National Bank Of Agriculture And Rural Development v. B. P. Colabawalla Jj

IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION WRIT PETITION NO.1497 OF 2013 National Bank of Agriculture And Rural Development …Petitioner Vs. The Dy. Commissioner of Income Tax 3(2) & Ors.…Respondents Mr. S E Dastur, Senior Counsel with Mr. Nishad Thakkar i/b Mr Atul K. Jasani for Petitioner. Mr. Vimal Gupta, Senior Counsel with Ms Padma Divakar for Respondents. CORAM: S. J. VAZIFDAR B. P. COLABAWALLA JJ. Reserved on: 11[th] April, 2014.Pronounced on : 16[th ]April, 2014. ORAL JUDGMENT (PER B.P. COLABAWALLA J.) :- 1.Rule. By Consent of Parties made returnable forthwith and heard finally. vrdate 1 / 20 WP1497/2013 2.By this Petition, the Petitioner seeks the quashing of the notice dated 28[th] March 2012 (impugned notice) issued by the Respondent No. 1 under section 148 of the Income Tax Act, 1961 (the Act) in relation to the A.Y. 2005 – 2006. 3.There are two principal grounds of challenge. Firstly, as more than four years had elapsed from the end of the relevant assessment year 2005 – 2006 Respondent No. 1, could not have issued the impugned notice without coming to the conclusion that he had reason to believe that income had escaped assessment by virtue of the fact that the Petitioner had failed to disclose fully and truly all material facts necessary for its assessment. In the present case, there was not even an allegation in the reasons recorded for re-opening the assessment, that the Petitioner had failed to disclose any facts as required under the first proviso to section 147 of the Act and hence the initiation of re-assessment proceedings was bad in law. Secondly, the original assessment order was passed under section 143(3) after the Assessing Officer had considered all the vrdate 2 / 20 WP1497/2013 relevant aspects of the matter. Hence, the purported re-opening of the assessment was based merely on a “change of opinion” which was impermissible in law. 4.The brief facts are as follows:- (a)The Petitioner is incorporated under the “The National Bank of Agriculture and Rural Development Bank Act, 1981” (NABARD Act) for providing and regulating credit and other facilities for the promotion and development of agriculture and small scale industries with a view to promoting integrated rural development, and for matters connected therewith and/or incidental thereto.Agriculture and Rural Development Bank Act, 1981” (NABARD Act) for providing and regulating credit and other facilities for the promotion and development of agriculture and small scale industries with a view to promoting integrated rural development, and for matters connected therewith and/or incidental thereto. (b)The Petitioner filed its return of income for the A.Y. 2005 – 2006 on 31[st] October 2005 claiming a deduction under section 36 (1) (viii) of the Act of Rs.544,63,94,200/-. It is the case of the Petitioner that the said claim was supported by a detailed computation of the said deduction in a tabular format giving 2006 on 31[st] October 2005 claiming a deduction under section 36 (1) (viii) of the Act of Rs.544,63,94,200/-. It is the case of the Petitioner that the said claim was supported by a detailed computation of the said deduction in a tabular format giving vrdate 3 / 20 WP1497/2013 details of the long-term and short-term finance provided by the Petitioner and the claim for deduction was restricted only in respect of the income from the long-term finance (i.e. finance given for a period of more than 5 years). (c) Section 36 deals with “other deductions”. Section 36 (1) (viii) details of the long-term and short-term finance provided by the Petitioner and the claim for deduction was restricted only in respect of the income from the long-term finance (i.e. finance given for a period of more than 5 years). (c) Section 36 deals with “other deductions”. Section 36 (1) (viii) at the relevant time, read as under:- “36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28 ---- (viii) In respect of any special reserve created and maintained by a financial corporation which is engaged in providing long-term finance for industrial or agricultural development or development of infrastructure facility in India or by a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes, an amount not maintained by a financial corporation which is engaged in providing long-term finance for industrial or agricultural development or development of infrastructure facility in India or by a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes, an amount not exceeding forty per cent of the profits derived from such business of providing long-term finance (computed under the head "Profits and gains of business or profession" before making any deduction under this clause) carried to such reserve account: Provided that where the aggregate of the amounts carried to such reserve account from time to time exceeds twice the amount of the paid-up share capital vrdate 4 / 20 WP1497/2013 and of the general reserves of the corporation or, as the case may be, the company, no allowance under this clause shall be made in respect of such excess. Explanation-- In this clause, — (a) "financial corporation" shall include a public company and a Government company;company and a Government company; (b) "public company" shall have the meaning assigned to it in section 3 of the Companies Act, 1956 (1 of 1956);it in section 3 of the Companies Act, 1956 (1 of 1956); (c) "Government company" shall have the meaning assigned to it in section 617 of the Companies Act, 1956 (1 of 1956);assigned to it in section 617 of the Companies Act, 1956 (1 of 1956); (d) "infrastructure facility" means-- (i) an infrastructure facility as defined in the Explanation to clause (i) of sub-section (4) of section 80-IA, or any other public facility of a similar nature as may be notified by the Board in this behalf in the Official Gazette and which fulfills the conditions as may be prescribed;Explanation to clause (i) of sub-section (4) of section 80-IA, or any other public facility of a similar nature as may be notified by the Board in this behalf in the Official Gazette and which fulfills the conditions as may be prescribed; (ii) an undertaking referred to in clause (ii) or clause (iii) or clause (iv) of sub-section (4) of section 80-IA; andclause (iii) or clause (iv) of sub-section (4) of section 80-IA; and(iii) an undertaking referred to in sub-section (10) of section 80-IB;of section 80-IB; (e) "long-term finance" means any loan or advance where the terms under which moneys are loaned or advanced provide for repayment along with interest thereof during a period of not less than five years;the terms under which moneys are loaned or advanced provide for repayment along with interest thereof during a period of not less than five years; vrdate 5 / 20 WP1497/2013 (ii) an undertaking referred to in clause (ii) or clause (iii) or clause (iv) of sub-section (4) of section 80-IA; andclause (iii) or clause (iv) of sub-section (4) of section 80-IA; and(iii) an undertaking referred to in sub-section (10) of section 80-IB;of section 80-IB; (e) "long-term finance" means any loan or advance where the terms under which moneys are loaned or advanced provide for repayment along with interest thereof during a period of not less than five years;the terms under which moneys are loaned or advanced provide for repayment along with interest thereof during a period of not less than five years; vrdate 5 / 20 WP1497/2013 It is not in dispute that the Petitioner is entitled to claim a deduction under this section as it is a “financial corporation” as defined therein. (d)The return of income of the Petitioner for the A.Y. 2005 – 2006 was selected for scrutiny assessment under section 143 (3) of the Act. During the course of this scrutiny assessment, Respondent No. 1 vide its detailed questionnaire dated 10[th ]February, 2006 specifically enquired about the Petitioner’s claim for deduction under section 36 (1) (viii) of the Act. In reply to the queries of the 1[st] Respondent, the Petitioner by it's letter dated 6[th] March 2006 gave a detailed explanation to the various questions raised by Respondent No. 1. At paragraph 10 of the said letter, the Petitioner gave details of the deduction under section 36 (1) (viii) including how it was quantified, with supporting calculations. In fact, the same computation was again given as was submitted with the original return of income filed on 31[st] October, 2005 which clearly indicated the interest received, less interest paid, the net interest received, vrdate 6 / 20 WP1497/2013 the establishment expenses claimed and the net business income arrived at. (e)Thereafter, Respondent No. 1 passed an order on 30[th ]November, 2007 under section 143 (3) of the Act accepting the Petitioner’s claim for deduction under section 36 (1) (viii) of the Act as he did not disallow the deduction claimed by the Petitioner. This fact has been admitted by Respondent No. 1 at paragraph 4(ii) of his affidavit in reply to this writ petition. (f)Thereafter, after a period of more than 4 years from the end of the A.Y. 2005 – 2006, Respondent No. 1 issued the impugned notice dated 28[th] March, 2012. The impugned notice stated that Respondent No. 1 had reason to believe that income chargeable to tax for the A.Y. 2005 – 2006 had escaped assessment within the meaning of section 147 of the Act and therefore proposed to initiate reassessment proceedings. The reasons for initiating the reassessment proceedings were also vrdate 7 / 20 WP1497/2013 enclosed along with the impugned notice which read as under:- (f)Thereafter, after a period of more than 4 years from the end of the A.Y. 2005 – 2006, Respondent No. 1 issued the impugned notice dated 28[th] March, 2012. The impugned notice stated that Respondent No. 1 had reason to believe that income chargeable to tax for the A.Y. 2005 – 2006 had escaped assessment within the meaning of section 147 of the Act and therefore proposed to initiate reassessment proceedings. The reasons for initiating the reassessment proceedings were also vrdate 7 / 20 WP1497/2013 enclosed along with the impugned notice which read as under:- "In the computation of the income for the year under consideration, the assessee has claimed deduction u/s 36(1)(viii) of the IT Act for Rs.544,63,94,200/- (@ 40% of the profits of income from long term finance). It is observed that the total interest income from long term and short term finance is Rs.1840,14,91,376/-, while the total establishment expenses claimed against the same are Rs.305,53,10,218/- or 16.6% of the total income. During the year under consideration, the gross fromtermfinanceare receiptslongRs.1556,73,38,994/-. The net receipts from long term finance after deduction of 16.6% of establishment expenses from the gross receipts would be Rs.1298,31,60,721/-. Accordingly, the allowable deduction u/s 36(1)(viii) of IT Act on net receipts from long term finance would be Rs.519,32,64,288/-. However, the assessee has claimed a deduction of Rs.544,63,94,199/-. Hence, the assessee has claimed excess deduction of Rs.25,31,29,910/-. In view of the fact that the assessee has claimed excess deduction of Rs.25,31,29,910/- u/s 36(1) (viii) of the IT Act, in my view the amount of Rs.25,31,29,910/- has escaped assessment. Based on above I have reason to believe that income of Rs.25,31,29,910/- has escaped assessment in the hands of assessee for AY 2005-06 within the meaning of section 147 of the IT Act. Issue notice u/s 148 of the IT Act." vrdate 8 / 20 WP1497/2013 It is pertinent to note that there is not even an allegation in the said reasons that the Petitioner had failed to disclose fully and truly any material fact, as required under the first proviso to section 147 of the Act. (g) On receipt of the said notice and the reasons, the Petitioner filed its return of income under protest on 17[th] April 2012. Thereafter, by their letter dated 6[th] November 2012, the Petitioner raised detailed objections to the validity of the re-opening of the assessment for the A.Y. 2005 – 2006. The three basic objections raised were:-filed its return of income under protest on 17[th] April 2012. Thereafter, by their letter dated 6[th] November 2012, the Petitioner raised detailed objections to the validity of the re-opening of the assessment for the A.Y. 2005 – 2006. The three basic objections raised were:- (i)that the reasons recorded for re-opening the assessment did not in any manner bring out or demonstrate or even suggest or allege that there had been any failure on the part of the Petitioner to disclose any material fact; assessment did not in any manner bring out or demonstrate or even suggest or allege that there had been any failure on the part of the Petitioner to disclose any material fact; (ii)that in fact, there had been no failure on the part of the Petitioner to disclose any material fact as required under the 1[st] proviso to section 147; and the Petitioner to disclose any material fact as required under the 1[st] proviso to section 147; and vrdate 9 / 20 WP1497/2013 (ii)that in fact, there had been no failure on the part of the Petitioner to disclose any material fact as required under the 1[st] proviso to section 147; and the Petitioner to disclose any material fact as required under the 1[st] proviso to section 147; and vrdate 9 / 20 WP1497/2013 (iii) that the re-opening was on the basis of a mere change of opinion which was impermissible in law. In view thereof, the Petitioner requested the 1[st] Respondent to drop further proceedings in the matter. (h)By an order dated 19[th] November 2012, Respondent No. 1 rejected the objections of the Petitioner and upheld the initiation of the re-assessment proceedings under section 147 of the Act. Even in this order, we do not find any allegation of failure on the part of the Petitioner to disclose any material fact, or the details thereof. 5.Section 147 of the Act inter alia provides that if the assessing officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings. In such a situation, the said section vrdate 10 / 20 WP1497/2013 further empowers the assessing officer to recompute the loss or the depreciation allowance or any other allowance, as the case may be. The first proviso to section 147 reads as under:- “Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section afterthe expiry of four years from the end of the relevant assessmentyear, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part ofthe assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary forhis assessment, for that assessment year:” (emphasis supplied) 6.The said proviso clearly stipulates that where an assessment under sections 143 (3) or 147 have been carried out for the relevant assessment year, no action can be taken under section 147, after the expiry of 4 years from the end of the relevant assessment year, unless any income chargeable to tax had escaped assessment by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under section 142 (1) or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year. vrdate 11 / 20 WP1497/2013 7.In the present case, admittedly a scrutiny assessment was done under section 143 (3) of the Act for the A.Y. 2005-2006 and the proposed reassessment is sought to be taken after the expiry of four years from the end of the relevant assessment year. In such a scenario, the first proviso to section 147 of the Act was attracted. Thus, no action for initiation of re-assessment proceedings for A.Y. 2005 – 2006 could be initiated unless the income chargeable to tax had escaped assessment by reason of the failure on the part of the Petitioner to disclose fully and truly all material facts. As rightly submitted by Mr Dastur, there was not even an allegation in the reasons recorded for initiating the re-assessment proceedings, that there was any failure on the part of the Petitioner to disclose any material fact, let alone the details thereof. 8.It is now well settled that the reasons which are recorded by the assessing officer for re-opening an assessment, are the only reasons which can be considered. No substitution or deletion is permissible. No additions can be made to those reasons. No vrdate 12 / 20 WP1497/2013 inference can be allowed to be drawn based on reasons not recorded. The reasons recorded should be clear and unambiguous and should not suffer from any vagueness. The reasons are the manifestation of the mind of the assessing officer and therefore should be self-explanatory and should not keep the assessee guessing for the reasons. The reasons provide the link between the conclusion and the evidence. The reasons recorded must be based on evidence so that in the event of a challenge, the assessing officer must be able to justify the same based on the material available on record. He must disclose in the reasons as to which fact or material was not disclosed by the assessee fully and truly necessary for assessment of that assessment year, so as to establish the vital link between the reasons and evidence. This vital link is the safeguard against arbitrary re-opening of a concluded assessment. 9.Mr Gupta, the learned senior counsel appearing on behalf of the Respondents, submitted that on a careful reading of the reasons for re-opening the assessment, it could be spelt out that the Petitioner had failed to disclose fully and truly all material facts for vrdate 13 / 20 WP1497/2013 the A.Y. 2005 – 2006. We do not agree. On reading the reasons, we find a complete absence of even an allegation that there was any failure on the part of the Petitioner to disclose any material fact whatsoever. We may hasten to add that it is not enough merely to state that there was a failure on the part of the Petitioner to disclose fully and truly all material facts. It is equally important that Respondent No.1 clearly sets out what fact or other material was not disclosed by the Petitioner that had led to the income escaping assessment as contemplated under section 147 of the Act. In our view, on this ground alone the Petitioner is entitled to succeed in this writ petition. 10.Even otherwise, from the record we find that the Petitioner disclosed fully and truly all material facts for the A.Y. 2005 – 2006 and that Respondent No. 1 considered the same before making the assessment order under section 143 (3) of the Act. This is clear from the return of income filed by the Petitioner for the A.Y. 2005 – 2006 on 31[st] October 2005, the queries raised and the material sought for by Respondent No. 1 on 10[th] February 2006, the Petitioner’s vrdate 14 / 20 WP1497/2013 response thereto dated 6[th] March 2006 and the assessment order passed on 30[th] November 2007. 10.Even otherwise, from the record we find that the Petitioner disclosed fully and truly all material facts for the A.Y. 2005 – 2006 and that Respondent No. 1 considered the same before making the assessment order under section 143 (3) of the Act. This is clear from the return of income filed by the Petitioner for the A.Y. 2005 – 2006 on 31[st] October 2005, the queries raised and the material sought for by Respondent No. 1 on 10[th] February 2006, the Petitioner’s vrdate 14 / 20 WP1497/2013 response thereto dated 6[th] March 2006 and the assessment order passed on 30[th] November 2007. 11.In its return of income filed on 31[st] October 2005 the Petitioner claimed a deduction of Rs.544,63,94,200/- under section 36 (1) (viii) of the Act. The said deduction was claimed on the basis of a detailed computation in a tabular format giving details of the long-term and short-term finance. It is important to note that the computation was clearly stated to be on the “interest received”. The phrase therefore referred to the gross interest. It is not in dispute that the claim for deduction was only restricted to the long-term finance. In the queries raised and material sought on 10[th] February 2006, Respondent No. 1 call upon the Petitioner to furnish the details of the computation for the deductions claimed under section 36 (1) (viii) of the Act. In response thereto, the Petitioner furnished all the details and once again gave the computation that was submitted along with the return of income filed on 31[st] October 2005. The attention of Respondent No. 1 was specifically drawn to the said computation. Thereafter, Respondent No. 1 passed the vrdate 15 / 20 WP1497/2013 assessment order on 30[th] November 2007 under section 143 (3) wherein he did not disallow the deduction claimed by the Petitioner under section 36 (1) (viii) of the Act and therefore accepted the same. 12.Mr Gupta submitted that the computation filed with the return of income, as well as submitted to Respondent No. 1 in answer to the queries raised on 10[th] February 2006, only showed the income from the different heads and the breakup of the interest received from short-term finance and long-term finance. He submitted that these documents did not reflect whether the establishment expenses claimed by the Petitioner were on the basis of the gross interest received or the net interest received. He therefore submitted, that the attention of Respondent No. 1 was not drawn to this specific aspect when he passed the assessment order on 30[th] November 2007. He therefore contended that Respondent No. 1 had failed to apply his mind on this question. vrdate 16 / 20 WP1497/2013 13.We find this argument without any merit. As stated earlier, Respondent No. 1 raised a specific query with reference to the deductions claimed by the Petitioner under section 36 (1) (viii) of the Act. This query was answered in detail by the Petitioner vide its letter dated 6[th] March 2006. Paragraphs 10(4) & (5) of the said letter stated as under:- “4. The establishment expenses as per P&L A/c has been adjusted for disallowances u/s 43B of the IT Act, 1961 towards Contribution to the Gratuity, Pension and Encashment of Ordinary Leave. This adjusted expenditure has been apportionedto the interest income received under the respective segments (Refer Sheet C of Annexure I)” 13.We find this argument without any merit. As stated earlier, Respondent No. 1 raised a specific query with reference to the deductions claimed by the Petitioner under section 36 (1) (viii) of the Act. This query was answered in detail by the Petitioner vide its letter dated 6[th] March 2006. Paragraphs 10(4) & (5) of the said letter stated as under:- “4. The establishment expenses as per P&L A/c has been adjusted for disallowances u/s 43B of the IT Act, 1961 towards Contribution to the Gratuity, Pension and Encashment of Ordinary Leave. This adjusted expenditure has been apportionedto the interest income received under the respective segments (Refer Sheet C of Annexure I)” 5. After all the above steps, we arrive at the net income under each segment. 40% of the net income from RIDF, MT(NS) and LT to State Government (since all the loans in these segments are for more than five years or more) as well as 40% of the net income derived from the loans given for five years or more for the Schematic and MT(C) were considered for deduction u/s 36(i)(viii) of the IT Act, 1961. Thus the total benefit u/s 36(i)(viii) aggregated to Rs. 544.64 cr, which has been claimed in the final computation of income under the head A(d)(ii), ‘deduction under section 36(i)(viii)’.” 14.The words “interest income received” in the paragraph 10 (4) can only be the gross interest received. This is clear from the annexure referred to in the said paragraph. Therefore, the attention vrdate 17 / 20 WP1497/2013 of Respondent No. 1 was specifically drawn to the fact that the establishment expenses had been apportioned to the gross interest received. After taking into consideration the explanations given by the Petitioner along with supporting documents, Respondent No. 1 did not think it fit to disallow the said deduction, claimed under section 36 (1) (viii). We have to presume, that having raised a specific query with reference to the said deduction, Respondent No.1 applied his mind to the issue and thereafter passed the assessment order dated 30[th] November 2007. In such a scenario, it would be unfair to the Assessing Officer, who made the assessment order, to speculate that he was either incapable of applying, or did not apply his mind to the very aspects in respect of which he sought details. 15.We therefore find, that there was no failure on the part of the Petitioner to disclose fully and truly all material facts as contemplated under the 1[st] proviso to section 147 of the Act. On this ground also, the Petitioner is entitled to succeed in this writ petition. vrdate 18 / 20 WP1497/2013 15.We therefore find, that there was no failure on the part of the Petitioner to disclose fully and truly all material facts as contemplated under the 1[st] proviso to section 147 of the Act. On this ground also, the Petitioner is entitled to succeed in this writ petition. vrdate 18 / 20 WP1497/2013 16.We also find force in the argument of Mr Dastur that the initiation of re-assessment proceedings under section 147 of the Act was only based on a “change of opinion” which is impermissible in law. As stated earlier, there was no failure on the part of the Petitioner to disclose fully and truly all material facts in relation to the A.Y. 2005 – 2006. Even in the scrutiny proceedings under section 143 (3), all disclosures were made by the Petitioner regarding its claim for a deduction under section 36 (1) (viii) of the Act. After considering the explanations of the Petitioner as well as the documents produced, Respondent No. 1 did not think it fit to disallow the deduction claimed by the Petitioner under section 36 (1) (viii) of the Act and thereby accepted the same. In fact, in paragraph 4 (ii) of the affidavit in reply filed by the 1[st] Respondent, it is clearly admitted that the Petitioner’s claim for deduction under section 36 (1) (viii) of the Act was accepted in the assessment order passed under section 143 (3) of the Act. In this view of the matter, we have no hesitation in holding that the re-assessment proceedings were initiated only on the basis of a “change of opinion” and hence vrdate 19 / 20 WP1497/2013 Respondent No. 1 had no jurisdiction to re-open the assessment proceedings. 17.In the view of all the aforesaid reasons, rule is made absolute and the writ petition is granted in terms of prayer clauses (a) and (c). However, in the facts and circumstances of the case there shall be no order as to costs. (B. P. COLABAWALLA J.) (S. J. VAZIFDAR J.)