Glaxosmithkline Pharmaceuticals Ltd. ) v. Oral Judgment (Per K. R. Shriram J

IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTIONWRIT PETITION NO.3553 OF 2019 Glaxosmithkline Pharmaceuticals Ltd. )252, GSK House, Dr. Annie Besant Road, )Worli, Mumbai 400 030)...Petitioner V/s.1. Asst./Deputy Commissioner of Income )Tax Circle 77(1)(1), )Room No.124, 1[st] floor, Aaykar Bhavan,)M. K. Marg, New Marinelines, Mumbai)2. Principal Commissioner of Income Tax )Range-7, )Room No.122, 1[st] floor, Aaykar Bhavan,)M. K. Marg, New Marinelines, Mumbai)3. The Union of India through the Secretary)Government of India, Ministry of Finance )New Delhi 110 001)...Respondents ---- Mr. Nishant Thakkar i/b Mint & Confreres for PetitionerMr. Sham V. Walve for Respondents-Revenue ---- CORAM : K.R. SHRIRAM &N.J. JAMADAR, JJ DATED : 24[th ]JANUARY 2022 ORAL JUDGMENT (PER K. R. SHRIRAM J.): 1Petitioner is impugning a notice dated 28[th] March 2019 issued underSection 148 of the Income Tax Act 1961 (the Act), by which respondentsstate that they have reasons to believe that petitioner's income chargeable totax for A.Y.-2012-2013 has escaped assessment within the meaning ofSection 147 of the Act. Petitioner is also impugning an order dated 13[th] November 2019 rejecting petitioner's objections to the reopening ofassessment for A.Y.-2012-2013. 2Having heard Mr. Thakkar and Mr. Walve and having considered thepetition, reply etc., we are in agreement with petitioner that the noticedated 28[th] March 2019 alongwith order dated 13[th] November 2019impugned in the petition have to be quashed and set aside. 3Admittedly, this is a case where the notice under Section 148 of theAct has been issued after the expiry of 4 years from the end of the relevantassessment year and assessment under Section 143(3) of the Act has alsobeen completed. Hence, proviso to Section 147 of the Act shall apply.Respondents have to show that there was failure on the part of petitioner totruly and fully disclose material facts relevant for the assessment. We haveconsidered the reasons recorded for reopening the assessment and we haveno doubt in concluding that respondents have failed in discharging its onusto show that petitioner has failed to disclose truly and fully all materialfacts. From the reasons itself as well as the documents annexed to thepetition, it is quiet clear that there has been full disclosure by petitioner.Jurisdictional Assessment Officer (JAO) has raised 4 heads, under which hefeels that income chargeable to tax has escaped assessment. The same forease of reference are reproduced from the reasons which reads as under: “Brief details of the information collected/received by the A.O.:- (1) It is found that the assessee has debited an amount ofRs.29,30,000/- towards security deposit against the interest incomeunder the head of other income in the profit and loss account. The security deposit being capital in nature is not an allowableexpenditure u/s 37 of the Act. (2) Further, the assessee has debited an amount ofRs.1,15,67,90,000/- under the head Exceptional items to the profitand loss account which included an amount of Rs.22,08,18,000/-towards expenses on reationalisation initiative mainly relating to amanufacturing site. Out of this, an amount of Rs.15,42,60,000/- wasadded back being the capital expenditure. As the whole amount ofRs.22,08,18,000/- being capital expenditure incurred towardsrationalisation initiative mainly relating to a manufacturing site,balance of Rs.6,65,58,000/- was required to be added back to thetaxable income. (3) Again, it is noticed that the assessee has reduced an amount ofRs.2,15,19,017/- towards Sales tax paid but not debited to P&Laccount in the computation of income. In the clause21(i) of 3CDreport (Schedule J) (notes 4a), the auditor has certified that thecompany has made payments in the nature of deposits aggregating toRs.2,15,19,017/- under the applicable sales tax laws of various states.Since these payment are in the nature of deposits, the same shouldnot be reduced in the computation of income. (3) Again, it is noticed that the assessee has reduced an amount ofRs.2,15,19,017/- towards Sales tax paid but not debited to P&Laccount in the computation of income. In the clause21(i) of 3CDreport (Schedule J) (notes 4a), the auditor has certified that thecompany has made payments in the nature of deposits aggregating toRs.2,15,19,017/- under the applicable sales tax laws of various states.Since these payment are in the nature of deposits, the same shouldnot be reduced in the computation of income. (4) Further, it is noticed from the balance sheet that Export incentivereceivable was Rs.97,04,000/- as on 31.03.2011 and Rs.32,56,000/-as on 31.12.2012. Thus, the assessee has claimed a deduction ofRs.64,48,000/- on account of difference of receivable which is notallowable deduction and should have been disallowed.” 4As regards item (2), JAO states that amount of Rs.15,42,60,000/- only was added back as capital expenditure, whereas the entire amount ofRs.22,08,18,000/- required to be added to the taxable income. This exposesclear change of opinion on the part of JAO. Coming to item (4), the JAO states the assessee has claimed deductionof Rs.64,48,000/- on account of difference of receivable which is notallowable deduction and should have been disallowed. This also exposesclear change of opinion. Notice to reopen the assessment for items (2) and (4) is foundentirely on the assessment records and according to JAO the Assessing Officer, who passed the assessment order did not do what he was supposedto do. It is settled law that the assessment cannot be reopened on accountof change of opinion. 5As regards item (1), this is based on audit objections. Aftercompletion of assessment under Section 143(3) of the Act respondents hadissued a communication to petitioner mentioning about the variousobjections raised by the audit department and one of that relates to thisamount of Rs.29,30,000/- towards interest expenditure. Petitioner by itsletter dated 14[th] January 2019 explained to respondents that the amount ofRs.29,30,000/- was not debited towards security deposit but was debitedtowards interest paid on security deposit. In their reply, petitioner hasexplained that the amount of Rs.29,30,000/- being debited under the headof other income in the profit and loss account and is reduced from interestincome represents interest expenditure incurred for security deposits. It wasalso brought to the notice of respondents that the interest on securitydeposit has been inadvertently considered as security deposits in the auditfindings and, therefore, the amount of Rs.29,30,000/- representing interestexpenditure is deductible as a revenue expenditure and not capital innature. We are in agreement with the explanation offered by petitioner.Moreover, this point has been raised because of audit objections. TheAssessing Officer cannot be stated to be satisfied that he had reasons tobelieve that this item has escaped assessment. The Income Tax Officer must determine for himself what is the effect and consequence of the lawmentioned in the audit note and whether in consequence of the lawwhich has come to his notice he can reasonably believe that income hadescaped assessment. The basis of his belief must be the law of which hehas now become aware. The opinion rendered by the audit party inregard to the law cannot, for the purpose of such belief, add to or colourthe significance of such law. The true evaluation of the law in its bearingon the assessment must be made directly and solely by the Income TaxOfficer. (Indian and Eastern Newspaper Society V/s. Commissioner ofIncome Tax, New Delhi 1,) Further there is nothing under this head to indicate that there wasfailure on the part of petitioner to truly and fully disclose any fact. JAO hasrelied on the documents already filed before the Assessing Officer. Further there is nothing under this head to indicate that there wasfailure on the part of petitioner to truly and fully disclose any fact. JAO hasrelied on the documents already filed before the Assessing Officer. 6Coming to item (3), JAO relying on the same primary facts which aredisclosed before the Assessing Officer, is considering the same material onrecord in which one view has been conclusively taken by the AssessingOfficer with an intention to take another view which is not permissible inlaw. Moreover, JAO's view that the payment of Rs.2,15,19,017/- were in thenature of deposits and hence could not have been deducted to profit andloss account in computation of income, is erroneous. We have to note thisalso has been raised on the basis of audit objections which, as noted earlierwas not permissible in order to arrive at a conclusion that concerned officer has reasons to believe that there was an escapement of income. According to JAO, during A.Y-2012-2013, the petitioner has deductedthe amount of Rs.2,15,19,017/- towards sales tax paid but not debited toprofit and loss account and since the payments were in the nature ofdeposits, it was not required to be reduced in the computation of income. 7In respect of statutory liability, the general principle laid down by thecourts is that a statutory liability arises in the year to which the relevanttaxable event pertains. In case of an assessee following mercantile systemof accounting, the statutory liability relates back to the year in which baseevent giving rise to such statutory liability takes place and the fact that theassessee has disputed the liability in appeal or that no entries were made inthe books of account would not result in cessation of such liability.Therefore, these tax demands although not debited to the profit and lossaccount should be deductible in the A.Y.-2012-2013 being the year ofpayment. It will be useful at this stage to quote the following paragraph fromthe judgment of the Apex Court in Kedarnath Jute Mgf. Co. Ltd. Vs. 2 Commissioner of Income Tax2 “ In Commissioner of Income-tax v. Royal Boot House [(1970) 75ITR 507 (Cal.)] it was held that where the assessee followed themercantile system of accounting and, without disputing the liability topay the Sales Tax had made a provision for its payment in its accounteven though he had not actually paid the tax over to the authorities,the assessee was entitled to deduction in respect of the provision forsales tax from his income under Section 10(2)(xv) of the Act. It was,pointed out that under the provisions of the Sales Tax statutes, theliability to pay the tax was not dependent upon assessment ordemand but was an obligation to pay the tax either annually,ITR 507 (Cal.)] it was held that where the assessee followed themercantile system of accounting and, without disputing the liability topay the Sales Tax had made a provision for its payment in its accounteven though he had not actually paid the tax over to the authorities,the assessee was entitled to deduction in respect of the provision forsales tax from his income under Section 10(2)(xv) of the Act. It was,pointed out that under the provisions of the Sales Tax statutes, theliability to pay the tax was not dependent upon assessment ordemand but was an obligation to pay the tax either annually, 2. (1971) 82 ITR 363 (SC) quarterly or monthly, as the case might be. This case was and hasbeen sought to be distinguished by the Revenue on the ground thatthe liability to pay the Sales Tax had not been disputed and theassessee had made a provision for its payment in its account. As willbe presently seen this distinction is without substance and does notaffect the true legal position. 2. (1971) 82 ITR 363 (SC) quarterly or monthly, as the case might be. This case was and hasbeen sought to be distinguished by the Revenue on the ground thatthe liability to pay the Sales Tax had not been disputed and theassessee had made a provision for its payment in its account. As willbe presently seen this distinction is without substance and does notaffect the true legal position. Now under all sales tax laws including the statute with which weare concerned, the moment a dealer makes either purchases or saleswhich are subject to taxation, the obligation to pay the tax arises andtaxability is attracted. Although that liability cannot be enforced tillthe quantification is effected by assessment proceedings, the liabilityfor payment of tax is independent of the assessment. It is significantthat in the present case, the liability had even been quantified and ademand had been created in the sum of Rs.1,49,776/- by means ofthe notice dated 21st November, 1957 during the pendency of theassessment proceedings before the Income Tax Officer and before thefinalisation of the assessment. It is not possible' to comprehend howthe liability would cease to be one because the assessee had takenproceedings before higher authorities for getting it reduced or wipedout so long as the contention of the assessee did not prevail withregard to the quantum of liability etc. An assessee that follows themercantile system of accounting is entitled to deduct from the profitsand gains of the business such liability which had accrued during theperiod for which the profits and gains were being computed. It canagain not be disputed that the liability to payment of sales tax hadaccrued during the year of assessment even though it had to bedischarged at a future date. In Pope The King Match Factory v.Commissioner of Income-tax, [(1963) 50 ITR 495 (Mad.)], a demandfor excise duty was served-on the assessee and though he wasobjecting to it and seeking to get the order of the Collector of Excisereversed, he debited that amount in his accounts. on the last day ofhis accounting year and claimed that amount as a deductibleallowance on the ground that he was keeping his accounts on themercantile basis. The Madras High Court had no difficulty in holdingthat the, assessee had incurred an enforceable legal liability on andfrom the date on which he received the Collector's demand forpayment and that his endeavor to get out of that liability by preferringappeals could not in any way detract from or retard the efficacy of theliability which had been imposed upon him by the competent exciseauthority. In our judgment, the above decision lays down the lawcorrectly.” 8In the circumstances, the entire basis for reopening is change ofopinion and as held in various judgments an Assessing Officer cannotreopen an assessment even within a period of 4 years merely on the basis ofa change of opinion (Jainam Investments Vs. ACIT Central Circle-8(1) 3Mumbai & Anr.). 9Therefore, we are holding that the petition has to be allowed in terms of prayer clause (a) which reads as under: “(a) that this Hon’ble Court be pleased to issue a Writ ofCertiorari or a writ in the nature of Certiorari or any otherappropriate writ, order or direction under Article 226 of theConstitution of India calling for the records of thepetitioner’s case and after examining the legality andvalidity thereof quash and set aside the impugned noticeunder Section 148 of the Act (Exhibit H) and the impugnedorder (Exhibit K) issued by respondent no.1.” 3Mumbai & Anr.). 9Therefore, we are holding that the petition has to be allowed in terms of prayer clause (a) which reads as under: “(a) that this Hon’ble Court be pleased to issue a Writ ofCertiorari or a writ in the nature of Certiorari or any otherappropriate writ, order or direction under Article 226 of theConstitution of India calling for the records of thepetitioner’s case and after examining the legality andvalidity thereof quash and set aside the impugned noticeunder Section 148 of the Act (Exhibit H) and the impugnedorder (Exhibit K) issued by respondent no.1.” 10At this stage, Mr. Thakkar states that there has been an errorcommitted by the Assessing Officer as regards item (4) namely the exportincentives deduction of Rs.64,48,000/-. Mr. Thakkar states that during theassessment proceedings, petitioner had, by its letter dated 24[th] February2016, in reply to the notice issued under Section 142(1) of the Act, broughtto the notice of the Assessing Officer that there was an error at the time ofmaking assessment and the amount of Rs.64,48,000/- has to be added asincome and not reduced as stated in the original returns filed. Mr. Thakkarstates that perhaps this point was missed by the Assessing Officer whilepassing the assessment order dated 21[st] April 2016 and offers to pay tax onthis amount for the said period. Revenue audit in its objections hadobserved as under: “Omission to do so has resulted in under assessment of income ofRs.64,48,000/- with consequent short levy of tax of Rs.20,92,054[19,34,400 (30%) 96,720 (5%), 60,934 (3%)] and interest underSection 234B of Rs.9,62,345. Thus the total short levy of tax worksout to Rs.30,54,398 [20,92,054 (Tax), 9,62,345 (int 234B)]” Rs.64,48,000/- with consequent short levy of tax of Rs.20,92,054[19,34,400 (30%) 96,720 (5%), 60,934 (3%)] and interest underSection 234B of Rs.9,62,345. Thus the total short levy of tax worksout to Rs.30,54,398 [20,92,054 (Tax), 9,62,345 (int 234B)]” Mr. Thakkar relies upon Gemini Leather Stores Vs. Income TaxOfficer4 where the court held that the assessment cannot be reopened byreason of the omission or failure on the part of the assessee to disclosefully and truly all material facts as the Income Tax Officer had materialfacts before him when he made the original assessment. The Court heldthat he cannot take recourse to reopen to remedy the error resulting fromhis own oversight. The relevant portions in this judgment of the Apex Court reads as under : “………. In the case before us the assessee did not disclosethe transactions evidenced by the drafts which the Income-Tax Officer discovered. After this discovery the Income-taxOfficer had in his possession all the primary facts, and it wasfor him to make necessary enquiries and draw properinferences as to whether the amounts invested in thepurchase of the drafts could be treated as part of the totalincome of the assessee during the relevant year. This theIncome-tax officer did not do. It was plainly a case ofoversight, and it cannot be said that the income chargeable totax for the relevant assessment year had escaped assessmentby reason of the omission or failure on the part of theassessee to disclose fully and truly all material facts. TheIncome tax officer had all the material facts before him whenhe made the original assessment. He cannot now takerecourse to Section 147 (a) to remedy the error resultingfrom his own oversight.” Mr. Thakkar states that though JAO cannot take recourse to reopen to remedy the error resulting from his own oversight, petitioner in fairnessis ready and willing to pay the amount as mentioned earlier provided it isnot construed as an admission of liability and no penalty proceedings for this are initiated. 4 (1975) 100 ITR 1 (SC) 11Mr. Walve states that the court may pass such directions as it deems fit. Mr. Thakkar states that though JAO cannot take recourse to reopen to remedy the error resulting from his own oversight, petitioner in fairnessis ready and willing to pay the amount as mentioned earlier provided it isnot construed as an admission of liability and no penalty proceedings for this are initiated. 4 (1975) 100 ITR 1 (SC) 11Mr. Walve states that the court may pass such directions as it deems fit. 12Petitioner is therefore, directed to pay the amount ofRs.30,54,398/- as mentioned in the revenue audit objections.Respondents are directed to raise the demand on petitioner for thisamount and petitioner shall pay the amount within time prescribed in thedemand. We are making it clear that as noted earlier, the entire 148notice is quashed and set aside and we have held that assessment couldnot have been reopened at all by respondents. We have only includedthis portion in this order in view of the without prejudice offer made byMr. Thakkar and that cannot be construed as an admission of any liabilityby petitioner. We also clarify that in view of our observation as above, nopenalty proceedings can be initiated by respondents under this head. 13Petition disposed. No order as to costs. (N. J. JAMADAR, J.) (K.R. SHRIRAM, J.)