Mangalore Refinery And Petrochemicals Limited v. The Deputy Commissioner Of Income Tax, Range 3(2) & Ors

SANTOSHSUBHASHKULKARNIDigitally signed bySANTOSH SUBHASHKULKARNIDate: 2022.02.2217:28:19 +0530 Santosh IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTION WRIT PETITION NO. 1160 OF 2014 Mangalore Refinery and Petrochemicals Limited ...Petitioner Versus The Deputy Commissioner of Income Tax, Range 3(2) & ors. ...Respondents Mr. J. D. Mistri, Senior Advocate, a/w Mr. Madhur Agrawal,and Mr. Rajesh Poojary, i/b Mulla & Mulla, CB & C, forthe Petitioner. Mr. Suresh Kumar, for the Respondents. CORAM:K. R. SHRIRAM &N. J. JAMADAR, JJDATED:18[th] FEBRUARY, 2022 JUDGMENT: (PER : N. J. JAMADAR, J.) 1.Rule. Rule made returnable forthwith, and with theconsent of the Counsels for the parties, heard finally. 2.The petitioner assails the legality and validity of a noticedated 25[th] February, 2013, issued by respondent no.1 underSection 148 of the Income Tax Act, 1961 (“the Act, 1961”) and theorder dated 17[th] February, 2014, whereby the objections raisedby the petitioner to the said notice to reopen the assessment for Assessment Year 2006 – 2007, came to be rejected. 3.The background facts leading to this petition can be stated in brief as under: (a)The petitioner is a company engaged in the businessof running a petroleum refinery. In respect of Assessment Year2006 – 2007, the petitioner filed the return of income on 25[th]October, 2016. It came to be revised on 28[th] March, 2008. Inthe revised return of income the petitioner disclosed total incomeof Rs.Nil under the normal provisions of the Act, 1961 and “bookprofits” of Rs.406,11,46,046/- under Section 115JB of the Act,1961. During the assessment proceedings, respondent no.1 hadinitially issued a notice under Section 142(1) of the Act, 1961 on10[th] September, 2017. The petitioner furnished the requisiteexplanation and documents in support thereof to the aforesaidnotice as well as the subsequent clarification sought byrespondent no.1. Eventually, respondent no.1 passed anassessment order on 18[th] December, 2008 under Section 143(3)of the Act, 1961, whereby respondent no.1 determined totalincome of the petitioner at Rs. Nil under the normal provisionsof the Act, 1961 and the book profit at Rs.806,91,33,098/- underSection 115JB of the Act, 1961. (b)Post assessment, the petitioner was served with anaudit query dated 30[th] July, 2009 in which objections were notedas regards the debit of Rs.1,26,33,095/- towards “leased assets repurchase expenses” and Rs.1,78,05,149/- towards “assetswritten off – irregular spares”. The petitioner clarified the auditnotes. (c)In the aforesaid backdrop, on 25[th] February, 2013,respondent no.1 issued the impugned notice under Section 148of the Act, 1961 recording that he had reason to believe thatpetitioner’s income chargeable to tax for the Assessment Year2006 – 2007 has escaped assessment within the meaning ofSection 147 of the Act, 1961. The said belief was sought to beformed on the premise that an amount of Rs.3,04,38,244/- wasdebited under the head of ‘miscellaneous expenses’ to the Profitand Loss Account, comprising of ‘leased assets repurchaseexpenses’ amounting to Rs.1,26,33,095/- and ‘assets written off(irregular spares)’ amounting to Rs.1,78,05,149/-, as revenueexpenses, though they were capital in nature and, thus,required to be disallowed. (d)Upon being served with the reasons recorded for theproposed reopening, the petitioner submitted objections on 8[th]April, 2013. By the impugned order dated 17[th] February, 2014,respondent no.1 rejected the objections and called upon thepetitioner to submit reply for the purpose of reassessment. 4.Being aggrieved, the petitioner has invoked the writ (d)Upon being served with the reasons recorded for theproposed reopening, the petitioner submitted objections on 8[th]April, 2013. By the impugned order dated 17[th] February, 2014,respondent no.1 rejected the objections and called upon thepetitioner to submit reply for the purpose of reassessment. 4.Being aggrieved, the petitioner has invoked the writ jurisdiction of this Court. The principal grounds of challengeare that there was no material to form the reason to believe thatincome chargeable to tax has escaped assessment. Secondly,the impugned notice suffers from clear non-application of mindas respondent no.1 lost sight of the fact that the amount ofRs.1,78,05,149/- was added back to the computation of incomeby the petitioner itself and no deduction was claimed on thesaid count. Thirdly, since the scrutiny assessment under Section143(3) of the Act, 1961 was completed in respect of AssessmentYear 2006 – 2007, respondent no.1 committed an error inassuming jurisdiction without satisfying himself that the incomehad escaped assessment on account of failure on the part of thepetitioner to disclose fully and truly all material facts necessaryfor the assessment. In the case at hand, the issues sought to beraised by respondent no.1 were specifically adverted to, anddealt with, in the original assessment. Fourthly, in any event,the exercise on the part of respondent no.1 was in the nature oftaking a different view of the matter on the basis of a merechange of opinion with regard to the same material. Therefore,the impugned notice under Section 148 and the consequentaction deserve to be quashed and set aside. 5.An affidavit-in-reply is filed on behalf of respondent no.1.An endeavour is made to support the impugned action by relying upon the very reasoning which permeates the reasons recordedby respondent no.1. 6.We, therefore, deem it appropriate to extract the reasonswhich weighed with the Assessing Officer to reopen theassessment. The relevant part of the reasons recorded by theAssessing Officer reads as under: “On perusal of the records for the Assessment Year2006 – 2007, it is found that the assessee company hasdebited an amount of Rs.3,04,38,244/- under the head“miscellaneous expenses” to the P&L Account. Said amountis consist of leased assets purchase expenses amounting toRs.1,26,33,095/- and assets written off (irregular spares)amounting to Rs.1,78,05,149/-. Said expenses have beenclaimed by the assessee company as revenue expenses,although they are capital in nature. As the cost incurredare capital in nature, the same requires to be disallowed. In view of the said discussion, I have reason to beliefthat income amounting to Rs.3,04,38,244/- has escapedassessment in the hands of M/s. Mangalore Refinery &Petrochemical Limited for A.Y. 2006 – 2007 within themeaning of Section 147 of the I. T. Act.” 7.A bare perusal of the aforesaid reasons indicates that,according to the Assessing Officer, income chargeable to taxescaped assessment on two counts. First, the assessee debiteda sum of Rs.1,26,33,095/- towards ‘leased assests repurchaseexpenses’, which were capital in nature. Second, the assesseedebited a sum of Rs.1,78,05,149/- towards ‘assests written off(irregular spares)’, again as a revenue expenses though it wascapital in nature. 8.In the light of the aforesaid reasons recorded by the 5/11 7.A bare perusal of the aforesaid reasons indicates that,according to the Assessing Officer, income chargeable to taxescaped assessment on two counts. First, the assessee debiteda sum of Rs.1,26,33,095/- towards ‘leased assests repurchaseexpenses’, which were capital in nature. Second, the assesseedebited a sum of Rs.1,78,05,149/- towards ‘assests written off(irregular spares)’, again as a revenue expenses though it wascapital in nature. 8.In the light of the aforesaid reasons recorded by the 5/11 Assessing Officer, Mr. Mistri, the learned Senior Counsel for thepetitioner, submitted the jurisdictional conditions for invokingthe provisions contained in Section 147 of the Act, 1961 are notat all satisfied. Since the scrutiny assessment was completedunder Section 143(3) of the Act, 1961 and the assessment wassought to be reopened beyond a period of four years, the firstProviso to Section 147 of the Act, 1961 came into play, and, thus,it was incumbent upon the Assessing Officer to record that theescapement of income was on account of the failure on the partof the petitioner to disclose fully and truly all the material factsnecessary for the assessment, urged Mr. Mistri. 9.The aforesaid submission appears impeccable. The reasonsrecorded by the Assessing Officer, which we have extractedabove, on purpose, singularly lack the element of satisfactionrecorded by the Assessing Officer that the escapement of incomewas on account of the failure on the part of the petitioner tomake a true and full disclosure. Nay, there is no assertion thatthere was a failure to disclose on the part of the petitioner. Asthe first Proviso to Section 147 of the Act, 1961 operated, it wasincumbent upon the Assessing Officer to satisfy himself aboutthe twin conditions; that there was a reason to believe that therewas an escapement of income and such escapement was theeffect of failure to make a true and full disclosure of the material facts by the petitioner, before the Assessing Officer assumedjurisdiction to issue notice for reopening the assessment. Inother words, the causal connection between alleged escapementand failure to disclose is simply non-existent. 10.The next challenge to the reopening of the assessment onthe count that, in fact, the petitioner had made a full and truedisclosure of the material, which forms the basis of the allegedreasons to believe escapement of income, and there was also aconscious consideration of the said material by the AssessingOfficer during the course of scrutiny assessment under Section143(3) of the Act, 1961, also appears to be borne out by thematerial on record. 11.As regards the escapement of income on the score that theexpenses towards leased assets repurchase amounting toRs.1,26,33,095/- were incorrectly debited as revenue expenses,from the perusal of the communication dated 5[th] November 2008addressed by the Assessing Officer it becomes evident that thepetitioner was called upon to submit, inter alia, the details ofmiscellaneous expenses of Rs.5,95,12,84,632/- (Para 3(f)) andthe petitioner did furnish details of those expenses along withthe communication dated 14[th] November, 2008, wherein theparticulars of the leased assets repurchase expenses at Rs.1,26,33,095/- were specifically shown. In addition to this, inreply to the audit query communicated vide letter dated 30[th]July, 2009 the petitioner had made further disclosure as regardsthe said expenses of Rs.1,26,33,095/- towards revenueexpenditure and offered justification in support thereof. Rs.1,26,33,095/- were specifically shown. In addition to this, inreply to the audit query communicated vide letter dated 30[th]July, 2009 the petitioner had made further disclosure as regardsthe said expenses of Rs.1,26,33,095/- towards revenueexpenditure and offered justification in support thereof. 12.The situation which is obvious is that during the courseof the scrutiny assessment under Section 143(3) of the Act, 1961,the Assessing Officer had made specific query as regards leasedassets repurchase expenses and solicited explanation anddocuments. In compliance thereto, the petitioner furnished therequisite information and documents. It is true that in theassessment order dated 18[th] December, 2008, the AssessingOfficer did not specifically advert to the said aspect of the matterand in terms record that the explanation so furnished wasaccepted and allowance upheld. However, this factor is not ofdecisive significance. 13.It is trite law that once a query is raised and the asseseefurnishes explanation thereto, the Assessing Officer is presumedto have applied his mind to the question so raised and the factthat the Assessing Officer had not specifically dealt with the saidaspect in the assessment order does not justify an inference thatthe Assessing Officer did not consider the same. On the contrary, it would be justifiable to assume that the AssessingOfficer was satisfied with the explanation so furnished by theassessee. 14.This position in law was expounded by this Court in thecase of Aroni Commercials Ltd. vs. Deputy Commissioner ofIncome-tax-2(1)[1]wherein the following observations were made:- “14.……… We are of the view that once a query is raisedduring the assessment proceedings and the assessee hasreplied to it, it follows that the query raised was a subject ofconsideration of the Assessing Officer while completing theassessment. It is not necessary that an assessment ordershould contain reference and/or discussion to disclose itssatisfaction in respect of the query raised. If an AssessingOfficer has to record the consideration bestowed by him onall issues raised by him during the assessment proceedingeven where he is satisfied then it would be impossible forthe Assessing Officer to complete all the assessments whichare required to be scrutinized by him under Section 143(3)of the Act. Moreover, one must not forget that the manner inwhich an assessment order is to be drafted is the soledomain of the Assessing Officer and it is not open to anassessee to insist that the assessment order must record allthe questions raised and the satisfaction in respect thereofof the Assessing Officer. The only requirement is that theAssessing Officer ought to have considered the objectionnow raised in the grounds for issuing notice under Section148 of the Act, during the original assessment proceedings.……..” 15.Once it becomes evident that the Assessing Officer hadraised the query and reply thereto was furnished by theassessee, the endeavour on the part of the revenue to reopen theassessment is fraught with two infirmities. One, it cannot besaid that the income escaped assessment on account of failure 1[2014] 44 taxmann.com 304 (Bombay). to make a true and full disclosure of the material facts (in caseswhere the proviso operates). Two, the exercise would then fall inthe realm of mere change of opinion on the basis of the verysame material, which is legally impermissible. Further, itcannot be said that there is a “tangible material” which wouldjustify recourse to the provisions contained in Section 147 of theAct, 1961. 15.Once it becomes evident that the Assessing Officer hadraised the query and reply thereto was furnished by theassessee, the endeavour on the part of the revenue to reopen theassessment is fraught with two infirmities. One, it cannot besaid that the income escaped assessment on account of failure 1[2014] 44 taxmann.com 304 (Bombay). to make a true and full disclosure of the material facts (in caseswhere the proviso operates). Two, the exercise would then fall inthe realm of mere change of opinion on the basis of the verysame material, which is legally impermissible. Further, itcannot be said that there is a “tangible material” which wouldjustify recourse to the provisions contained in Section 147 of theAct, 1961. 16.The third count of challenge to the impugned action that, itsuffers from the vice of non-application of mind is equally well-merited. The second leg of the alleged escapement of income tothe tune of Rs.1,78,05,149/- towards ‘assets written off (irregularspares)’, is not at all borne out by the material on record. Theclaim of the petitioner that in the return submitted by thepetitioner, the said amount of Rs.1,78,05,149/- came to be addedback, finds support in the computation of income submittedalong with the tax audit report. Evidently, the Assessing Officerhad not at all adverted to the fact that the petitioner had notclaimed the said amount of Rs.1,78,05,149/- as deductiontowards the revenue expenses. Failure to take cognizance of thefact that the said amount of Rs.1,78,05,149/- came to be addedback as income erodes not only the sanctity of the reasonsrecorded by the Assessing Officer but also the sanction accordedby the Principal Commissioner, under Section 151 of the10/11 Act, 1961. 17.Lastly, it would be contextually relevant to note that therejection of the objections to the reopening also suffers from afamiliar error, which the notices for reopening usually manifest.The Assessing Officer in the impugned order recorded thatthough the details of the expenses were called for and broughton record, no further inquiry regarding the expenses wasconducted and, thus, the Assessing Officer (during the course ofthe scrutiny assessment) cannot be said to have applied hismind and recorded a finding as to the allowability or otherwise ofthe said expenses. These reasons betray a clear change ofopinion on the same material. 18.The conspectus of the aforesaid consideration is that theimpugned notice under Section 148 and the consequent actionare required to be quashed and set aside. 19.Hence, the following order: : O R D E R : (i)The petition stands allowed in terms of prayer Clauses (a) and (b).Clauses (a) and (b). (ii)Rule made absolute in the aforesaid terms. (iii)No costs. [N. J. JAMADAR, J.] [K. R. SHRIRAM, J.]