.ecourts.gov.in/hcservices/ Question of Law:- "Whether in the facts and circumstances of the case, theTribunal was right in treating the reassessment underSection 147, as time barred?" 2. The facts leading to the above question of law are asfollows:- JUDGMENT (Judgment of the Court was delivered by P.P.S.JANARTHANA RAJA, J.) The present Appeals are filed by the Revenue under Section 260Aof the Income-tax Act (hereinafter referred to as 'the Act'),against the order passed by the Income-tax Appellate Tribunal,Madras 'B' Bench, dated 12.12.2002 in ITA No.355 & 356/Mds/2002.These appeals came up before this Court and this Court admitted theappeals on 17.10.2003 and formulated the following Substantial https://hcservices.ecourts.gov.in/hcservices/ Question of Law:- "Whether in the facts and circumstances of the case, theTribunal was right in treating the reassessment underSection 147, as time barred?" 2. The facts leading to the above question of law are asfollows:- The assessee is a company engaged in the business of financeand leasing. The return filed by the assessee company for theassessment year 1992-93 was initially processed under Section 143(1)(a) on 11.11.1993. Thereafter it was converted into a scrutinyassessment and the said assessment was completed under Section 143(3) by the order of assessment dated 07.03.1994. Later theassessment was rectified under Section 154 by a subsequent orderdated 15.04.1996. In respect of assessment year 1993-94, theoriginal assessment under Section 143(3) was completed on 25.03.1996and the said assessment order also was later rectified under Section154 by order dated 18.03.1997. While the assessments for theimpugned two assessment years 1992-93 and 1993-94 were resting so,the Assessing Officer issued notices under Section 148 dated17.07.1998 calling for the assessee company to file returns ofincome for the impugned assessment years in response to the saidnotice. The reason stated by the Assessing Officer to issue noticesunder Section 148 was that, depreciation at a higher rate wasallowed in favour of the assessee company while completing theoriginal assessments in respect of plant and machinery let out bythe assessee company to other lessees, and also granting 100%depreciation on items, on the ground that individual value was lessthan Rs.5,000/- per piece, in view of proviso to Section 32 of theIncome Tax Act, 1961. The Assessing Officer therefore held that thegranting of excess depreciation allowance in the originalassessments had resulted in escapement of income. It is for theabove reason that he had issued notices under Section 148 for thepurpose of reopening the assessments to withdraw the excessdepreciation allowed to the assessee. The reopened assessments underSection 147 were completed on 30.03.2001 by separate orders for theimpugned two assessment years. The assessments were completed underSection 143(3). In the revised assessments the Assessing Officerrestricted the claim of depreciation made by the assessee company inits return of income and allowed by the Assessing Officer in theoriginal assessments. The assessee company had leased outcommercial vehicles and it had claimed a depreciation of 40% incomputing its taxable income on the ground that the commercialvehicles leased out by the assessee company were used by the lesseesfor commercial purposes only i.e., running on hire. The assessingofficer held that the higher rate of 40% was available only to anassessee who itself carried on the business of running vehicles on hire and not for anybody else. The business of the assessee companywas that of leasing alone. The assessee company by itself had notrun the commercial vehicles on hire. Therefore the AssessingOfficer held that the assessee company, being a leasing company,cannot claim the higher rate of depreciation at 40% on thecommercial vehicles leased out by it. Hence, the Assessing Officerrestricted the claim to the normal rate of 25%. In the originalassessment, depreciation was granted at the rate of 100% under theproviso to Section 32 on the ground that the cost of individual itemwas less than Rs.5,000/-. In the revised assessment, the AssessingOfficer found that the assessee had leased out those items as a bulkunit and all those items are functionally inter-related and did nothave any independent status or identity as plant and machinery andtherefore those items need to be considered in bulk, instead ofconsidering as individual item. When those items listed areconsidered in bulk, obviously the cost of the bulk exceedsRs.5,000/- and the Assessing Officer restricted the depreciation tothe normal rate. 3.Aggrieved by the order, the assessee filed an appeal tothe Commissioner of Income Tax (Appeals). The Commissioner ofIncome Tax (Appeals) agreed with the Assessing Officer and confirmedthe action of the Assessing Officer in restricting the depreciationto the normal rate. Aggrieved, the assessee filed an appeal beforethe Income Tax Appellate Tribunal and also raised additional groundsfor the said assessment year, which reads as follows:- "The Commissioner of Income Tax (Appeals)should have found that the assessmenthaving been reopened more than five yearsfrom the end of the relevant assessmentyears, the original assessment having beencompleted u/s 143(3), the reopening isbarred by limitation, without jurisdiction,against the provisions of law and ab initiovoid." The point raised in the additional ground was earlier omitted to beincorporated in the grounds filed before the Tribunal by oversightand the ground being legal in nature, the assessee requested theTribunal to admit the additional ground on record. The Tribunalalso admitted the additional ground raised by the assessee company. 4.The learned counsel appearing for the Revenue submittedthat the Assessing Officer was right in reopening the assessment andthe Assessing Officer also reopened within the limitation period andhence the order of the reassessment is valid in law. The learnedcounsel appearing for the assessee submitted that the reopening ofthe assessment is barred by limitation and also relied on proviso to https://hcservices.ecourts.gov.in/hcservices/ Section 147 of the Income Tax Act. 5.Heard the counsel appearing for both the sides. The lawrelating to the reassessment has undergone a change from 1[st] April1989. The change was brought in by the Direct Tax Laws (Amendment)Act, 1987. Two sets of provisions were available under Section 147in Clause (a) and Clause (b). This distinction has now been takenaway by the Amendment Act. Previously, the line of distinction was alimitation period of four years and the limitation period exceedingfour years. The Assessing Officer would reopen a back assessmentwithin a period of four years as long as he had reason to believe inconsequence of any information, that income has been under-assessedor income has escaped assessment. In the case of limitation,providing for a period exceeding four years, there should have beena failure on the part of the assessee to disclose fully and trulyall material facts leading to the escapement of income. But as aresult of the amendment brought with effect from 01.04.1989, theabove distinction had been obliterated and the Assessing Officercould reassess the income as long as he had reason to believe thatincome chargeable had escaped assessment. The new law has inserteda proviso to Section 147 in the following words: "Providing that where an assessment under sub-section (3) of section 143 or this section hasbeen made for the relevant assessment year, noaction shall be taken under this section afterthe expiry of four years from the end of therelevant assessment year, unless any incomechargeable to tax had escaped assessment forsuch assessment year by reason of the failure onthe part of the assessee to make a return undersection 139 or in response to a notice issuedunder sub-section (1) of section 142 or section148 or to disclose fully and truly all materialfacts necessary for his assessment for thatassessment year." In addition to the time limits provided for under section 149, thelaw has provided another limitation of four years under the provisoto section 147. As far as the above proviso to section 147 isconcerned, the law prescribes a period of four years to initiatereassessment proceedings, unless the income alleged to have escapedassessment was made out as a result of failure on the part of theassessee to disclose fully and truly all material facts necessaryfor the assessment. 6.In the present case, the question is whether the assesseecompany had disclosed fully and truly all the material factsnecessary for the assessments and with particular reference to computation of depreciation allowance. The assessee company hadfiled full set of accounts before the Assessing Officer comprisingof profit & loss account, balance sheet and schedules thereto. Theassessee company had furnished the details regarding the acquisitionof various machineries and assets and the details regarding theleasing out of those machineries and items to other parties. Theassessee had also furnished the details of lease rent received outof those lease agreements. The assessee had also furnished thedetailed computation of depreciation mentioning therein the writtendown value of machineries and assets before and after claiming thedepreciation allowance for the impugned assessment years. It is afactual finding by the Tribunal that the assessee company had fullyand truly disclosed all material facts necessary for working out thequantum of depreciation allowance and completed the assessmentaccordingly. The Tribunal is right in following the judgment of thelearned Single Judge of this Court reported in 241 ITR 672 in thecase of Fenner (India) Limited Vs. Deputy Commissioner of IncomeTax. In the said judgment, the learned Single Judge considered thescope of proviso to Section 147 of the Income Tax Act in detail andheld as follows: "The pre-condition for the exercise of the powerunder section 147 in cases where power isexercised within a period of four years from theend of the relevant assessment year is thebelief reasonably entertained by the AssessingOfficer that any income chargeable to tax hasescaped assessment for that assessment year.However, when the power is invoked after theexpiry of the period of four years from the endof the assessment year, a further pre-conditionfor such exercise is imposed by the provisonamely, that there has been a failure on thepart of the assessee to disclose fully and trulyall material facts necessary for his assessmentfor that assessment year. Unless, the conditionin the proviso is satisfied, the AssessingOfficer does not acquire jurisdiction toinitiate any proceeding under section 147 of theAct after the expiry of four years from the endof the assessment year. Thus, in cases wherethe initiation of the proceedings is beyond theperiod of four years from the end of theassessment year, the Assessing Officer mustnecessarily record not only his reasonablebelief that income has escaped assessment butalso the default or failure committed by theassessee. Failure to do so would vitiate thenotice and the entire proceedings. The relevant words in the proviso are, words in the proviso are, ".... unless any income chargeable to taxhas escaped assessment for such assessment yearby reason of the failure on the part of theassessee....." Mere escape of income is insufficient tojustify the initiation of action after theexpiry of four years from the end of theassessment year. Such escapement must be byreason of the failure on the part of theassessee either to file a return referred to inthe proviso or to truly and fully disclose thematerial facts necessary for the assessment. Whenever a notice is issued by theAssessing Officer beyond a period of four yearsfrom the end of the relevant assessment year,such notice being issued without recording thereasons for his belief that income escapedassessment, it cannot be presumed in law thatthere is also a failure on the part of theassessee to file the returns referred to in theproviso or a failure to fully and truly disclosethe material facts. The reasons referred to inthe main paragraph of section 147 would, incases where the proviso is attracted, includereasons referred to in the proviso and it isnecessary for the Assessing Officer to recordthat any one or all the circumstances referredto in the proviso existed before the issue ofnotice under section 147. After an assessment has been made, in thenormal circumstances, there would be no reasonfor anyone to doubt that the assessment has beenmade on the basis of all relevant facts. If theAssessing Officer chooses to entertain thebelief that the assessment has been made in thebackground of the assessee's failure to disclosetruly and fully all material facts, it isnecessary for him to record that fact, and inthe absence of a record to that effect, itcannot be held that a notice issued withoutrecording such a fact is capable of beingregarded as a valid notice. As to whether thematerial facts disclosed by the assessee arefull and true is always a question of fact andunless the facts disclosed had been examined inrelation to the extent of failure if any on thepart of the assessee, it is not possible to formthe opinion that there had been a failure on the assessee's part to truly and fully disclose thematerial facts. A notice issued without arecord of the Assessing Officer's reasonablebelief that there was such failure on the partof the assessee would be indicative of a failureon the part of the Assessing Officer to applyhis mind to material facts, and on that groundalso the notice issued would be vitiated." So, when the factual finding is that the assessee company had fullyand truly disclosed all material facts necessary for computing thedepreciation allowance in the course of the original assessmentscompleted under Section 143(3) itself, the period of limitationapplicable to the reopening for these two years would be a period offour years prescribed in the proviso to Section 147 of the IncomeTax Act, 1961. For the said two years, notice under Section 148 hadbeen issued after the expiry of four years from the end of theassessment years, 1992-93 and 1993-94. In respect of the assessmentyear 1992-93, notice if at all necessary, should have been issued onor before 31.03.1997, whereas in fact the notice was issued only on17.07.1998. For the assessment year 1993-94, notice under Section148 should have been issued on or before 31.03.1998, whereas infact, the notice was issued only on 17.07.1998. So, notice underSection 148 for both the assessment years were issued after theexpiry of four years from the respective assessment years.Therefore, any notice issued after the expiry of four years from theend of the relevant assessment year, is illegal and is withoutjurisdiction. Hence the assessment years completed, are barred bylimitation and they are liable to be set aside. 7.In view of the above reasoning, the reassessments for theassessment years 1992-93 and 1993-94 are clearly barred bylimitation and in view of the same, we answer the question in favourof the assessee. Accordingly, the tax cases are dismissed. Nocosts. Sd/Asst.Registrar /true copy/ Sub Asst.Registrar Rao/km To1.The Commissioner of Income-tax (Appeals)-I, Coimbatore.2. Assistant Registrar,The Income-tax Appellate Tribunal, Madras Bench 'B',Rajaji Bhavan, Besant Nagar, Madras-90.3.The Addl. Commissioner of Income Tax Spl. Range -I, Coimbatore.4.The Commissioner of Income Tax,Coimbatore.+2cc to M/s.R.V.Chitra & Associates Sr 12431 & 12432+2ccs to Mr.N.Muralidharan, Senior Standing Counsel SR 12534 & 12535JE (CO)km/17.5. T.C.(A)Nos.65 and 66 of 2003