Fire Challenger Rep. By Its Managing Partnership T. Dhevanathan v. The Assistant Commissioner Of Income Tax Central Circle – Ii (5) Chennai – 34

Fire ChallengerRep. by its Managing PartnershipT. DhevanathanNo. 3 Deenadayalur StreetT. NagarChennai - 17:: Petitionervs.The Assistant Commissioner of Income TaxCentral Circle – II (5)Chennai – 34:: Respondent Petition filed under Article 226 of the Constitution of Indiaseeking for issuance of writ of Certiorari calling for the records ofthe respondent pertaining to Assessment order dated 22.5.2007 made inAAAFF1060H and to quash the same. Heard the arguments of Mr. A. Thiagarajan, learned SeniorCounsel leading Mr. S. Janarthanam, learned counsel appearing for thepetitioner and Mr. J. Narayanasamy representing Mrs. Pushya Sitaraman,learned Standing Counsel representing the respondent and have perusedthe records. 2.The challenge in this writ petition is to the Demand Noticedated 22.5.2007 issued by the respondent Assistant Commissioner ofIncome Tax wherein and by which the petitioners were given anAssessment Order assessing the liability of the tax payable at Rs.1,65,10,039/- and also with liberty to proceed to take penal action in https://hcservices.ecourts.gov.in/hcservices/ terms of Section 271(1)(c) of the Income Tax Act [for short, 'I.T.Act']. The petitioners, though have a remedy by way of appeal to theCommissioner of Income Tax, have not availed the same on the groundthat there has been a gross violation of laws and legal principles bythe authorities under the power of the Appellate Commissioner underSection 246(a) of the I.T. Act. was also restricted. 3.In the writ petition, notice was given to the respondentsand interim stay was granted on 04.7.2007 by this Court. Though itwas extended subsequently, there was no further extention beyond12.11.2007. However, the respondents have appeared and filed acounter affidavit dated 25.7.2007 and with the consent of the parties,the main writ petition itself was taken up for hearing. 4.The petitioner earlier moved this Court in W.P. No. 1361 of2006 seeking to challenge the notice dated 28.3.2005 made for theassessment year 1998-99 and this Court granted an interim stay offurther proceedings on 21.01.2006. Subsequently, this Courtdirected that since the assessment proceedings have been reopened andthe reasons were not disclosed, the respondents were directed todisclose the reasons. The operative portion of the order found inparagraph 2 reads as follows: "Learned counsel for the respondents submits thatwithout waiting to receive the copy of the reasonswhich the petitioner has sought for, the petitionerrushed to this Court and obtained interim relief. Hefurther submits that the department is willing tofurnish the copy of the reasons recorded to thepetitioner. The said statement is recorded and thewrit petition is disposed of, with a direction to therespondents to serve a copy of the reasons recorded,before the issue of the notice within two weeks fromthe date of receipt of a copy of this order and proceedin accordance with law after service of the copy of thereasons." 5.In obedience to the orders passed by this Court, therespondents by a proceedings dated 22.02.2007 furnished the reasonsfor reopening the assessment. It is useful to extract the saidcommunication in extenso for the purpose of better appreciation of thefacts involved in the case:-- "The assessee is a partnership firm. Theassessee filed its return of income for the year A.Y.1998-99 on 1[st]July 1998 declaring loss of Rs.50,25,668/-. In the P&L a/c enclosed to the returnof income, the assessee has claimed Bad debts of Rs.2,66,72,880/-. Shri T. Devanathan, a partner in the https://hcservices.ecourts.gov.in/hcservices/ 5.In obedience to the orders passed by this Court, therespondents by a proceedings dated 22.02.2007 furnished the reasonsfor reopening the assessment. It is useful to extract the saidcommunication in extenso for the purpose of better appreciation of thefacts involved in the case:-- "The assessee is a partnership firm. Theassessee filed its return of income for the year A.Y.1998-99 on 1[st]July 1998 declaring loss of Rs.50,25,668/-. In the P&L a/c enclosed to the returnof income, the assessee has claimed Bad debts of Rs.2,66,72,880/-. Shri T. Devanathan, a partner in the https://hcservices.ecourts.gov.in/hcservices/ above firm was asked to explain the basis of such aclaim. He has stated in the sworn statement recordedfrom him on 28.2.2000 that the U.P. Government had paidhim only Rs. 89,34,120/- against the total sale priceof Rs. 3,56,07,000/- made to the UP Government by M/sFire Challenger. Shri T.Devanathan has stated thatsome arbitration was going on between the assessee firmand the Government of Uttar Pradesh. It is not knownwhether the settlement has been arrived at as a resultof such arbitration or the same is yet to come. Inthe circumstances, since the matter relates to A.Y. 98-99, it is considered expedient to keep the matter aliveby re-opening the assessment u/s 148. The assessee has filed the Audit report along withthe return of income stating the method of accountingadopted is Mercantile. However, the assessee may alsotake a stand that since the accounts are mercantile,the claim of bad debts was made in A.Y 1998-99 and thereward received as a result of arbitration also relatesonly to the assessment year. Hence, the same cannotbe taxed on receipt basis. It is seen from the records that the reasons forissue of notice u/s. 148 for the assessment year 98-99had been communicated to you already vide this officeletter dated 5.1.2006." 6.Mr. A. Thiagarajan, learned Senior Counsel, after referringto the impugned order, more particularly to paragraph 7, submittedthat the verification of profit and loss account has shown that thepetitioners have claimed several amounts under the headingadvertisement and business promotion, communication expenses, salariesand allowances and travelling and conveyance. The petitioners hadgiven details with reference to the expenditure incurred by theirreply dated 21.5.2007 and the same was also not considered. Theyhave also enclosed several documents to show the justification of theexpenditure incurred by them. He also made heavy reliance upon thearbitration proceedings in A.P. No. 4870 of 1998 before the DistrictJudge, Kanpur wherein the Award passed by the arbitrators was setaside. The amount for which queries were made, viz., Rs.2,66,72,880/- was shown as bad debts in the profit and loss accountfiled along with the Income Tax Return for the year 1998-99 and in thesame assessment, the authorities have taken the stand that it wasshown as prevailing dispute and not as bad debts. It was contendedthat to label it as a wrongful claim and consequently, labelling asincome chargeable to tax as escaped assessment, is impermissible.It was further submitted that by mere change of opinion on the samefacts without there being any additional material, the authorities cannot proceed to reopen the assessment by invoking the power underSection 148 of the I.T. Act. 7.The learned Senior Counsel referred to the judgment of theGujarat High Court in Sarangpur Cotton Manufacturing Co. Ltd. V.Commissioner of Indome Tax, Gujarat -I [143 ITR 166] and stated thatthere are four conditions for grant of deductions in respect of baddebts in terms of Clause (vii) of Section 36(1) of the I.T. Act andthey are as follows: "Four conditions govern the grant of deduction undercl. (vii) of s. 36(1), namely:cl. (vii) of s. 36(1), namely: cannot proceed to reopen the assessment by invoking the power underSection 148 of the I.T. Act. 7.The learned Senior Counsel referred to the judgment of theGujarat High Court in Sarangpur Cotton Manufacturing Co. Ltd. V.Commissioner of Indome Tax, Gujarat -I [143 ITR 166] and stated thatthere are four conditions for grant of deductions in respect of baddebts in terms of Clause (vii) of Section 36(1) of the I.T. Act andthey are as follows: "Four conditions govern the grant of deduction undercl. (vii) of s. 36(1), namely:cl. (vii) of s. 36(1), namely: (i)the debt or loan should be in respect of abusiness which is carried on by the assessee inthe relevant accounting year; (ii) the debt should have been taken into account incomputing the income of the assessee for theaccounting year or for an earlier accounting yearor should represent money lent in the ordinarycourse of his business of banking or money-lending; (iii) the amount of debt or loan, or part thereof whichis claimed as a deduction should be establishedto have become bad in the accounting year; and (iv) the amount should be written off as irrecoverablein the accounts of the assessee for thataccounting year in which the claim for deductionis made for the first time." 8.It is relevant to note the following passage found in page178 in the aforesaid judgment:-- "Inspite of the efforts made by the assessee-company,it was not able to recover a single paisa towards theamount due to it by the end of 1970. That itself wassufficient to justify writing off of the amount due.What is required is honest judgment of the assessee atthe time of writing off the debt in the light of eventsup to that stage. Having regard to the facts andcircumstances of the case, it cannot be said that thedecision of the assessee-company was not honest.Events and circumstances subsequent to the stage ofwriting off which are not irrelevant also amply justifythe action of the assessee-company. The assessee-company has satisfied us that the conclusion reached bythe Tribunal is vitiated by a gross error or refusal totake into consideration material evidence." 9.Thereafter, the learned Senior Counsel relied upon thejudgment of the Gujarat High Court in the Commissioner of Income Taxv. Girish Bhagwatparasad [256 ITR 772] wherein similar observationshave been made by the Division Bench. It is relevant to extractthe following passage found in that judgment. ".... The genuineness of such a claim made by theassessee was not in doubt. Therefore, all that theTribunal has done is to uphold the first appellateauthority's decision, applying the provisions of theamended section 36(1)(vii) of the Act, and no questionof law arises in the matter from such application ofthe provision to the facts of the case." 10.The learned Senior Counsel also drew the attention of thisCourt to the circular dated 23.01.1990 issued by the Central Board ofDirector Taxes [for short, 'CBDT'] and more particularly, to paragraph6.6 of the circular, which reads as follows: ".... The genuineness of such a claim made by theassessee was not in doubt. Therefore, all that theTribunal has done is to uphold the first appellateauthority's decision, applying the provisions of theamended section 36(1)(vii) of the Act, and no questionof law arises in the matter from such application ofthe provision to the facts of the case." 10.The learned Senior Counsel also drew the attention of thisCourt to the circular dated 23.01.1990 issued by the Central Board ofDirector Taxes [for short, 'CBDT'] and more particularly, to paragraph6.6 of the circular, which reads as follows: "Amendments to sections 36(1)(vii) and 36(2) torationalise provisions regarding allowability of baddebts.-- The old provisions of clause (vii) of sub-section (1) read with sub-section (2) of the sectionlaid down conditions necessary for allowability of baddebts. It was provided that the debt must beestablished to have become bad in the previous year.This led to enormous litigation on the question ofallowability of bad debt in a particular year, becausethe bad debt was not necessarily allowed by theAssessing officer in the year in which the same hadbeen written off on the ground that the debt was notestablished to have become bad in that yea. In orderto eliminate the disputes in the matter of determiningthe year in which a bad debt can be allowed and also torationalise the provisions, the Amending Act, 1987, hasamended clause (vii) of sub-section (1) and clause (i)of sub-section (2) of the section to provide that theclaim for bad debt will be allowed in the year in whichsuch a bad debt has been written off as irrecoverablein the accounts of the assessee." 11.Per contra, the learned Standing Counsel representing theRevenue referred to the judgment of the Rajasthan High Court reportedin 121 ITR 89 [Hiralal v. Commissionerof Income-Tax, Rajasthan] andcontended that for invoking Section 147 of the I.T. Act, the word"such income" will be referable to income which is chargeable to taxbut as escaped assessment. It is also stated that where reassessmentis made in that Section in respect of income which has escaped tax,the Income Tax Officer's jurisdiction under the Section is confined tosuch income which has escaped tax and does not extend to revising, reopening or reconsidering the whole assessment. The said view wasconsidered by the Supreme Court in the decision reported in 198 ITR297 [Commissioner of Income-Tax v. Sun Engineering Works P. Ltd]and submitted that the earlier judgment of the Rajasthan High Court inHiralal case (cited supra) was not found acceptance. reopening or reconsidering the whole assessment. The said view wasconsidered by the Supreme Court in the decision reported in 198 ITR297 [Commissioner of Income-Tax v. Sun Engineering Works P. Ltd]and submitted that the earlier judgment of the Rajasthan High Court inHiralal case (cited supra) was not found acceptance. 12.The learned counsel stated that the Supreme Court did notagree with the view of several High Courts and referred to page 320 ofthe judgment of the Supreme Court, which reads as follows:"As a result of the aforesaid discussion, we find thatin proceedings under Section 147 of the Act, the IncomeTax Officer may bring to charge items of income whichhad escaped assessment other than or in addition tothat item or items which have led to the issuance ofnotice under Section 148 and where reassessment is madeunder Section 147 in respect of income which hasescaped tax, the Income Tax Officer’s jurisdiction isconfined to only such income which has escaped tax orhas been under-assessed and does not extend torevising, reopening or reconsidering the wholeassessment or permitting the assessee to reagitatequestions which had been decided in the originalassessment proceedings. It is only the under-assessmentwhich is set aside and not the entire assessment whenreassessment proceedings are initiated. The Income TaxOfficer cannot make an order of reassessmentinconsistent with the original order of assessment inrespect of matters which are not the subject-matter ofproceedings under Section 147. An assessee cannotresist validly initiated reassessment proceedings underthis section merely by showing that other income whichhad been assessed originally was at too high a figureexcept in cases under Section 152(2). The words ‘suchincome’ in Section 147 clearly refer to the incomewhich is chargeable to tax but has “escaped assessment”and the Income Tax Officers’ jurisdiction under thesection is confined only to such income which hasescaped assessment . It does not extend toreconsideringgenerallytheconcludedearlierassessment. Claims which have been disallowed in theoriginal assessment proceeding cannot be permitted tobe reagitated on the assessment being reopened forbringing to tax certain income which had escapedassessment because the controversy on reassessment isconfined to matters which are relevant only in respectof the income which had not been brought to tax duringthe course of the original assessment. A matter notagitated in the concluded original assessmentproceedings also cannot be permitted to be agitated in the reassessment proceedings unless relatable to theitem sought to be taxed as ‘escaped income’. Indeed ,in the reassessment proceedings for bringing to taxitems which had escaped assessment, it would be open toan assessee to put forward claims for deduction of anyexpenditure in respect of that income or the non-taxability of the items at all. Keeping in view theobject and purpose of the proceedings under Section 147of the Act which are for the benefit of the Revenue andnot an assessee. An assessee cannot be permitted toconvert the reassessment proceedings as his appeal orrevision, in disguise, and seek relief in respect ofitems earlier rejected or claim relief in respect ofitems not claimed in the original assessmentproceedings, unless relatable to ‘escaped income’, andreagitate the concluded matters. Even in cases wherethe claims of the assessee during the course ofreassessment proceedings relating to the escapedassessment are accepted, still the allowance of suchclaims has to be limited to the extent to which theyreduce the income to that originally assessed. Theincome for purposes of ‘reassessment’ cannot be reducedbeyond the income originally assessed." 13.The learned counsel contended by referring to Section 36(1)(vii) of the I.T. Act wherein it is clearly stated that it is a baddebt written off as irrecoverable of the assessee in the previous yearand as per the explanation, it does not include provision for baddebts or doubtful debts made in the account of the assessee. 14.In the present case, when the documents were called forregarding the said claim, the same were not furnished and it is not asif, the arbitration proceedings have become final and that an appealwas also filed before the Allahabad High Court. Therefore, it hasnot become irrecoverable as provided in the statute. As notedalready, though the petitioner is a partnership firm, since thecertificate issued by the auditors have shown that there is aprevailing dispute which are referable to the Court, inclusion of thebad debt account for 1998-99 is clearly impermissible and for thispurpose, notice was issued to the petitioner for reopening theassessment and no exception can be taken to the same. The decisionscited by the learned Senior Counsel for the petitioner are notappropriate to the facts of the case. 15.In view of the above, there is no illegality or irregularityin the impugned order passed by the respondent. Accordingly, thewrit petition will stand dismissed. No costs. ConnectedMiscellaneous Petition is closed. Sd/Asst.Registrar /true copy/ Sub Asst.RegistrarW.P. No. 22676 of 2007 gri To The Assistant Commissioner of Income TaxCentral Circle – II (5), Chennai – 34.1 cc To Mr.Pushya Sitaraman, Standing Counsel for I.T.Cases, SR.13902.W.P. No. 22676 of 2007 SSK(CO)RVL 25.03.2008