Lambda Therapeutic Research Limited v. Andhonourable Mr. Justice Bhargav D. Karia

IN THE HIGH COURT OF GUJARAT AT AHMEDABADR/SPECIAL CIVIL APPLICATION NO. 17583 of 2021 FOR APPROVAL AND SIGNATURE: HONOURABLE MR. JUSTICE N.V.ANJARIA andHONOURABLE MR. JUSTICE BHARGAV D. KARIA ========================================================== 1Whether Reporters of Local Papers may be allowedYesto see the judgment ?2To be referred to the Reporter or not ?Yes3Whether their Lordships wish to see the fair copyNoof the judgment ?4Whether this case involves a substantial questionNoof law as to the interpretation of the Constitutionof India or any order made thereunder ? ========================================================== LAMBDA THERAPEUTIC RESEARCH LIMITED Versus DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE - 2(1)(1) ==========================================================Appearance:MR. TUSHAR HEMANI, SR. ADV. WITH MS VAIBHAVI K PARIKH(3238) for the Petitioner(s) No. 1MR. M.R.BHATT, SR. ADV. WITH MR. KARAN SANGHANI FOR M R BHATT& CO.(5953) for the Respondent(s) No. 1 ========================================================== CORAM:HONOURABLE MR. JUSTICE N.V.ANJARIA andHONOURABLE MR. JUSTICE BHARGAV D. KARIA Date : 19/09/2022 ORAL JUDGMENT (PER : HONOURABLE MR. JUSTICE N.V.ANJARIA) In the facts and circumstances of the case and having regard to the request and consent of the learned advocates appearing for the respectiveparties, the petition was taken up for final consideration. 1.1Rule, returnable forthwith. Learned advocate Mr. Karan Sanghanifor M. R. Bhatt & Co. waives service of Rule on behalf of the respondent. 2.By filling this petition under Article 226 of the Constitution , thepetitioner has prayed to set aside notice dated 27.3.2021 issued undersection 148 of the Income Tax Act, 1961 in respect of Assessment Year2014-2015 seeking to reopen the assessment stating that the AssessingOfficer had reasons to believe that the income of the petitioner chargeableto income tax for the Assessment Year under consideration had escapedassessment within the meaning of section 147 of the Income Tax Act,1961 (hereinafter referred to as ‘the Act’). 3.The facts are that the petitioner is engaged in the business ofproviding clinical research services. In the year under consideration, itsnon-current investment as on 31.3.2013 and 31.3.2014 aggregated toRs. 59,11,96,725/- and Rs. 69,58,82,489/- as reflected in the annualaccounts. It was stated that majority of investments were in the shares ofthe foreign companies and dividend from the shares of the foreigncompanies is taxable. The petitioner incurred interest expenses ofRs. 3,19,34,823/- as is evident from the profit and loss account. In thefinal return of income filed by the petitioner on 27.11.2014, it madedisallowance of Rs. 1,12,869/- under section 14A of the Act on its own. 3.1The case of the petitioner was selected for scrutiny assessment. Thenotice was issued on 2.8.2017 under section 142(1) of the Act. Theassessing officer called from the petitioner the information regardingsuo motu disallowance of Rs. 1,12,869/-. The petitioner addressed letterdated 30.08.2017 and provided the working of the dis-allowance of Rs. 1,12,869/- taken under section 14A of the Act. The Assessing Officerframed assessment under section 143 (3) read with section 144(C) of theAct and passed order dated 25.1.2018 after making various additionsincluding disallowance. The actual disallowance under section 14A ofthe Act was worked out by the then assessing officer to beRs. 32,17,698/-, however, since the petitioner had itself disallowedRs. 1,12,869/- suo motu, net disallowance of Rs. 31,04,829/- (Rs.32,17,698/- - Rs. 1,12,869/-) was made. Rs. 1,12,869/- taken under section 14A of the Act. The Assessing Officerframed assessment under section 143 (3) read with section 144(C) of theAct and passed order dated 25.1.2018 after making various additionsincluding disallowance. The actual disallowance under section 14A ofthe Act was worked out by the then assessing officer to beRs. 32,17,698/-, however, since the petitioner had itself disallowedRs. 1,12,869/- suo motu, net disallowance of Rs. 31,04,829/- (Rs.32,17,698/- - Rs. 1,12,869/-) was made. 3.2The disallowance under section 14A of the Act made by theauthorities came to be challenged by the petitioner by preferring theappeal before the Commissioner of Income Tax (Appeals). The appellateauthority passed order dated 20.6.2018 and deleted the disallowanceunder section 14A observing that the investment made in foreigncompanies cannot be considered for the purpose of making disallowanceunder the said section 14A of the Act read with Rule 8D of the incometax rules. 3.3It is the case of the petitioner that thereafter the respondent issuedimpugned notice dated 27.3.2021 under section 148 of the Act. Thepetitioner filed return of income 15.4.2021 in response to the notice andrequested the officer to supply the reasons for reopening the assessment.The reasons were supplied to the petitioner by letter dated 11.5.2021. Thepetitioner raised objections on 25.5.2021 and by order dated 11.11.2021,the objections of the petitioner came to be rejected by the assessingofficer. 3.4 Now the reasons supplied for reopening are as under, “2. Brief details of information collected/received by the AO: Scrutinyof the Case Records, Balance Sheet, P&L Account, Computation ofIncome, it is seen that, the assessee-company had claimed and allowed exempt income of Rs.1,43,679/- by way of dividend. It is further noticedthat the assessee-company had itself disallowed of Rs.1,12,869/- undersection 14A r.w.r. 8D of the IT Rules. It is further noticed fromassessment order that AO has also disallowed of Rs.31,04,829/- undersection 14A r.w.r. 8D(2)(iii). It is further noticed from Balance Sheetand Profit & Loss Account that assessee-company had invested in equityshares and preference shares a total sum of Rs.69,58,82,489/- as on31.03.2015 and Rs.59,11,96,725/- as on 31.03.2014 and had incurredinterest expenditure of Rs.3,19,34,823/- in P&L Account. However, theexpenses in relation to the exempt income were disallowed short interms of the provisions of section 14A of the Income-tax Act r.w.r.8D(2)(ii) accordance with the formula (A x B)/C of the Income-taxRules. The amount of Rs 99,81,608/- required to be disallowed undersection 14A r.w.s. Rule 8D works out as under: Particulars Working Amount (In Rs.)Total interest paid during the year (i) 3,19,34,823/-Average Investment [69588489+591196725]/2 64,35,39,607/-Average total assets [3078889101+2997868844]/2 3,03,83,78,8724/-Interest x Average Investment Average-Total 31934823 x 643539607/3038378872 67,63,910/- Assets (ii)Add:0.5% of Average- 0.5% 643539607 32,17,698/- Investment (iii)Total Disallowable Amount (i + ii + iii) 99,81,608/ 3. Analysis of information collected/received: As discussed in Para-2above, it can be seen from the case records that, assessee-company hadclaimed and allowed exempt income of Rs.1,43,679/- by way ofdividend income. It is further noticed that the assessee-company haditself disallowed of Rs.1,12,869/- under section 14A r.w.r. 8D of the ITRules. It is further noticed from assessment order that, the Assessing Officer in addition to the above disallowed another amount ofRs.31,04,829/- under section 14A r.w.r. 8D(2)(iii) at the time offinalizing the assessed income. 3. Analysis of information collected/received: As discussed in Para-2above, it can be seen from the case records that, assessee-company hadclaimed and allowed exempt income of Rs.1,43,679/- by way ofdividend income. It is further noticed that the assessee-company haditself disallowed of Rs.1,12,869/- under section 14A r.w.r. 8D of the ITRules. It is further noticed from assessment order that, the Assessing Officer in addition to the above disallowed another amount ofRs.31,04,829/- under section 14A r.w.r. 8D(2)(iii) at the time offinalizing the assessed income. It is further noticed from Balance Sheet and Profit & Loss Account thatassessee-company had invested in equity shares and preference shares atotal sum of Rs.69,58,82,489/- as on 31.03.2015 and Rs.59,11,96,725/-as on 31.03.2014 and had incurred interest expenditure ofRs.3,19,34,823/- in P&L Account. However, the expenses in relation tothe exempt income were disallowed short in terms of the provisions ofsection 14A of the Income-tax Act r.w.r. 8D(2)(ii) accordance with theformula (A x B/C of the Income-tax Rules. The total amount required tobe disallowed under section 14A r.w.s. Rule 8D comes to Rs.99,81,608/-whereas only amount of Rs.32,17,698/- was disallowed. This shortdisallowance of expenditure has resulted into underassessment of Rs.67,63,910/- (Rs. 99,81,608/- (-) Rs. 32,17,698/-)” 3.5The assessee responded to the reasons supplied in his letter dated25.5.2021. 4.Heard learned senior advocate Mr. Tushar Hemani with learnedadvocate Ms. Vaibhavi Parikh for the petitioner and learned senioradvocate Mr. M. R. Bhatt for M. R. Bhatt & Co. for the respondent. 5.The reasons for reopening reveals that the case of the Petitioner hasbeen reopened broadly on the count that there is short disallowance undersection 14A of the Act. Briefly, the case of the Respondent is that thescrutiny of case records, Balance-sheet, Profit & Loss account andcomputation of income revealed that the Petitioner had itself disallowedRs. 1,12,869/- under section 14A of the Act and the then AssessingOfficer had made disallowance of Rs.31,04,829/- under section 14A ofthe Act while framing original assessment. It was further noticed from theBalance-sheet that investments as at 31.03.15 (should be 31.03.14) &31.03.14 (should be 31.03.13) aggregated to Rs.69,58,82,489/- andRs.59,11,96,725/- respectively and that the Petitioner had incurred interest expenses of Rs.3,19,34,823/- in Profit & Loss account.Disallowance under section 14A of the Act read with Rule 8D(2)(ii)worked out to Rs.99,81,608/- as against which, disallowance of onlyRs.32,17,698/- (Rs.1,12,869 + Rs.31,04,829) was made under section14A of the Act. Thus, there was a short disallowance of Rs,67,63,910/-(Rs.99,81,608 - Rs.32,17,698) under section 14A of the Act. 5.1Now there is no gainsaying that prior to the impugned noticeseeking to reopen the assessment, the scrutiny assessment was undertakenin the case of the petitioner. The petitioner was issued notice dated2.8.2017 under section 142(1) of the Act. The petitioner had respondedto the same by letter dated 30.8.2017. The final final order was passed on25.1.2018 under section 143(3) read with section 144C of the Act. 5.2In notice dated 2.8.2017, the following details were asked foramongst other details, “(i) Details of interest free and interest bearing loans and advances madeby the company, viz. name and address of such persons to whom theloans and advances were made and the specific purpose of such loan andadvances. Also give clarification regarding whether any interest bearingfund has been diverted for non business purposes or for acquisition ofcapital asset. If yes then explain as to why proportionate interestexpenses should not be disallowed u/s. 36(1)(iii) of the Act orcapitalized with the capital assets. Please furnish details of advancerecoverable in cash or kind along with justification for non charging ofinterest on such advance, if any. 5.2In notice dated 2.8.2017, the following details were asked foramongst other details, “(i) Details of interest free and interest bearing loans and advances madeby the company, viz. name and address of such persons to whom theloans and advances were made and the specific purpose of such loan andadvances. Also give clarification regarding whether any interest bearingfund has been diverted for non business purposes or for acquisition ofcapital asset. If yes then explain as to why proportionate interestexpenses should not be disallowed u/s. 36(1)(iii) of the Act orcapitalized with the capital assets. Please furnish details of advancerecoverable in cash or kind along with justification for non charging ofinterest on such advance, if any. (ii) Details of holding of shares all the Directors of the company alongwith their latest addresses. Submit the copies of ledger account for thefinancial year 2013-14 of all such shareholders who are the beneficialowner of shares in the company holding not less than ten per cent ofvoting power or who is substantially interested in the Company or ofany concerns in which such shareholders are substantially interestedwithin the meaning of section 2(22)(e) of the IT Act, 1961.” 5.3The petitioner responded with the details of working ofdisallowance under section 14A as under, 5.3.1The details of the outstanding balance as on 31.3.2014 ofallowance and advances made by the petitioner weas also furnished to beas under, 5.3.2The details of the share holding pattern of the petitioner company was also made available as under, 5.4After considering the above details, the assessment orderunder section 143(3) was passed by the assessing officer. The followingaspects of disallowance of expenses under section 14A of the Act wasspecifically dealt with, extracting the relevant part, “On verification of the balance sheet it is noticed that the assessee hasshown investments of Rs. 695882489/- in the year under consideration.Further, the assessee has paid substantial interest on the borrowingsamounting to Rs.2,86,97,897/- in the year under consideration. Theassessee has made investment in shares of the subsidiary company. Inview of the above, during the assessment proceedings, the assessee videnotice dated 2/08/2017 was asked to show cause as to why expenses u/s.14A r.w.r. 8D should not be disallowed. In response to the assessee hasfurnished its reply dated 30/08/2017, the assessee submitted that theworking of disallowance of Rs. 1,12,869/- under section 14A is alreadymade while computing the income and no further expenses requires tobe disallowed.” 5.5While filling the objections to the reasons recorded, the assesseefurnished to the assessing officer Note 15 of the audited accounts, whichprovided details of investment, that is investment in shares held by theassessee, which included the investment in preference shares of foreigncompanies/foreign subsidiaries as well. 5.6It was further pointed out that the petitioner while filed return ofincome on 27.11.2014 declaring income of Rs. 51,06,77,201/- afterdiallowing Rs. 1,12,689/- under section 14A. In absence of specific borrowings and availability of sufficient own interest free funds in thehands of the assessee, any adjustment under Rule 8D2(ii) was not madeand any interest expenses was not disallowed. It was pointed out that theassessee worked out disallowance as provided in rule 8D2(iii) at 0.5% inabsence of any interest expenses. The said details were given in tabularform thus, 5.7It was also pointed out that while passing order, the assessingofficer calculated Rs. 32,17,698/- as it was disallowable amount underrule 8D(2)(iii) towards 0.5% of average investment of Rs. 64,35,39,607/-shown in the financial statement it mainly included the investments in the shares of the foreign companies as well as shares allotted towards holdingof movable property. borrowings and availability of sufficient own interest free funds in thehands of the assessee, any adjustment under Rule 8D2(ii) was not madeand any interest expenses was not disallowed. It was pointed out that theassessee worked out disallowance as provided in rule 8D2(iii) at 0.5% inabsence of any interest expenses. The said details were given in tabularform thus, 5.7It was also pointed out that while passing order, the assessingofficer calculated Rs. 32,17,698/- as it was disallowable amount underrule 8D(2)(iii) towards 0.5% of average investment of Rs. 64,35,39,607/-shown in the financial statement it mainly included the investments in the shares of the foreign companies as well as shares allotted towards holdingof movable property. 6.From the above details, there shall be no gainsaying that the issueabout the allowable expenditure under section 14A of the Act was goneinto by the assessing officer at the time of scrutiny assessment on thebasis of material and the information supplied and available with it.Furthermore, notice under section 148 was issued in respect ofassessment year 2014-2015, after four years from the end of the yearconsideration. The pre-requisite was to show that there was failure onpart of the petitioner assessee in fully and truly disclosing the facts as perthe first proviso to section 147 of the Act. 6.1In the facts of the case, there was full and true disclosure in theyear under consideration on the part of the assessee. The submissioncould not be brushed aside lightly that on the said ground alone, thenotice issued by the respondent under section 148 of the Act was liable tobe set aside. 6.2As could be seen from the above discussion, the assessing officerhad acted to undertake the assessment, which ended up with theassessment order under section 143(3) of the Act, in which the aspect ofallowability of interest under section 14A was considered alolngwith theother aspects on the basis of the material and conscious decision wastaken reflected in the assessment order. It is on the basis of the very factsthat the assessing officer wanted to reopen the concluded assessmentproceedings. It amounted to change of opinion. 6.3It is well settled that mere change of opinion could not be a ground for the Assessing Officer to reopen the concluded assessment. InCommissioner of Income Tax vs. Kelvinator of India Ltd. [(2010) 320ITR 561 O(SC)], the supreme court observed that concept of change ofopinion was an inbuilt test and it did not stand obliterated aftersubstitution of section 147 in the Act by the Direct Tax Laws(Amendment) Act, 1987 and 1989. The Apex Court stated, 6.3It is well settled that mere change of opinion could not be a ground for the Assessing Officer to reopen the concluded assessment. InCommissioner of Income Tax vs. Kelvinator of India Ltd. [(2010) 320ITR 561 O(SC)], the supreme court observed that concept of change ofopinion was an inbuilt test and it did not stand obliterated aftersubstitution of section 147 in the Act by the Direct Tax Laws(Amendment) Act, 1987 and 1989. The Apex Court stated, “... prior to Direct Tax Laws (Amendment) Act, 1987, re-opening couldbe done under above two conditions and fulfillment of the saidconditions alone conferred jurisdiction on the Assessing Officer to makea back assessment, but in section 147 of the Act with effect from 1stApril, 1989, they are given a go-by and only one condition hasremained, viz., that where the Assessing Officer has reason to believethat income has escaped assessment, confers jurisdiction to re-open theassessment. Therefore, post-1st April, 1989, power to re-open is muchwider. However, one needs to give a schematic interpretation to thewords "reason to believe" failing which, we are afraid, section 147would give arbitrary powers to the Assessing Officer to re-openassessments on the basis of "mere change of opinion", which cannot beper se reason to re-open. We must also keep in mind the conceptualdifference between power to review and power to re-assess. TheAssessing Officer has no power to review; he has the power to re-assess.But re-assessment has to be based on fulfillment of certain pre-conditionand if the concept of "change of opinion" is removed, as contended onbehalf of the Department, then, in the garb of re-opening the assessment,review would take place. One must treat the concept of "change ofopinion" as an in-built test to check abuse of power by the AssessingOfficer.” 6.4The assessing officer issued notice under section 148 only to makea roving inquiry into the facts which were already considered and whichhad gone into his consideration and decision. It appeared that theassessing officer wanted to re-verify the facts, which is not an acceptableground for exercising powers to reopen the assessment. 7.For all the foregoing reasons and discussions, the impugned noticedated 27.3.2021 under section 148 of the Income Tax Act, 1961 issued bythe respondent, whereby the Assessing Officer proposed to exercise thepowers to reopen the assessment for the year 2014-2015 stands illegaland is liable to be set aside. Also deserves to be set aside is the orderdated 11.11.2021 of the Assessing Officer disposing of the objections ofthe petitioner filed against the reopening to reject the same. Accordingly,the impugned notice dated 27.3.2021 is hereby set aside. Also set asideare the consequential actions and orders. The petition is allowed. Rule ismade absolute (N.V.ANJARIA, J) C.M. JOSHI (BHARGAV D. KARIA, J)