Mangalam Alloys Ltd v. Dy. Commissioner Of Income Tax Circle 2(1)(2) ==========================================================Appearance

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/SPECIAL CIVIL APPLICATION NO. 22495 of 2019 FOR APPROVAL AND SIGNATURE: HONOURABLE MR. JUSTICE N.V.ANJARIA andHONOURABLE MR. JUSTICE BHARGAV D. KARIA ========================================================== ========================================================== MANGALAM ALLOYS LTD. Versus DY. COMMISSIONER OF INCOME TAX CIRCLE 2(1)(2) ==========================================================Appearance: MR NITIN K MEHTA(3286) for the Petitioner(s) No. 1,2 MR MR BHATT SENIOR ADVOCATE WITH MR KARAN SANGHANI FOR M R BHATT & CO.(5953) for the Respondent(s) No. 1 ========================================================== CORAM:HONOURABLE MR. JUSTICE N.V.ANJARIAand HONOURABLE MR. JUSTICE BHARGAV D. KARIA Date : 12/09/2022 ORAL JUDGMENT (PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA) 1.Heard learned advocate Mr. Nitin k. Mehta forthe petitioner and learned Senior Advocatethe petitioner and learned Senior Advocate Mr. M.R. Bhatt with learned advocate Mr.Karan Sanghani for M.R. Bhatt and Co. for therespondent. 2.Having regard to the controversy involved inthe present case which lies in a very narrowcompass, with the consent of the learnedadvocates for the respective parties, thematter is taken up for final hearing. 3.Rule returnable forthwith. Learned advocateMr. Karan Sanghani waives service of noticeof rule on behalf of the respondent.Mr. Karan Sanghani waives service of noticeof rule on behalf of the respondent. 4.By this petition under Article 226 of theConstitution of India, the petitioner haschallenged the notice dated 25.03.2019 issuedunder section 148 of the Income Tax Act, 1961 (For short “the Act”) for reopening of theassessment proceedings for the AssessmentYear 2012-2013 and impugned order dated15.11.2019 passed under section 143(3) readwith section 147 of the Act. 5.Brief facts of the case are as under : 5.1)The petitioner no.1 is a company registered under the Companies Act, 1956and petitioner no.2 is the Director of thesaid company, which is engaged in thebusiness of manufacturing of stainless steelingots, round bar, flat, etc. 5.2)The assessee company filed its return of income for the assessment year2012-2013 on 30.09.2012 declaring totalincome of Rs. 2,12,53,116/-. 5.3) Case of the petitioner was taken for scrutiny assessment whereby notice dated6.08.2014 was issued under section 143 of theAct and a detailed questionnaire was issuedby the Assessing Officer. submitted the required details along with thebalance sheet and profit and loss accountalongwith schedules thereto. 5.5)During the course of assessment proceedings, the petitioner was askedspecific queries about doubtful debts,difference between the interest income whichformed part of the interest income reflectedin the Profit and Loss Account and that shownas doubtful debts in the Profit and Lossaccount to which the petitioner supplied itsexplanation vide its reply. 5.6) The Assessing Officer passed under order section 143(3) of the Act on 28.01.2015determining the total income at Rs.2,69,26,640/-. 5.7)Subsequently, case of the petitionerwas reopened by issuance of notice undersection 148 of the Act dated 25.03.2019 forreassessment under section 147 of the Act. 5.8) The petitioner submitted letter dated 1.06.2019 requesting for providing the reasons recorded for reopening of theassessment. Since the petitioner did notreceive such reasons recorded by theAssessing Officer, the petitioner addressedlettersdated01.06.2019,23.09.2019,16.10.2019 and 19.10.2019 requesting for providing the reasons recorded by the Assessing Officer. The petitioner wasthereafter provided the reasons for reopeningby letter dated 1.11.2019. The reasons order section 143(3) of the Act on 28.01.2015determining the total income at Rs.2,69,26,640/-. 5.7)Subsequently, case of the petitionerwas reopened by issuance of notice undersection 148 of the Act dated 25.03.2019 forreassessment under section 147 of the Act. 5.8) The petitioner submitted letter dated 1.06.2019 requesting for providing the reasons recorded for reopening of theassessment. Since the petitioner did notreceive such reasons recorded by theAssessing Officer, the petitioner addressedlettersdated01.06.2019,23.09.2019,16.10.2019 and 19.10.2019 requesting for providing the reasons recorded by the Assessing Officer. The petitioner wasthereafter provided the reasons for reopeningby letter dated 1.11.2019. The reasons recorded by the Assessing Officer forreopening the assessment under section 147 of the Act read as under : : “1. The Assessee company is engaged inthe business of manufacturing of steeland other alloys. The assessee M/s.Mangalam Alloys Ltd. filed its return ofincome for the A.Y.2012-13 on 30.09.2012declaringtotalincomeofRs.2,12,53,116/-. The case was finalizedunder section 143(3) on 28.01.2015deciding income at Rs. 2,44,32,009/-. 2. Subsequently, on verification of thecase records and P&L account it isnoticed that the assessee had claimedprovision for bad and doubtful debt ofRs.1,19,22,280/-. However, as per theprovisions of section 37 of the Act, theexpenditureincurredshouldhaveactually been incurred to claim it as anexpense for Income Tax purposes, Asprovision for doubtful debt was just aprovision, it was required to bedisallowed. As per section 36 (1)(vii),the assessee has the right to write offthe debt which is found irrecoverableand offered as income of any year by theassessee In the instant case, theassessee had not written off the debtbut made a provision for the same.Hence, it was required to be disallowedand added to the total income of theassessee. 3. Further, on verification of the caserecords it is also noticed that theassessee submitted it reply on this point on perusal of the same it isnoticed that assessee submitted thatduring the year it had sold and purchasegoods with Manglam Steel & Alloys Ltd.Vietnam and which a sum of Rs.5.84,41,221/- is outstanding includingof booking claim for interest. Further,the assessee stated that chances ofrecovery of goods sell were doubtful andthe claim of interest was not the incomeunder income tax provisions. As theassessee it stated that the interest wasnot the income under income taxprovisions. Hence as per section 37 ofthe income tax Act the above mentionedprovision for bad and doubtful debt ofRs.1,19,22,280/- is not allowable asexpenses and the same should bedisallowed and added to the total incomeof the assessee. 4. In view of the above discussion it isclear that the assessee completelyfailed in disclosing before the A.O.that provision for bad and doubtful debtof Rs.1,19,22,280/- are not allowable asrevenue expenditure in view of section37 of the Income Tax Act. Hence, it isfound that Income of Rs.1,19,22,280/-for the year under consideration hasescaped assessment within the meaning ofsection 147 of the I.T. Act 5. In view of the above facts, havereason to believe that income ofRs.1,19,22,280/- has escaped assessmentwithin the meaning of Section 147 of theAct. Therefore, it is a fit case forreopening of the assessment by invokingthe provision of section 147 of theIncome Tax Act, 1961. Accordingly, it is a fit case for issuing notice uls. 148of the I.T. Act. 4. In view of the above discussion it isclear that the assessee completelyfailed in disclosing before the A.O.that provision for bad and doubtful debtof Rs.1,19,22,280/- are not allowable asrevenue expenditure in view of section37 of the Income Tax Act. Hence, it isfound that Income of Rs.1,19,22,280/-for the year under consideration hasescaped assessment within the meaning ofsection 147 of the I.T. Act 5. In view of the above facts, havereason to believe that income ofRs.1,19,22,280/- has escaped assessmentwithin the meaning of Section 147 of theAct. Therefore, it is a fit case forreopening of the assessment by invokingthe provision of section 147 of theIncome Tax Act, 1961. Accordingly, it is a fit case for issuing notice uls. 148of the I.T. Act. 6. In this case a return of income wasfiled for the year under considerationand regular assessment u/s. 143(3) wasmade on 28.01.2015. Since, 4 years fromthe end of the relevant year has expiredin this case, the requirement toinitiate proceeding u/s, 147 of the Actare reason to believe that income forthe year under consideration has escapedassessment because of failure on thepart of the assessee to disclose fullyand truly all material facts necessaryfor its assessment for the assessmentyear under consideration. It ispertinent to mention here that reason tobelieve that income has escapedassessmentfortheyearunder consideration have been recorded inabove para. I have carefully consideredthe assessment records containing thesubmission made by the assessee inresponse to various notices issuedduring the assessment proceedings andhave noted that the assessee has notfully and truly disclosed the followingmaterial facts necessary for itsassessmentfortheyearunderconsideration: The assessee has failedin disallowing provision for bad anddoubtful debt of Rs.1.19.22,280/- as thesame is not allowable as revenueexpenditure in view of section 37 of theIncome Tax Act It is evident from the above facts thatthe assessee had not truly and fullydisclosed material facts necessary forits assessment for the year under considerationtherebynecessitatingreopening u/s. 147 of the Act. In thiscase more than four years have elapsedfrom the end of assessment year underconsideration. Hence, necessary sanctionto issue notice u/s. 148 is requestedfor from Pr. CIT as per the provisionsof section 151 of the Act.” 5.9)Further,thepetitioneralsoreceived online penalty notice dated16.11.2019 under section 271(1)(c) of theAct. 5.10)It is the case of the petitionerthat as the petitioner did not receive theassessment order, it requested the CharteredAccountant to inquire from the departmentabout the same and upon personal visit by theChartered Accountant to the department, hewas handed over copy of assessment orderdated 15.11.2019. 5.11) Being aggrieved by the action of the respondent, the petitioner has preferred this petition. 6.Learned advocate Mr. Nitin Mehta for thepetitioner submitted that the impugned orderis passed in gross violation of principles ofnatural justice inasmuch as the impugnedorder is passed without giving theopportunity to the assessee to object to thereasons supplied by the Assessing Officer. Itwas submitted that the impugned notice iswithout jurisdiction as the same is issuedbeyond the period of four years without therequirements of proviso of section 147 readwith section 148 being fulfilled. 6.1) Learned advocate for the petitionersubmitted that for the very assessment year,the audited statements of accounts containedNote-12 clarifying the fact of doubtful debtsas well as Note 12.1 disclosing the facts onthe issue under reference and therefore, petition. 6.Learned advocate Mr. Nitin Mehta for thepetitioner submitted that the impugned orderis passed in gross violation of principles ofnatural justice inasmuch as the impugnedorder is passed without giving theopportunity to the assessee to object to thereasons supplied by the Assessing Officer. Itwas submitted that the impugned notice iswithout jurisdiction as the same is issuedbeyond the period of four years without therequirements of proviso of section 147 readwith section 148 being fulfilled. 6.1) Learned advocate for the petitionersubmitted that for the very assessment year,the audited statements of accounts containedNote-12 clarifying the fact of doubtful debtsas well as Note 12.1 disclosing the facts onthe issue under reference and therefore, there was no failure on part of the assesseeto disclose fully and truly all materialfacts. It was further submitted that duringthe detailed scrutiny and upon query raisedby the Assessing officer, the petitionersubmitted all the details pertaining to theprovision of doubtful debt and after havingbeen satisfied with the details submitted bythe petitioner, the Assessing Officer formedhis opinion that no addition or disallowanceis required to be made and therefore, passedthe assessment order dated 28.01.2015 undersection 143(3) of the Act. It was furthersubmitted that the Assessing Officer acceptedthe contention and submission of the assesseeon the issue of interest income and provisionfor doubtful debt relating to the interestincome but at the same time rejected thesubmission of the assessee with respect toRs. 5,63,035/- being foreign exchangefluctuation and added back the same and therefore, the impugned notice is nothing buta change of opinion on the same issue whichwas earlier scrutinised while finalising theassessment under section 143(3) of the Act.It was further submitted that in theassessment order dated 28.01.2015 it isconcluded by the Assessing Officer that theinterest income of Rs.1,13,59,245/- is not areal income and has not formed part of totalincome and therefore, the deduction of thesame by way of Provision of Doubtful Debtalso does not arise and accordingly theaddition sought to be made by impugned orderis erroneous and without application of mind 7.On the other hand learned Senior Advocate Mr.M.R. Bhatt for the Revenue at the outsetsubmitted that there is an alternativeefficacious remedy available to thepetitioner by way of an appeal before theCIT(Appeals) and thereafter before the Tribunal. 7.1) Itwassubmittedthaton verification of the case records and Profitand Loss account, it was noticed that theassessee had claimed provision for bad anddoubtful debt of Rs. 1,19,22,280/-. As persection 36(1)(vii) of the Act, the assesseehad a right to write off the debt which wasirrecoverable if the same had been offered asincome of any year, however the assessee hadnot written off the debt but made a provisionof the same and therefore, it was required tobe disallowed and added to the total incomeof the assessee. Learned Senior Advocatetherefore, submitted that since income chargeable to tax has escaped assessment,notice under section 148 was issued. 7.2) Learned Senior Advocate Mr. Bhatt further submitted that after the introduction of changes in the provision of section 147 ofthe Act with effect from 1.4.1989, the scopeof reassessment has widened. It was submittedthat the Assessing Officer on the basis ofinformation and after perusal of the recordshad rightly formed the opinion that there wasescapement of income and such escapement wasbecause of the failure on part of theassessee to fully and truly disclose all thematerial facts necessary for assessment. Itwas therefore, submitted that there isescapement of income in view of the aforesaidfacts which give jurisdiction to the Assessing Officer to reopen the assessment. 8.Considering the submissions made by the 7.2) Learned Senior Advocate Mr. Bhatt further submitted that after the introduction of changes in the provision of section 147 ofthe Act with effect from 1.4.1989, the scopeof reassessment has widened. It was submittedthat the Assessing Officer on the basis ofinformation and after perusal of the recordshad rightly formed the opinion that there wasescapement of income and such escapement wasbecause of the failure on part of theassessee to fully and truly disclose all thematerial facts necessary for assessment. Itwas therefore, submitted that there isescapement of income in view of the aforesaidfacts which give jurisdiction to the Assessing Officer to reopen the assessment. 8.Considering the submissions made by the learned advocates on both the sides, itappears that the impugned notice undersection 148 of the Act, 1961 is issued onlyon the ground that the assessee failed indisclosing before the Assessing Officer that provision for bad and doubtful debt ofRs.1,19,22,280/- are not allowable as revenueexpenditure in view of section 37 of theIncome Tax Act. Hence, it is found thatincome of Rs.1,19,22,280/- for the year underconsideration has escaped assessment withinthe meaning of section 147 of the Act. 9.It appears from the record that during the original assessment, the petitioner had submitted the required details along with thebalance sheet and profit and loss accountalong with schedules thereto. Thereafter during the assessment proceedings specificquery regarding the doubtful debt appearingin the statement of accounts was raised andthe petitioner tendered his explanation tosuch query. Thereafter also the AssessingOffice raised query with respect to thedifferencebetweentheincomeofRs.1,13,59,245/- which formed part of the interest income reflected in the Profit andLoss account and Rs.1,19,22,280/- shown asdoubtful debts in Profit and Loss account towhich the petitioner gave detailed reply and pointed out that the difference of Rs.5,63,035/- (Rs.1,19,22,280-Rs.1,13,59,245) is with respect to the foreign exchange variation account. The Assessing Officer after considering such explanation and submission and the details submitted duringthe assessment proceedings, finalised theassessment proceedings under section 143(3)of the Act without making any addition ordisallowancewithrespecttoRs.1,13,59,245/- shown as doubtful debts in theProfit and Loss account from the taxableincome disclosed in the return of incomeoriginally filed. Thus, it is not in dispute that during the course of assessment proceedings under section 143(3) of the Act all the detailswere fully and truly disclosed by thepetitioner and there is no escapement of income chargeable to tax on account of failure on part of the assessee to disclosefully and truly all material facts. 11.From the facts on record it appears that during the detailed scrutiny and upon query raised by the Assessing officer, the petitioner submitted all the detailspertaining to the provision of doubtful debtand after having been satisfied with the details submitted by the petitioner, theAssessing Officer formed his opinion that noaddition or disallowance is required to bemade and thereafter, passed the assessmentorder dated 28.01.2015 under section 143(3)of the Act. 12. It is therefore, apparent that there is change of opinion by the Assessing Officer toreopen the assessment for the Assessment Year2012-2013, more particularly, when the issueof provision of doubtful debts is alreadyconsidered during the assessment proceedingsunder section 143(3) of the Act, 1961. TheAssessingOfficercannothaveanyjurisdiction to issue the notice undersection 148 of the Act, 1961 for reopeningthe assessment for the year under details submitted by the petitioner, theAssessing Officer formed his opinion that noaddition or disallowance is required to bemade and thereafter, passed the assessmentorder dated 28.01.2015 under section 143(3)of the Act. 12. It is therefore, apparent that there is change of opinion by the Assessing Officer toreopen the assessment for the Assessment Year2012-2013, more particularly, when the issueof provision of doubtful debts is alreadyconsidered during the assessment proceedingsunder section 143(3) of the Act, 1961. TheAssessingOfficercannothaveanyjurisdiction to issue the notice undersection 148 of the Act, 1961 for reopeningthe assessment for the year under consideration more particularly, when theassessment is sought to be reopened beyond aperiod of four years as held by the SupremeCourt in case of Commissioner of Income tax v. Kelvinator of India Ltd. reported in2010(2) SCC 723 as under: “2. A short question which arises fordetermination in this batch of civilappeals is, whether the concept of"change of opinion" stands obliteratedwith effect from 1st April, 1989, i.e.,after substitution of Section 147 ofthe Income Tax Act, 1961 by Direct TaxLaws (Amendment) Act, 1987? xxxx 6. On going through the changes, quotedabove, made to Section 147 of the Act,we find that, prior to Direct Tax Laws(Amendment) Act, 1987, re-opening couldbe done under above two conditions andfulfillment of the said conditionsalone conferred jurisdiction on theAssessing Officer to make a backassessment, but in section 147 of theAct [with effect from 1st April, 1989],they are given a go-by and only onecondition has remained, viz., thatwhere the Assessing Officer has reasonto believe that income has escapedassessment, confers jurisdiction to re-open the assessment. Therefore, post-1st April, 1989, power to re-open ismuch wider. However, one needs to givea schematic interpretation to the words"reason to believe" failing which, weare afraid, Section 147 would givearbitrary powers to the AssessingOfficer to re-open assessments on thebasis of "mere change of opinion",which cannot be per se reason to re-open. We must also keep in mind theconceptual difference between power toreview and power to re-assess. TheAssessing Officer has no power toreview; he has the power to re-assess.But re-assessment has to be based onfulfillment of certain pre-conditionand if the concept of "change ofopinion" is removed, as contended onbehalf of the Department, then, in thegarb of re-opening the assessment,review would take place. One must treatthe concept of "change of opinion" asan in-built test to check abuse ofpower by the Assessing Officer. Hence,after 1st April, 1989, AssessingOfficer has power to re-open, providedthere is "tangible material" to come tothe conclusion that there is escapement of income from assessment. Reasons musthave a live link with the formation ofthe belief. Our view gets support fromthe changes made to Section 147 of theAct, as quoted hereinabove. Under theDirect Tax Laws (Amendment) Act, 1987,Parliament not only deleted the words"reason to believe" but also insertedthe word "opinion" in Section 147 ofthe Act. However, on receipt ofrepresentations from the Companiesagainst omission of the words "reasonto believe", Parliament re-introducedthe said expression and deleted theword "opinion" on the ground that itwould vest arbitrary powers in theAssessing Officer. We quote hereinbelowthe relevant portion of Circular No.549dated 31st October, 1989, which readsas follows: of income from assessment. Reasons musthave a live link with the formation ofthe belief. Our view gets support fromthe changes made to Section 147 of theAct, as quoted hereinabove. Under theDirect Tax Laws (Amendment) Act, 1987,Parliament not only deleted the words"reason to believe" but also insertedthe word "opinion" in Section 147 ofthe Act. However, on receipt ofrepresentations from the Companiesagainst omission of the words "reasonto believe", Parliament re-introducedthe said expression and deleted theword "opinion" on the ground that itwould vest arbitrary powers in theAssessing Officer. We quote hereinbelowthe relevant portion of Circular No.549dated 31st October, 1989, which readsas follows: "7.2 Amendment made by theAmending Act, 1989, to reintroducethe expression `reason to believe'in Section 147.--A number ofrepresentationswerereceivedagainst the omission of the words`reason to believe' from Section147 and their substitution by the`opinion'oftheAssessingOfficer. It was pointed out thatthe meaning of the expression,`reason to believe' had beenexplained in a number of courtrulings in the past and was wellsettled and its omission fromsection 147 would give arbitrarypowers to the Assessing Officer toreopen past assessments on merechange of opinion. To allay thesefears, the Amending Act, 1989, hasagain amended section 147 toreintroduce the expression `has reason to believe' in place of thewords `for reasons to be recordedby him in writing, is of theopinion'. Other provisions of thenew section 147, however, remainthe same." 13.Inviewofforegoingreasons, considering the facts of the case impugnednotice under section 148 of the Act, 1961 is not tenable in law and is accordingly quashed and set aside and consequentially, impugnedorder dated 15.11.2019 is also quashed andset aside. 14.Rule is made absolute to the aforesaid extent. No order as to costs. (N.V.ANJARIA, J) RAGHUNATH R NAIR (BHARGAV D. KARIA, J)