Ita v. Firstly, We Will Take Up The Question

IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 53 of 2003 CORAM:HON'BLE MR. JUSTICE HEMANT GUPTAHON’BLE MR. JUSTICE G.S. SANDHAWALIA 1. Whether Reporters of local papers may be allowed to see the judgment? 2. To be referred to the Reporters or not? 3. Whether the judgment should be reported in the Digest? Present:Mr. Rohit Katoch, Advocate for appellant. Ms. Radhika Suri, Advocate for respondent in all cases exceptMr. Sandeep Goyal, Advocate for respondent in ITA No. 53 of2003 HEMANT GUPTA, J. This order shall dispose of the following six appeals at the instance of revenue claiming identical questions of law for the assessment years as mentioned below: - In ITA No. 53 of 2003, the following substantial question of law arises for consideration: 1. “Whether, on the facts and in the circumstances of the case, theIncome Tax Appellate Tribunal was right in law in deleting thedisallowance of Rs. 17,62,622/- made on account of interest oninterest free advances given to the sister concerns for non-business purposes?”Income Tax Appellate Tribunal was right in law in deleting thedisallowance of Rs. 17,62,622/- made on account of interest oninterest free advances given to the sister concerns for non-business purposes?” 2. “Whether, on the facts and in the circumstances of the case, theIncome Tax Appellate Tribunal was right in law in holding thatthis issue of disallowance of interest had already attained finalityIncome Tax Appellate Tribunal was right in law in holding thatthis issue of disallowance of interest had already attained finality in the original assessment order and thus could not be reagitatedin the reassessment proceedings.” The identical question No 1 arises in all other cases aswell. In ITA Nos. 53 of 2003, 246, 247 and 669 of 2005, the Commissionerof Income Tax (Appeals) has set aside the order passed by the AssessingOfficer deleting the disallowance of the amount on account of interest oninterest free advances given to the sister concerns for non-business purposeswhere as in ITA Nos 52 and 53 of 2004, it is the Tribunal who has deletedthe disallowance of the interest on interest free advances given to the sisterconcern for non-business purposes. For the facility of reference, the facts are being takenfrom ITA No. 53 of 2003. In the said case, the Assessment order underSection 143(3) of the Income Tax Act, 1961 (for short the ‘Act’) was passedon 7.1.1992. The Assessing Officer has deleted the amount of Rs. 3,52,212/-claimed as expenses by the assessee under Section 36 (1) (iii) as the amountof interest paid in respect of the capital borrowed for the purpose ofbusiness or provision in respect of the advances made to sister concern M/sGanpati International (P) Ltd from the cash credit account of the assessee.In appeal, the assessee did not dispute the said deletion of the allowance.Thereafter, a notice under Section 147 of the Act was issued for re-assessment of the income allegedly escaping the assessment. In such re-assessment proceedings, it was found that the assessee has paid interest freeloan to other three sister concerns i.e. M/s Aushupati Enterprises Pvt. Ltdand M/s Trimurti Chemiare Pvt. Ltd. and to Smt. Uma Khanna. TheAssessing Officer recorded a finding that had the assessee not advanced theinterest free loan, the same could have been available to the assessee forrepayment of loan and reducing credit balance in Bank. Thus, it was found that the total amount of interest on money advanced to sister concernscomes to Rs. 17,62,622/- which is not allowable as deduction. On14.8.1992, Commissioner of Income Tax (Appeals) found that disallowanceof interest in the case of M/s Ganpati International Pvt. Ltd comes to Rs.3,47,313/- as against disallowance of Rs. 3,52,212/- made in an order underSection 143(3) of the Act. The order passed by the Assessing Officer wasaffirmed by the Commissioner of Income Tax (Appeals). However, theIncome Tax Appellate Tribunal set aside the order in respect ofdisallowance of interest claimed on two groundsfirstlyin view of the earlierorder of the Tribunal for the assessment year 1990-91 andsecondly, that theassessment has not been reopened on the question of disallowance ofinterest of amount advanced to other sister concerns, therefore, in view ofthe judgment of this Court in Vipin Khanna vs. Commissioner of IncomeTax and others 255 ITR 220,the Assessing Officer cannot frameassessment in relation to the issues unconnected with the issues on whichassessment has been reopened. It is the said order which is the subjectmatter of challenge at the instance of revenue in the present appeal. Firstly, we will take up the question No 2 raised by the revenuefor the decision of this Court in ITA No 53 of 2003. It has been vehementlyargued by the assessee that there was no concealment on behalf of theassessee before the Assessing Officer passed an order under Section 143(3)of the Act. In such proceedings, the amount of interest to the extent ofinterest accrued on the loan advanced to M/s Ganpati International (P) Ltdalone was disallowed. The assessee has disclosed the name of all creditorsand debtors, therefore, the Assessing Officer could not initiate theproceedings for reassessment merely on account of change of opinion. Reliance is placed upon a judgment of this Court reported as180 ITR 144,CIT vs. Amritsar Swadeshi Woolen Mills. We do not find any merit in the said argument. Section 147 hasbeen amended by the Direct Tax Laws (Amendment) Act, 1989 w.e.f.1.4.1989 and also Explanation 3 inserted vide the Finance Act No. 2 of2009 with retrospective effect from 1.4.1989. On the basis of the amendedprovisions of the Act, after the Explanation No. 1 was inserted, thedisclosure of material facts falling within the scope of proviso to Section147 does not include the disclosure on the production of the account bookbefore the Assessing Officer from which material evidence with duediligence could have been discovered by the Assessing Officer. The scopeof above-said provisions was examined by Hon’ble Supreme Court in ajudgment reported as Assistant Commissioner of Income Tax vs. RajeshJhaveri Stock Brokers P. Ltd,291 ITR 500, wherein, it has been held 17. The scope and effect of Section 147 as substituted with effectfrom April 1, 1989, as also Sections 148 to 152 are substantiallydifferent from the provisions as they stood prior to such substitution.Under the old provisions of Section 147, separate Clauses (a) and (b)laid down the circumstances under which income escapingassessment for the past assessment years could be assessed orreassessed. To confer jurisdiction under Section 147(a) twoconditions were required to be satisfied firstly the Assessing Officermust have reason to believe that income profits or gains chargeableto income tax have escaped assessment, and secondly he must alsohave reason to believe that such escapement has occurred by reasonof either (i) omission or failure on the part of the assessee to disclosefully or truly all material facts necessary for his assessment of thatyear. Both these conditions were conditions precedent to be satisfiedbefore the Assessing Officer could have jurisdiction to issue noticeunder Section 148 read with Section 147(a) But under the substitutedSection 147 existence of only the first condition suffices. In otherwords if the Assessing Officer for whatever reason has reason tobelieve that income has escaped assessment it confers jurisdiction to reopen the assessment. It is however to be noted that both theconditions must be fulfilled if the case falls within the ambit of theproviso to Section 147. The case at hand is covered by the mainprovision and not the proviso. 18. So long as the ingredients of Section 147 are fulfilled, theAssessing Officer is free to initiate proceeding under Section 147and failure to take steps under Section 143(3) will not render theAssessing Officer powerless to initiate reassessment proceedingseven when intimation under Section 143(1) had been issued. In another judgment reported as Commissioner of Income Tax vs.Kelvinator of India Ltd,320 ITR 561, the Supreme Court draw distinctionbetween change of opinion and power to reassess. It held 6. On going through the changes, quoted above, made toSection 147 of the Act, we find that, prior to Direct Tax Laws(Amendment) Act, 1987, re-opening could be done under above twoconditions and fulfillment of the said conditions alone conferredjurisdiction on the Assessing Officer to make a back assessment, butin Section 147 of the Act [with effect from 1st April, 1989], they aregiven a go-by and only one condition has remained, viz., that wherethe Assessing Officer has reason to believe that income has escapedassessment, confers jurisdiction to re-open the assessment.Therefore, post-1st April, 1989, power to re-open is much wider.However, one needs to give a schematic interpretation to the words"reason to believe" failing which, we are afraid, Section 147 wouldgive arbitrary powers to the Assessing Officer to re-openassessments on the basis of "mere change of opinion", which cannotbe per se reason to re-open. We must also keep in mind theconceptual difference between power to review and power to re-assess. The Assessing Officer has no power to review; he has thepower to re-assess. But re-assessment has to be based on fulfillmentof certain pre-condition and if the concept of "change of opinion" isremoved, as contended on behalf of the Department, then, in the garbof re-opening the assessment, review would take place. One musttreat the concept of "change of opinion" as an in-built test to checkabuse of power by the Assessing Officer. Hence, after 1st April,1989, Assessing Officer has power to re-open, provided there is "tangible material" to come to the conclusion that there isescapement of income from assessment. Reasons must have a livelink with the formation of the belief. "tangible material" to come to the conclusion that there isescapement of income from assessment. Reasons must have a livelink with the formation of the belief. The decision of this Court inAmritsar Swadeshi Wollen Mills case(supra), is prior to amendment of Section 147 and thus cannot be madeapplicable in respect of present proceedings initiated after the amendment.Mere giving of details of debit and credit is not a decision approving suchlist. Such aspects are specifically covered by the amendment carried out in1989. Still further, the insertion of Explanation 3 has the effect to nullify thejudgment of this Court in the case of Vipin Khanna (supra), when suchprovision has been inserted with retrospective effect contemplating that theAssessing officer may assess or reassess the income in respect of any issuewhich has escaped assessment notwithstanding that the reasons for suchissues have not been included in the reasons recorded under Sub-Section ofSection 148 of the Act. Therefore, we find that the finding of the IncomeTax Appellate Tribunal that the original assessment order has attainedfinality and thus in reassessment proceedings, additions cannot be made isnot sustainable. Consequently the said question is decided against theassessee and in favour of the revenue. The question No. 1 is common in all the appeals. Learnedcounsel for respondent has argued that the Tribunal has decided the appealin favour of the assessee on the basis of the order passed in assessee’s owncase for the assessment year 1991-92. It is pointed out that such order of theTribunal was the subject matter of challenge before this Court in ITA No.30 of 2002. The question of law has been answered in favour of the revenueand against the assessee vide the order dated 7.11.2006 relying upon theorder passed inCommissioner of Income Tax-I Ludhiana vs. M/s AbhishekIndustries Limited Ludhiana (2006) 286 ITR 1(P&H). Therefore, once the question of law has been answered in favour of the revenue, for the samereasons the appeal should be accepted. To controvert the said argument, learned counsel for theassessee points out that the judgment inAbhishek Industries Limited (surpa)is the subject matter of appeal before the Hon’ble Supreme Court, whereinleave has been granted and Civil Appeal No. 244 of 2007 is pendingconsideration. Therefore, such judgment cannot be taken into considerationfor deciding the said question of law against the assessee. Learned counselfor the assessee also relies upon another judgment of Hon’ble the SupremeCourt inS.A.Builders Ltd vs. Commissioner of Income Tax (Appeals) andanother (2007) 288 ITR 1SCwherein, it has been held that the transfer ofborrowed funds to a sister concern is to be examined from the point of viewof commercial expediency and not from the point of view whether theamount of advance was for earning profits. It is contended that the questionwhether the amount was advanced by the assessee as a commercialtransaction has not been examined by any of the authorities, therefore, thematter be remitted for determination of the commercial expediency of theamount of interest free loan advanced to the sister concern of the assessee. We have heard learned counsel for the parties and find that theplea of the assessee that the matter be remitted back to the authorities under theAct to determine the commercial expediency of the amount of transactioncannot be permitted to be raised at this stage. The assessee has taken a standbefore the assessing officer that the advances are not made for businessconsideration. Such explanation was recorded in the order dated 21.1.1994 bythe Assessing Officer. The explanation of the assessee was that the money hasnot been advanced out of its own funds, therefore, no part of the fund can bedisallowed was negated by the Assessing Officer. It was found that had theassessee not advanced interest free loan, the same could have been reduced for We have heard learned counsel for the parties and find that theplea of the assessee that the matter be remitted back to the authorities under theAct to determine the commercial expediency of the amount of transactioncannot be permitted to be raised at this stage. The assessee has taken a standbefore the assessing officer that the advances are not made for businessconsideration. Such explanation was recorded in the order dated 21.1.1994 bythe Assessing Officer. The explanation of the assessee was that the money hasnot been advanced out of its own funds, therefore, no part of the fund can bedisallowed was negated by the Assessing Officer. It was found that had theassessee not advanced interest free loan, the same could have been reduced for credit balance in the Bank. The interest liability of the assessee woulddefinitely have gone down to that extent. Once, the assessee has categoricallytaken a stand that there was no business consideration; the assessee cannot bepermitted to take a different stand only on account of a subsequent judgment ofthe Supreme Court. Thus, the plea of commercial expediency having been not raisedby the assessee at the stage of assessment cannot be permitted to be raised onlyon the basis of subsequent judgment of the Hon’ble Supreme Court. Theappeals against the order passed by the Court is pending consideration beforethe Hon’ble Supreme Court but there is no interim order staying the operationpassed by this Court. Therefore as far as this Court is concerned, the matterstands concluded by the judgment reported asAbhishek Industries (Supra). The Tribunal has relied upon the order passed in respect of theearlier assessment year which order has been set aside in appeal by this court,therefore, the basis of the order passed by the Tribunal stands knocked down inthe present case. In ITA 53 0f 2004, the learned Commissioner allowedexpenses in respect of interest paid on the ground that interest free loans weremuch less as compared to share application money and cash accruals. The saidorder has been followed in other cases i.e. ITA 246, 247 of 2005. In ITA669of 2005, the Commissioner has followed the earlier decision of theTribunal in respect of assessee pertaining to assessment year 1991-92. Thesaid decision of the Tribunal has been since been set aside in ITA No.30 of 2002. Similar explanation has not found favour with the Tribunal or bythis Court in earlier cases. The order of Tribunal deleting the disallowanceon account of interest on interest free advances given to the sister concerns for the non-business purposes is thus not tenable in law. Consequently, thequestions of law in all the appeals are answered in favour of the revenue andagainst the assessee while allowing the appeals. 14.10.2011 preeti (HEMANT GUPTA)JUDGE (G.S. SANDHAWALIA) JUDGE