M/S. Kone Elevator India Pvt. Ltd v. The Income-Tax Officer,Company Circle-Ii (4)

IN THE HIGH COURT OF JUDICATURE AT MADRAS The Honourable Mr. Justice ELIPE DHARMA RAO The Honourable Mr. Justice M. VENUGOPAL M/s. Kone Elevator India Pvt. Ltd.... Appellant ..Vs.. The Income-tax Officer,Company Circle-II (4),121, Mahatma Gandhi Road,Chennai – 600 034.... Respondent Tax Case Appeal filed against the order dated 15.10.2007passed by the Income Tax Appellate Tribunal, Chennai Bench 'B' inI.T.A. No.1340 (MDS)/2006 and against the order dated 17.2.2006passed by the commissioner of Income Tax (Appeals) III Chennai inITA.No.185/2005-2006/A.III against the Assessment order of theIncome Tax officer company ward II (1) Chennai dated 7.3.2005 forthe assessment year 1998-1999. (Judgment was delivered by ELIPE DHARMA RAO, J.) The above Tax Case Appeal is filed against the orderdated 15.10.2007 passed by the Income Tax Appellate Tribunal,Chennai Bench 'B' in I.T.A. No.1340 (MDS)/2006. 2. The brief facts necessary for the disposal of thecase are that the assessee-Company had filed its return of incomefor the assessment year 1998-1999 on 30.10.1998 admitting 'Nil' https://hcservices.ecourts.gov.in/hcservices/ income, which was processed under Section 143(1)(a) of the Income-tax Act, 1959 (hereinafter referred to as "the Act") on 10.5.1999.Subsequently, the assessee filed a revised return on 26.11.1999admitting 'Nil' income by enclosing some more TDS certificatesthat were omitted to be enclosed along with the original returnof income, which were also processed on 29.3.2001. Again arevised order was passed on 27.6.2002 giving credit to some moreTDS certificates which resulted in an additional refund ofRs.8,86,226/-. 3. Thereafter, it was noticed that on a perusal ofrecords, the assessee-Company had not computed the income underSection 115 JA of the Act properly. Therefore, on facts, therewas a reason to believe that the income assessable to tax hasescaped assessment. In view of the same, a proceeding underSection 147 of the Act was initiated by issuing notice underSection 148 of the Act on 23.12.2003. In response to the saidnotice, the assessee's representative M/s.N.C.Rajagopal & Co.Chartered Accountants vide their letter dated 5.1.2004 informedthat the original return filed for the Assessment Year 1998-99 maybe treated as the one filed in response to the notice issued underSection 148 of the Act. Further, notice for hearing under Section143(2) of the Act was issued to the assessee on 16.12.2004. Inresponse to this notice, Shri. R. Niranjan Chawala of M/s. N.C.Rajagopal & Co., Chartered Accountants appeared on behalf of theassessee. 4. After hearing the representative of the assessee, theAssessing Officer has given his reasons for re-opening theassessment for the assessment Year 1998-99 as follows:- "(A) The assessee Company has not admittedincome under section 115JA under the pretextof having unabsorbed depreciation andunabsorbed loss. (B) The provisions for bad and doubtfuldebts was omitted to be considered forarriving the book profit u/s. 115JA of theAct. (c) The assessee company has not creditedthe Royalty written back in the P & L A/cwhich were written back by the collaboratorwhich is clearly a taxable income. Therefore, the aforesaid reasons are thebasis leading to the conclusion that income otherwise taxable has escaped assessment andhence, the notice u/s. 148 has been issued toyou for the A.Y. 1998-99." "(A) The assessee Company has not admittedincome under section 115JA under the pretextof having unabsorbed depreciation andunabsorbed loss. (B) The provisions for bad and doubtfuldebts was omitted to be considered forarriving the book profit u/s. 115JA of theAct. (c) The assessee company has not creditedthe Royalty written back in the P & L A/cwhich were written back by the collaboratorwhich is clearly a taxable income. Therefore, the aforesaid reasons are thebasis leading to the conclusion that income otherwise taxable has escaped assessment andhence, the notice u/s. 148 has been issued toyou for the A.Y. 1998-99." 5. The Assessing Officer, on a consideration of thefacts and circumstances of the case, held that as per Section115JA, the assessee did not have any business loss or unabsorbeddepreciation to be carried out to Assessment Year 1998-99.Further, the assessee claims that provision for bad and doubtfuldebts amounting to Rs.3,14,37,439/- is an ascertained liabilityand hence this is not liable for inclusion in book profit for thepurpose of Section 115JA. However, as per the decision of thisCourt in the case of DEPUTY CIT v. BEARDS SHELL LTD. reported in244 ITR 256, provision for bad and doubtful debts not written offin the Profit and Loss Account does not represent 'ascertainedliability' and this is certainly liable for inclusion in bookprofit. But for such a claim which is not an ascertainedliability the book profit would have been higher. By resorting tosuch claim, the assessee has clearly tried to suppress its income. 6. Further, the assessee has claimed that an accumulatedroyalty of Rs.2,61,18,013/- which was debited in the P & L accountfor the Assessment Years 1991-92 to 1997-98 was written back tothe P & L Account for this assessment year since the royalty waswaived by their Collaborator M/s. Kone OY Finland. The assesseeconsidered this royalty written back in the 'P & L AccountAppropriation Account', instead of crediting the same in the P & LAccount. Since the royalty had been debited to P & L Account fromthe accounting year ending 31.3.1991 onwards, the waiver ofroyalty is clearly a taxable income and has to be treated asincome and the book profit u/s. 115JA of the Act has to be arrivedat accordingly. 7. As against the said order, the assessee filed anappeal before the Commissioner of Income-tax (Appeals)-III and thesaid appeal was allowed by an order dated 17.2.2006, holding asfollows:- "I have considered the various submissionsmade by the appellant's representative both onthe issue of jurisdiction and on merits.After going through the documents furnished insupport of the facts that a valid notice u/s143(2) has been issued within the time limitpermitted under the Act and allowing theproceedings to remain inconclusive, theAssessing Officer does not get jurisdiction toinitiate action u/s. 148 of the Act as held by the apex court in the two cases relied on bythe appellant. I, therefore, hold that theassessment has not been validly reopened andhence the impugned order passed is ab initiovoid. In as much as the reassessmentproceedings have been struck down as not validin law, other grounds of appeal are notconsidered. The appellant succeeds on thisground." 8. As against the said order, the Department filed anappeal before the Income Tax Appellate Tribunal and the Tribunal,by its order dated 15.10.2007, reversed the findings of theCommissioner of Income Tax (Appeals)-III, holding as under:- the apex court in the two cases relied on bythe appellant. I, therefore, hold that theassessment has not been validly reopened andhence the impugned order passed is ab initiovoid. In as much as the reassessmentproceedings have been struck down as not validin law, other grounds of appeal are notconsidered. The appellant succeeds on thisground." 8. As against the said order, the Department filed anappeal before the Income Tax Appellate Tribunal and the Tribunal,by its order dated 15.10.2007, reversed the findings of theCommissioner of Income Tax (Appeals)-III, holding as under:- "We have heard the rival submissions. TheCommissioner (Appeals) quashed the assessmentorder on the ground that the Assessing Officerissued notice under section 143(2) within thetime permitted under the Act and allowed theproceedings to remain inconclusive. Accordingto the Commissioner (Appeals) under suchcircumstances the Assessing Officer cannotassume jurisdiction to initiate action undersection 148 of the Act. It was made clearbefore us that the time for completing theassessment under section 143(3) did expire.No proceedings in this regard were pendingbefore the Assessing Officer. As such therewas no error in the issuance of notice undersection 148. We have taken into considerationthe entire conspectus of the case. In ouropinion the Commissioner (Appeals) was notcorrect in quashing the assessment on theground that the proceedings pursuant to thenotice under section 143(2) were inconclusive.Since no proceedings were pending in thisregard we hold that the initiation of thereassessment proceedings was valid under thelaw. Accordingly we set aside the impugnedorder and restore the issue to the file of theCommissioner (Appeals) with a direction todecide the issue afresh." As against the said order, the assessee has filed the present taxcase appeal. 9. While admitting the appeal, this Court formulated thefollowing substantial question of law:- " Whether on the facts and in thecircumstances of the case, the Income TaxAppellate Tribunal is right in law in holdingthat the issuance of notice under Section 148of the Income-tax Act is valid in law whennotice issued under Section 143(2) is pendingconsideration?" 10. Learned counsel appearing for the assessee submittedthat the Income-tax Appellate Tribunal erred in holding that theproceeding under Section 148 of the Act has been validly initiatedand that the assessment is not liable to be annulled on the groundof lack of jurisdiction. 11. The learned counsel also submitted that the IncomeTax Appellate Tribunal failed to notice that the jurisdictionunder Section 147 of the Act can be invoked only if theproceedings under Section 143 (2) of the Act has resulted in anassessment or in the alternative, proceedings for enquiry underSection 143(2) of the Act has not been initiated by issuingnotice. Once a notice under Section 143(2) is issued, proceedingsunder Section 147 of the Act cannot be initiated, so long as thesaid notice has not fructified in an order under Section 143(3) ofthe Act. 12. Learned counsel further submitted that the IncomeTax Appellate Tribunal erred in holding that since the time forcompleting the assessment under Section 143(3) of the Act hadexpired after issuing notice under Section 143(2) of the Act,proceedings under Section 147 of the Act could be initiated. 13. In support of her submissions, the learned counselrelied on the decision of the Hon'ble Supreme Court reported inthe case of TRUSTEES OF H.E.H. NIZAM'S TRUST v. C.I.T. ((2000)VOL. 242 I.T.R. 381), wherein the Hon'ble Supreme Court has heldas under:- 12. Learned counsel further submitted that the IncomeTax Appellate Tribunal erred in holding that since the time forcompleting the assessment under Section 143(3) of the Act hadexpired after issuing notice under Section 143(2) of the Act,proceedings under Section 147 of the Act could be initiated. 13. In support of her submissions, the learned counselrelied on the decision of the Hon'ble Supreme Court reported inthe case of TRUSTEES OF H.E.H. NIZAM'S TRUST v. C.I.T. ((2000)VOL. 242 I.T.R. 381), wherein the Hon'ble Supreme Court has heldas under:- "It is settled law that unless the returnof income already filed is disposed of, noticefor reassessment under section 148 of theIncome-tax Act, 1961, cannot be issued, i.e.no reassessment proceedings can be initiatedso long as assessment proceedings pending onthe basis of the return already filed are notterminated. A return of income filed in the form prescribed along with an application forreturn under section 237 of the Act is a validreturn. Filing of return in the formprescribed under section 139 of the Act alongwith the application for refund is not anempty formality. It assumes importance ifsuch return had not been filed earlier." In the instant case, for the Assessment Year 1998-99 the assesseefiled its return of income on 30.10.1998 which was processed underSection 143(1)(a) of the Act on 10.5.1999. The assessee filed itsrevised return of income on 26.11.1999, which was also processedon 29.3.2001 and final order was passed on 27.6.2002. Thereafter,on a perusal of records, it was noticed that the assessee-Companyhas not computed the income under Section 115 JA of the Actproperly. Therefore, on facts, there was a reason to believe thatthe income assessable to tax has escaped assessment. In view ofthe same, proceedings under Section 147 of the Act was initiatedby issue of notice under Section 148 of the Act on 23.12.2003,which is within the prescribed time limit. 14. To fortify the aforesaid contention, in the decisionreported in the case of ASSISTANT COMMISSIONER OF INCOME-TAX v.RAJESH JHAVERI STOCK BROKERS P. LTD. ((2007) 291 ITS 500), theHon'ble Supreme Court has held in paragraph 17 as under:- "The scope and effect of section 147 assubstituted with effect from April 1, 1989, asalso sections 148 to 152 are substantiallydifferent from the provisions as they stoodprior to such substitution. Under the oldprovisions of section 147, separate clauses(a) and (b) laid down the circumstances underwhich income escaping assessment for the pastassessment years could be assessed orreassessed. To confer jurisdiction undersection 147(a) two conditions were required tobe satisfied: firstly the Assessing Officermust have reason to believe that income,profits or gains chargeable to income tax haveescaped assessment, and secondly he must alsohave reason to believe that such escapementhas occurred by reason of either omission orfailure on the part of the assessee todisclose fully or truly all material factsnecessary for his assessment of that year.Both these conditions were conditions precedent to be satisfied before the AssessingOfficer could have jurisdiction to issuenotice under section 148 read with section 147(a). But under the substituted section 147existence of only the first conditionsuffices. In other words if the AssessingOfficer for whatever reason has reason tobelieve that income has escaped assessment itconfers jurisdiction to reopen the assessment.It is, however, to be noted that both theconditions must be fulfilled if the case fallswithin the ambit of the proviso to section147. The case at hand is covered by the mainprovision and not the proviso." precedent to be satisfied before the AssessingOfficer could have jurisdiction to issuenotice under section 148 read with section 147(a). But under the substituted section 147existence of only the first conditionsuffices. In other words if the AssessingOfficer for whatever reason has reason tobelieve that income has escaped assessment itconfers jurisdiction to reopen the assessment.It is, however, to be noted that both theconditions must be fulfilled if the case fallswithin the ambit of the proviso to section147. The case at hand is covered by the mainprovision and not the proviso." 15. Therefore, applying the aforesaid ruling of the ApexCourt to the facts and circumstances of the case, the AssessingOfficer came to the subjective satisfaction as indicated in hisletter dated 7.2.2005 referred to above. Therefore, it cannot bestated that the contention of the learned counsel for theappellant that the Assessing Officer has no jurisdiction toreconsider the matter or to initiate reassessment proceedings oncethe proceedings are concluded. As laid down by the Supreme Court,the condition precedent is that the Assessing Officer must havereason to believe that income, profits or gains chargeable toincome tax have escaped assessment. As could be seen from theassessment order, it is seen that as per Section 115JA of the Act,the assessee did not have any business loss/unabsorbeddepreciation to be carried out to Assessment Year 1998-99. 16. With regard to inclusion of book profit, theassessee claims that the provision for bad and doubtful debtsamounting to Rs.3,14,37,439/- is an ascertained liability andhence this is not liable for inclusion in book profit for thepurpose of Section 115JA of the Act. But, according to theAssessing Officer, as per the decision of this Court in the caseof DEPUTY CIT v. BEARDS SHELL LTD. reported in 244 ITR 256,provision for bad and doubtful debts not written off in the Profitand Loss Account does not represent 'ascertained liability' andthis is certainly liable for inclusion in book profit. But forsuch a claim which is not an ascertained liability the book profitwould have been higher by this amount. By resorting to such aclaim, the assessee has clearly tried to suppress its income. 17. With regard to the claim of accumulated royalty, theassessee has claimed that accumulated royalty of Rs.2,61,18,013/-which was debited in the P & L account for the assessment years1991-92 to 1997-98 was written back to the P & L Account for thisassessment year since the royalty was waived by their Collaborator M/s. Kone OY Finland. The assessee considered this royaltywritten back in the 'P & L Account Appropiration Account'.Instead of crediting the same in the P & L Account, since theroyalty had been debited to P & L Account from the accounting yearending 31.3.1991 onwards, the waiver of royalty is clearly ataxable income and has to be treated as income and the book profitu/s. 115JA of the Act arrived accordingly. 18. Considering the above reasons given by the AssessingOfficer, we consider it appropriate to hold that it is not properto accept the contention of the learned counsel for the assesseethat there is no material before the Assessing Officer for comingto the subjective satisfaction that he has reason to believe thatcertain income assessable to tax has escaped assessment for theAssessment Year 1998-99. 18. Considering the above reasons given by the AssessingOfficer, we consider it appropriate to hold that it is not properto accept the contention of the learned counsel for the assesseethat there is no material before the Assessing Officer for comingto the subjective satisfaction that he has reason to believe thatcertain income assessable to tax has escaped assessment for theAssessment Year 1998-99. 19. As per the decision of the Hon'ble Supreme Court,once the Assessing Officer has come to the conclusion that thetaxable amount has escaped assessment, two conditions wererequired to be satisfied on the basis of the materials placedbefore him. Both these conditions were conditions precedent tobe satisfied before the Assessing Officer could have jurisdictionto issue notice under section 148 read with section 147(a). Butunder the substituted section 147 existence of the first conditionalone is suffice. In other words if the Assessing Officer hasreason to believe that certain income assessable to tax hasescaped assessment it confers jurisdiction to reopen theassessment. It is, however, to be noted that both the conditionsmust be fulfilled if the case falls within the ambit of theproviso to section 147. Hence, we are not able to appreciate thecontention of the learned counsel for the appellant that theAssessing Officer has no jurisdiction to reopen the assessment. 20. The finding of the Assessing Officer is that as perSection 115JA, the assessee did not have any business loss orunabsorbed depreciation to be carried out to Assessment Year 1998-99. Further, the assessee has claimed that an accumulatedroyalty of Rs.2,61,18,013/- which was debited in the P & L accountfor the Assessment Years 1991-92 to 1997-98 was written back tothe P & L Account for this assessment year since the royalty waswaived by their Collaborator M/s. Kone OY Finland. The assesseeconsidered this royalty written back in the 'P & L AccountAppropriation Account', instead of crediting the same in the P & LAccount. Since the royalty had been debited to P & L Account fromthe accounting year ending 31.3.1991 onwards, the waiver ofroyalty is clearly a taxable income and has to be treated asincome and the book profit u/s. 115JA of the Act has to be arrivedat accordingly. In the facts and circumstances of the case, the Assessing Officer has rightly assessed the matter and passed theassessment order. In such circumstances, the tax case appealstands dismissed. We answer against the assessee and in favour ofthe Revenue. Sd/- Asst.Registrar. Sub Asst.Registrar. /true copy/ ssa.To1. The Income-tax Officer,Company Circle-II (4),121, Mahatma Gandhi Road,Chennai – 600 034.2. The Assistant RegistrarIncome tax appellate TribunalChennai Bench B3rd Floor, Rajaji Bhavan, Besant NagarMadras-903. The SecretaryCentral Board of RevenueNew Delhi4. The Commissioner of Income Tax (Appeals) III121 Mahatma Gandhi Road,Chennai-345. The Additional Commissioner of Income Tax Company Range, Chennai1 cc to mr.K. Subramaniam, Advocate, Sr. 169511 cc to M/s. Dr. Anita Sumanth, Advocate, Sr. 16779T.C.(A) No.41 of 2008RSI (CO)kk 19/4