Ita/26/2010 Of The Commissioner Of Income Tax, Kottayam v. M/S.malayala Manorama Co. Ltd., Kottayam

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR. JUSTICE ASHOK MENON TUESDAY, THE 29TH DAY OF MAY 2018 / 8TH JYAISHTA, 1940 ITA.No. 26 of 2010 AGAINST THE ORDER/JUDGMENT IN ITA 601/2007 of I.T.A.TRIBUNAL,COCHIN BENCH DATED 17-06-2009 APPELLANT(S)/APPELLANT/REVENUE THE COMMISSIONER OF INCOME TAX, COCHIN. BY ADV.SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT(S)/RESPONDENT/ASSESSEE: M/S.MALAYALA MANORAMA CO. LTD., KOTTAYAM. BY ADV. SRI.E.K.NANDAKUMAR (SR.) BY ADV. SRI.P.BENNY THOMAS BY ADV. SRI.P.GOPINATH BY ADV. SRI.K.JOHN MATHAI THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 29-05-2018, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: APPENDIX APPELLANT'S EXHIBITS jg-25/6 K.VINOD CHANDRAN & ASHOK MENON, JJ. -------------------------------------------ITA No.26 of 2010 ------------------------------------------- Dated this the 29[th] day of May, 2018 J U D G M E N T Vinod Chandran, J. The questions of law to be decided in this appealare as follows:- “(1) Whether, on the facts and in thecircumstances of the case and also in thelight of Explanation 3 to Section 147introduced by the Finance (2) Act 2009 withretrospective effect from 1.4.1989, theTribunal is right in law in canceling thereassessment? (2)Whether, on the facts and in thecircumstances of the case is not thereassessment in accordance with law and theITAT was not justified in interfering withthe same?” 2.The relevant assessment year is 1999-2000 andthe return of income filed by the assessee conceding atotal income of Rs.6,48,88,718/-, was proceeded withunder Section 143(1) of the Income Tax Act, 1961.Later, the assessment was re-opened and a revised totalincome of Rs.8,14,57,229/- was determined. The challenge of the assessee before the first appellateauthority was on the ground that the Assessing Officerhad looked into other issues and found escapedassessment on those issues also; which issues werenever recorded as reasons for re-opening of assessmentunder Section 148(2). The reasons recorded for re-assessment were the following as is evident fromAnnexure-A assessment order. “(1) Failure to make addition of Rs.17.64lakhs with respect to teak plantation to thetotal income. (2)Income from property at Bombay notdeclared. (3) Claim under Section 80(IA) is excessive. (4)A sum of Rs.187.32 lakhs shown asdeposits from agents, have been included underthe head “quasi capital”. 3.The second and fourth issues with respect toincome from property in Bombay and the deposits fromagents; the assessing authority did not make anyaddition. The addition with respect to teak plantationwas not resisted by the assessee. The claim underSection 80(IA) was revised by the Assessing Officer(AO) after taking into account the gains from businessof each of the units and apportioning it ITA 26/10 proportionally. This was done after calling for thedetails from the assessee, who had made theapportionment in a different manner. In addition tothe above, the AO had also considered two issues withrespect to deemed dividend and expenditure with respectto one Mammen Mappillai Hall, which were found to haveescaped assessment for reason of not being included inthe total income. ITA 26/10 proportionally. This was done after calling for thedetails from the assessee, who had made theapportionment in a different manner. In addition tothe above, the AO had also considered two issues withrespect to deemed dividend and expenditure with respectto one Mammen Mappillai Hall, which were found to haveescaped assessment for reason of not being included inthe total income. 4.Annexure-A order of the AO was challenged infirst appeal in which Annexure-B order was passed.Additions made with respect to opening work in teakplantation was found to have been admitted by theassessee. Agency deposits and rent from Bombay flatwere found to have been not assessed by the AO. Withrespect to Section 80(IA) claim, the finding of thefirst appellate authority was that the AO went on arowing inquiry and called for details from the assesseebased on which re-computation was carried out which wasimpermissible under Section 148(2). The reasonsrecorded were not sufficient to carry out re-openingand to conduct a rowing inquiry making computations andapportionment in accordance with the details suppliedby the assessee, held the appellate authority. The first appellate authority directed re-computation ofthe deduction under Section 80(IA) to the extent it wasconceded by the assessee. 5.On the question of additions made with respectto the expenditure in Mammen Mappillai Hall and thedividend income, the first appellate authority reliedon 2006 (4) KLT 344 [Travancore Cements Ltd. v.Assistant Commissioner of Income Tax] to find thatthere could be no additional escapement proceeded for,on issues not finding a place in the reasons recordedunder Section 148(2). A second appeal by the Revenue,filed before the Tribunal, was rejected. 6.The learned Standing Counsel for Revenue wouldpoint out that Travancore Cements was overruled by aFull Bench of this Court in (2011) 311 ITR 63 (Ker)(FB) : [Commissioner of Income Tax v. Best WoodIndustries and Saw Mills]. Even then, the AO could nothave included the additional items, is the contentionof the learned counsel for the assessee relying on thedecision in (2011) 331 ITR 236 (Bom) [Commissioner ofIncome Tax v. Jet Airways (I) Ltd.], a decision of theBombay High Court. ITA 26/10 -5- 7.We would first look at the decisions placedbefore us. Travancore Cements found that notice beforeassessment, to assess escaped income, is mandatoryunder Section 148(2). Even if the assessing authoritydetects on reassessment an escapement, on an issuetotally unconnected with the reasons as recorded underSection 148(2), the same cannot be proceeded with onreassessment. A Full Bench of this Court howeveroverruled the said decision. The Full Bench in BestWood Industries Limited looked at the main body ofSection 147 and found that the Supreme Court in (1992)198 ITR 297 (SC) [CIT v. Sun Engineering Works P.Ltd.] has not laid down any preposition as has beenfound in Travancore Cements. The Full Bench held thatif in the course of reopening, for escapement ofincome, it comes to the notice of the AO that any otheritem or items of income, other than that recorded asreasons originally for the purpose of re-opening, hasescaped assessment; then the AO is bound to assess suchitem or items of income also in the course of re-assessment under Section 147. The decision in (2007)291 ITR 500 (SC) [Asst. CIT v. Rajesh Jhaveri StockBrokers P.Ltd.] was also relied on by the Full Bench. The Hon'ble Supreme Court in that decision held that atthe stage of issuance of notice under Section 148, theonly question is whether there was relevant material onwhich a reasonable person could have formed requisitebelief. Whether it could eventually prove escapementof income is not at all the concern at the stage of re-opening. The decision in Travacore Cements stoodoverruled by the Full Bench. The Hon'ble Supreme Court in that decision held that atthe stage of issuance of notice under Section 148, theonly question is whether there was relevant material onwhich a reasonable person could have formed requisitebelief. Whether it could eventually prove escapementof income is not at all the concern at the stage of re-opening. The decision in Travacore Cements stoodoverruled by the Full Bench. 8.Even when the Full Bench had declared so,Explanation 3 to Section 147 was inserted by FinanceAct (No.2) of 2009 with effect from April 1, 1989.Explanation 3 reads as follows: “Explanation 3 : For the purpose of assessment or reassessment under thissection, the Assessing Officer may assessor reassess the income in respect of anyissue, which has escaped assessment, andsuch issue comes to his notice subsequentlyin the course of the proceedings under thissection, notwithstanding that the reasonsfor such issue have not been included inthe reasons recorded under sub-section (2)of section 148.” 9.The Division Bench of the Bombay High Court inJet Airways (I) Ltd., was considering the effect of theExplanation insofar as reopening of assessment under ITA 26/10 Section 148. The Division Bench specifically referredto Travancore Cementsand found that the decision wasrendered prior to the insertion of Explanation 3. Afterintroduction of Explanation 3, the decision wouldcease to reflect the correct position in law. Theeffect of the Explanation was found to be that “once anAssessing Officer has formed a reason to believe thatincome chargeable to tax has escaped assessment and hasproceeded to issue a notice under Section 148, it isopen to him to assess or re-assess income in respect ofany other issue though the reasons for such issue hadnot been included in the reasons recorded under Section148(2) (sic. Para 19)”. 10.The Court then went on to consider whether inthe circumstances of the original reasons recorded forre-opening, does not conclude in a finding ofescapement of income; the other issues on which therewere no reasons recorded, but were put to the assesseein the course of the re-assessment proceedings, couldbe proceeded with. The Division Bench answered theissue in the negative and found that, if on theoriginal reasons recorded, there are no additions made,then necessarily, for the other issues detected in the ITA 26/10 course of the re-opening proceedings, there should be afresh notice under Section 148 with reasons recordedunder Section 148(2). We have our own doubts about thedictum so laid down, but however, we need not expressourselves on the issue in the present case, since thesaid issue would not arise at all here. 11.As was noticed, there were four reasonsrecorded for re-opening of assessment under Section148(2) of which two were eventually added on as escapedincome. The other issues detected in the course of re-assessment proceedings were put to the assessee andreply/explanation obtained from the assessee. There isno ground urged of violation of principles of naturaljustice. It is after looking into the explanationoffered by the assessee that the additions were made.This is not a case in which additions made, on theissues not originally recorded under Section 148(2)could be deleted, merely on the ground of originalreasons recorded having not concluded in an assessmentof escaped income. Two of the reasons recorded didconclude in assessment of escaped income. It definitelycannot be a preposition that only if all the recordedreasons ended in assessment of escaped income, could ITA 26/10 there be assessment made on issues of escapement;detected during the course of re-opening. We, hence,answer the questions of law framed in favour of theRevenue and against the assessee. ITA 26/10 there be assessment made on issues of escapement;detected during the course of re-opening. We, hence,answer the questions of law framed in favour of theRevenue and against the assessee. 12.We notice that the deletions were made on theassumption that there could be no other issues dealtwith on re-opening other than what was recorded asreasons under Section 148(2). We have found otherwisebased on the Full Bench judgment as also the judgmentof the Division Bench of the Bombay High Court. Insuch circumstances, we would have remanded the matterfor consideration of the quantum appeal. The issuesrequiring fresh consideration are (i) Section 80(IA),(ii) deemed dividend and (iii) expenditure with respectto Mammen Mappillai Hall. 13.Then, the learned counsel appearing for theassessee placed before us two decisions of this Courtin which the issue under Section 80(IA) and of deemedincome was considered and the same having acquiredfinality. When ordering a remand we have to notice thatthere are issues already settled, in the assessees owncase, which need not now be addressed. Theissue ofdeemed dividend is no longer res-integra being covered ITA 26/10 by the common judgment of another Division Bench in ITANo. 167 of 2008 dated 03.01.2018. 14.On the reasons recorded under Section 148(2),excessive relief granted under Section 80(IA) was aspecific ground. The AO had called for explanationwhich was supplied and on the basis of the detailssupplied with respect to the business in the variousunits, there was an apportionment made by the AO,contrary to what was conceded by the assessee. Thefirst appellate authority had found that there were nosufficient reasons recorded to conduct a rowing enquiryand directed the AO to accept the computation asconceded by the assessee on the reopening effected. Wewould not delve further into that issue especiallysince this Court had in an earlier assessment yearanswered the question in favour of the assessee andagainst the Revenue in Malayala Manorama Co.Ltd Vs.C.I.T (2002) 257 ITR 633.We see from the assessmentorder that the Assessing Officer noticed the decisionbut sought to draw a distinction. However yet anotherDivision Bench again for another assessment yearfollowed the aforecited decision inC.I.T. Vs. ITA 26/10 Malayala Manorama Co.Ltd [I.T.A No. 655 of 2009judgment dated 03.11.2017]. 15.Further in the present case, which is areassessment proceeding, quite surprisingly, theAssessing Officer proceeded to assess the escapement ofincome in the following manner: “The assessee has notexplained why there is discrepancy in the sales as perthe old statement and the new statement except for thediscrepancy in Trichur. After due consideration thisyear I am making a departure from the old methodandallocating the sales as per the old statement as thesales but with certain changes”(sic). This definitelyis not permissible and falls foul of the principles ofreassessment for reason of it being a mere change ofopinion. The power conferred under Section 147 is notone of review and is of reassessment for reasonsrecorded. These reasons recorded has to emanate fromsome material coming to the notice of the AssessingOfficer after the original assessment; which is absentat this instance. On the ground of binding precedents,inter-parties, in the other assessment years as also onthe ground of the reassessment proceedings beingincompetent, we are of the opinion that the direction of the First appellate Authority on the issue ofSection 80(IA), need not be touched. We affirm theorder to that extent and the consequences flowing fromthe said directions necessarily follow. of the First appellate Authority on the issue ofSection 80(IA), need not be touched. We affirm theorder to that extent and the consequences flowing fromthe said directions necessarily follow. 16.Hence there would be no purpose served inremanding those two issues. What remains is the expenseincurred for maintaining Mammen Mappilai Hall. Theexpenses is in the nature of salary paid to a sweeperfor cleaning the premises. Though the Hall is in thename of the founder of the assessee, it is not owned bythe assessee. The claim is that in keeping the Hallclean the assessse's business gets enhanced good will.A similar claim for business expenditure, was held tobe not permissible in a binding precedent in theasessee's own case for another assessment year;reported in [2006] 284 ITR 69 (Ker) Malayala MonoramaCo.Ltd. v. Commissioner of Income-Tax. The amount isalso only Rs.2,45,33/- and there can be no dispute onquantum looking at the facts pleaded. Hence there is noreason for a remand. We answer the questions of law as framed by theRevenue in favour of the Revenue and against theassessee on the reasoning above. But the additions under Section 80(IA) will be as directed in the firstappellate authority's order and the addition on deemeddividend stands reversed. The addition on the expensesincurred for Mammen Mappillai Hall stands sustained.The Income Tax Appeal is partly allowed. Sd/- K.VINOD CHANDRAN JUDGE jg Sd/- ASHOK MENON JUDGE