Principal Commissioner Of Income Tax 6 v. M/S. Vijayeshwari Textiles Ltd., (Now M/S.vtx Industries Ltd)

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 06.08.2020 CORAM THE HONOURABLE DR.JUSTICE VINEET KOTHARI &THE HONOURABLE MR.JUSTICE KRISHNAN RAMASAMY T.C.A.No.470 of 2017 Principal Commissioner of Income Tax 6No.63, Race Course Road,Coimbatore. ... AppellantVersus M/s. Vijayeshwari Textiles Ltd.,(Now M/s.VTX Industries Ltd),No.10/400, Palaghat Road,Kuniyamuthur, Coimbatore – 641 008.PAN:AAA CV 6388 F ... Respondent Prayer: Tax Case Appeal filed under section 260A of the IncomeTax Act, 1961 against the order of the Income Tax AppellateTribunal Madras, 'D' Bench dated 31.1.2017 in ITANo.3176/Mds/2016. This Appeal filed against the order of theIncome Tax Appellate Tribunal, Madras D Bench, dated 31/01/2017in STA No.3176/Mas/2016. Coimbatore District Assessment Year2007-2008, against the Commissioner of Income Tax (Appeals)-I,Coimbatore. Appeal No.04/15-16, dated 26/08/2016, PanNo.AAACV6388F, Assessment Year 2007-2008, against the DeputyCommissioner of Income Tax Corporate Circle-I, Coimbatore dated23/03/2015, Pan No. , Assestment Year 2007-2008. For Appellant: Mr.T.R.Senthilkumar, Senior Standing Counsel The Court was held by Video Conference, as per theResolution of the Full Court dated 3 July 2020, by Judges attheir respective residences and the counsel, staff of the Courtappearing from their respective residences. https://hcservices.ecourts.gov.in/hcservices/ 2. Heard Mr.T.R.Senthilkumar, learned Senior StandingCounselappearedfortheAppellant/departmentandMr.R.Venkatnarayanan, for Mr.Subbraya Aiyar Padmanaban, learnedcounsel appeared for the respondent/assessee. 3.The appellant filed the present appeal by suggesting thefollowing substantial questions of law:- “1.Whether the ITAT is correct in law inquashing the reassessment order made underSection 143(3) r/w S. 147 of the Income Tax Act,on the ground that reassessment initiated afterfour years and no fresh material on record forsuch reassessment proceedings? 2.Whether the ITAT is correct in law inquashing the reassessment order withoutconsidering Explanation 1 and Explanation 29(c)to Section 147 of the Income Tax Act? 3.Whether the Appellate Tribunal was rightin law in deleting the reassessment when theassessee has amortized a portion of the productdevelopment expenditure and the balance amountwas claimed as deferred revenue expenditure, butthe same was not debited in the profit & lossaccount which is against law?” 4. The appellant has filed the present appeal, aggrieved bythe order of the Income Tax Appellate Tribunal (ITAT) dated31.1.2017 made in ITA No.3176/Mds/2016. 5. Learned counsel for the appellant/department submittedthat the appellant/department issued a notice under Section 148of the Income Tax Act, 1961, (in short “the Act”) on 11.06.2013for re-assessment under Section 147 of the Act. The counselreferred to Explanation 2(c)(iii) of the Act which reads asfollows:- “If the [Assessing] Officer... assessment year concerned. Explanation 1- Production before theAssessing Officer of account books or otherevidence from which material evidence could withdue diligence have been discovered by theAssessing Officer will not necessarily amount todisclosure within the meaning of foregoingproviso.Explanation 2- For the purpose of thisSection, the following shall also be deemed tobe cases where income chargeable to tax hasescaped assessment, namely:-(a)Wherenoreturn.......................................................................................... “If the [Assessing] Officer... assessment year concerned. Explanation 1- Production before theAssessing Officer of account books or otherevidence from which material evidence could withdue diligence have been discovered by theAssessing Officer will not necessarily amount todisclosure within the meaning of foregoingproviso.Explanation 2- For the purpose of thisSection, the following shall also be deemed tobe cases where income chargeable to tax hasescaped assessment, namely:-(a)Wherenoreturn.......................................................................................... ...........................................................chargeable to income tax;(b)Whereareturnofincome................................................................................................................allowance or relief in thereturn;.................................................................required under Section 92E],(c) Where an assessment has been made,but-(i) income chargeable to tax has beenunder assessed.........; or(ii)suchincome.................................................................; or(iii) such income has been made thesubject of excessive reliefunder this Act................or(iv)excessive.................................Acthas been computed] ”6. By referring to the above Section, the learned counselsubmitted that the department is empowered to make re-assessmentunder Section 147, in case, the income chargeable to tax hasescaped assessment i.e., such income has been made the subjectof excessive relief. In the present case, according to thedepartment, the total product development expenditure was a sumof Rs.3,39,27,315/-. Out of the said amount, a sum ofRs.1,33,49,000/- was amortized towards the product developmentexpenditure and the balance of Rs.2,65,78,000/- was claimed asdeferred revenue expenditure, which is not allowable fordeduction. However, the Assessing Officer wrongly allowed thededuction. Therefore, the notice under Section 148 was issuedfor making re-assessment in terms of Explanation 2(c)(iii) ofSection 147 of the Act, by the Deputy Commissioner of Income Taxand passed the assessment order on 19.03.2015. He has alsoreferred the relevant portion of the assessment order whichreads as under:- “Secondly, as per sub-clause (i) of clause(c) of Explanation 2 under Section 147 excessiveunder assessment of income chargeable to tax canbe construed as escapement of income. In viewof the above, the re-opening of assessment is asvalid and holds well in the eyes of law.5. Further, it is seen tht a sum ofRs.3,99,27,000/- has been claimed as deferredrevenue expenditure in the computation of incomestatement. However, in the profit and loss account the assessee has amortized a sum ofRs.1,33,49,000/-ofproductdevelopmentexpenditure and claimed as expenditure. Thebalance amount of Rs.2,65,78,000/- has beenclaimed as deferred revenue expenditure. Anyexpense not debited to the profit and lossaccount is not allowable while computing thetotal income of the assessee. Hence, thisexpenditure of Rs.2,65,78,000/- is disallowedand added back to the total income.” account the assessee has amortized a sum ofRs.1,33,49,000/-ofproductdevelopmentexpenditure and claimed as expenditure. Thebalance amount of Rs.2,65,78,000/- has beenclaimed as deferred revenue expenditure. Anyexpense not debited to the profit and lossaccount is not allowable while computing thetotal income of the assessee. Hence, thisexpenditure of Rs.2,65,78,000/- is disallowedand added back to the total income.” 7. The counsel further submitted that against the said re-assessment order, the assessee preferred the appeal before theCommissioner of Income Tax (Appeals) – I, Coimbatore. TheCommissioner of Income Tax (Appeals) – I, without appreciatingall these facts narrated in the re-assessment order passed underSection 147, allowed the appeal by holding as follows:-“5. I have considered the assessment orderand the written submission of the assessee. Itwas found that during the original assessmentproceedings, notice u/s 142(1) was issuedcalling for certain details which included thecopy of product development expenses account,bills and vouchers, thereof and the nature ofthe product developed along with the note onproduct development expenditure. The detailswere submitted by the assessee vide letter dated30.01.2010 along with a separate detailed noteon the nature of product developmentexpenditure. The Assessing Officer has acceptedthe contentions of the assessee and passed theassessmentorderdated31.12.2010.Subsequently, the assessment was re-opened byissuing a notice u/s 148 on 11.06.2013. Thereason given for re-opening is that anyexpenditure not included in the Profit and LossAccount is not allowable and this was noticedonly after completion of assessment. 6. In the reassessment order dated19.03.2015, in para 4(a) it is mentioned that“After completion of assessment only it isnoticed that the assessee has amortized aportion of the product development expenditureand the balance amount was claimed as deferredrevenue expenditure. The assessee has deductedthis amount while computing the total income,even though the same was not debited to theprofit and loss account which is not correct”.7. It could be clearly seen that theassessee has given the entire material facts on the issue of product development expenditureduring the original assessment proceedingsitself and failure to produce full and truedisclosure of facts during the originalassessment proceedings has not been proved bythe Assessing Officer. It has to be acceptedthat, when the Assessing Officer has raised anissue or query and the assessee has answered thequery in the original assessment proceedingsitself and the Assessing Officer has not madeany addition, the issue has been examined andthere is no failure on the part of the assesseeto disclose the facts during the originalassessment proceedings.8. As the Assessing Officer has notbrought any new material on record warrantingthe reopening of the assessment after fouryears. The reopening of the assessment is onlyon account of change of opinion of the AssessingOfficer. Hence, issue of notice u/s 148 afterfour years from the end of the Asst. Year 2007-08 is without jurisdiction and invalid. Whenthe reopening is invalid, the additions madedoes not stand the test of scrutiny andtherefore stands deleted in the hands of theappellant”. 8. Aggrieved by the order of the Commissioner of Income Tax(Appeals), the appellant/department preferred an appeal beforethe Income Tax Appellate Tribunal (ITAT), Chennai. However, theTribunal also refused to accept the contention of theappellant/department and dismissed the appeal and held asfollows:- 8. Aggrieved by the order of the Commissioner of Income Tax(Appeals), the appellant/department preferred an appeal beforethe Income Tax Appellate Tribunal (ITAT), Chennai. However, theTribunal also refused to accept the contention of theappellant/department and dismissed the appeal and held asfollows:- “5. We have carefully gone through theprovisions of Section 147 of the Act. When theAssessing Officer has completed assessment underSection 143(3) of the Act, the completedassessment cannot be reopened under Section 147of the Act unless there was negligence on thepart of the assessee, after expiry of a periodof four years from the end of the relevantassessment year. In this case, the four yearsperiod from the end of the relevant assessmentyear expired on 31.03.2012. However, theAssessing Officer issued notice under Section148 of the Act only on 11.06.2013. Therefore,obviously, the assessment was reopened afterexpiry of four years from the end of therelevant assessment year. The assesseeadmittedly filed the Profit and Loss account and other details which are required for completingthe assessment. Therefore, it cannot be saidthat there was any negligence on the part of theassessee. Merely because the Assessing Officercould not examine the Profit and Loss accountfiled by the assessee in the course of regularassessment, that cannot be a reason to say thatthe assessee has not filed relevant details.This Tribunal is of the considered opinion thatwhen the assessee provided all the relevantdetails before the Assessing Officer and theAssessing Officer has also completed assessmentunder Section 143(3) of the Act, it cannot besaid that there was any negligence on the partof the assessee. Therefore, reopening ofassessment beyond the period of four years fromthe end of the relevant assessment year isoutside the scope of Section 147 of the Act. Inview of the above, this Tribunal do not find anyreason to interfere with the order of the lowerauthority and accordingly the same isconfirmed.” 9. The learned counsel for the department further submittedthat in the present case, the assessment order was made on31.12.2010, notice under Section 148 was issued on 11.06.2013and the re-assessment proceedings was initiated by thedepartment within the period of limitation. Further, hesubmitted that the Assessing Officer has rightly invoked theprovision under section 147 of the Act for re-assessment, sincethe assessee sought excessive relief under the Act. Theassessee has debited in the profit and loss account a sum ofRs.1.33 crore as product development expenditure, whereas theassessee had taken Rs.3.39 crore as a deduction for the purposeof computing the income for the payment of Income Tax.According to him, whatever the amount is shown in the profit andloss account alone can be permitted to be deducted for thepurpose of computing the Income Tax. All these facts were notconsidered by both the Commissioner of Income Tax (Appeals) – I,Coimbatore as well as the Income Tax Appellate Tribunal.Therefore, he pleaded before this Court that the orders passedby the Commissioner of Income Tax (Appeals) - I, Coimbatore, aswell as the Income Tax Appellate Tribunal have to be set aside. 10. Per contra, the learned counsel for the respondentsubmitted that the assessee had spent a sum of Rs.3.39 crore,during the relevant assessment year 2007-08 towards the productdevelopment expenses. There is no dispute on either side withregard to the revenue nature of the expenditure. While so, theassessee is entitled to deduct the whole amount while making 10. Per contra, the learned counsel for the respondentsubmitted that the assessee had spent a sum of Rs.3.39 crore,during the relevant assessment year 2007-08 towards the productdevelopment expenses. There is no dispute on either side withregard to the revenue nature of the expenditure. While so, theassessee is entitled to deduct the whole amount while making calculation for the purpose of payment of Income Tax. In thepresent case, the assessee has debited a sum of Rs.1.33 crore inthe profit and loss account for the year ending 31.03.2007towards the amortization of 1/3[rd] amount of product developmentexpenses, relating to the previous financial year ending31.03.2006 relevant to the assessment year 2006-07. Therefore,both the Commissioner of Income Tax (Appeals) – I, Coimbatore,as well as the Income Tax Appellate Tribunal have appreciatedthese facts and held that the entire amount of Rs.3.39 croresspent by the assessee towards product development expensesduring the current year is revenue expenditure and that theassessee is entitled for deduction of the entire amount. 11. Further, the counsel for the assessee submitted thatapart from the merits of the case, the present appeal is alsobarred by limitation since the notice under Section 148 wasissued beyond the period of limitation. That apart, during thecourse of original assessment and at the time of scrutiny, allthese facts were disclosed and the relevant particulars werealso furnished, but the same were not considered by theAssessing Officer. Therefore, he submitted that there is nojustification in reopening the assessment under Section 147 ofthe Act, as there is no income on the part of the assesseerelating to Income Tax, which had escaped from the assessment.Hence, he prayed for dismissal of the appeal. 12. We have given due attention to the submissions made byboth the counsel and perused the material available on records. 13. The present dispute is relating to the assessment year2007-08. The assessee company has filed its return for theassessment year 2007-08 on 13.11.2007, declaring a total loss ofRs.62,77,473/-. Subsequently, the case was taken up forscrutiny and notice under Section 143(2) of the Income Tax Actwas issued on 03.09.2009. The assessment was completed underSection 143(3) of the Act on 13.12.2010 determining the totalincome at Rs.15,76,55,602/-. During the course of the scrutiny,the Assessing Officer called for several details and all theinformation were furnished by the assessee. The AssessingOfficer pointed out certain mistakes and therefore, the ordermade under Section 143(3) was modified and rectification orderwas passed on 19.04.2012. The notice for reassessment was issuedunder Section 148 on 11.06.2013. It is to be noted that in thepresent case, the return was filed on 13.11.2007 for theassessment year 2007-08, for which reassessment proceedingsunder sections 147 and 148 ought to have been initiated withinthe period of four years, which was over by 31.03.2012. But,the notice for reassessment proceedings under Section 148 wasissued on 11.06.2013, beyond the period of limitation.Therefore, we do not find any error in the finding of the Income Tax Appellate Tribunal in this aspect. 14. Another contention of the department was that theproduct development expenses incurred during the year was a sumof Rs.3.39 crore and it cannot be deducted during the year sincein the profit and loss account the assessee has shown only a sumof Rs.1.33 crores. We have gone through the materials on recordand we are not in a position to accept the submissions made bythe appellant/department for the following reasons.- (a) Both the department as well as the assessee hadaccepted the sum of Rs.3.39 crore spent towards the productdevelopment expenditure as revenue expenditure, relevant to theassessment year 2007 – 08. Tax Appellate Tribunal in this aspect. 14. Another contention of the department was that theproduct development expenses incurred during the year was a sumof Rs.3.39 crore and it cannot be deducted during the year sincein the profit and loss account the assessee has shown only a sumof Rs.1.33 crores. We have gone through the materials on recordand we are not in a position to accept the submissions made bythe appellant/department for the following reasons.- (a) Both the department as well as the assessee hadaccepted the sum of Rs.3.39 crore spent towards the productdevelopment expenditure as revenue expenditure, relevant to theassessment year 2007 – 08. (b) Further, we noticed that a sum of Rs.4 crores wasspent by the assessee towards the product developmentexpenditure during the assessment year 2006-07. The assesseehas amortized the 1/3[rd] of the product development expenditure ofthe previous year, namely a sum of Rs.1.33 crore and debited inthe profit and loss account during the assessment year 2007-08.But, the assessee has deducted the entire amount of Rs.4 crorestowards the product development expenditure of the previous yearrelevant to the assessment year 2006–07, while determining theincome for the purpose of computing the income tax. Therefore,the assessee is entitled for deduction and the department cannothave any objection for the same. Therefore, in the previous yearrelevant to the assessment year 2007 - 08, though a sum ofRs.1.33 crore was debited towards product developmentexpenditure in the profit and loss account, the said amount wasrightly added by the assessee, while computing the income forthe payment of income tax. Therefore, we do not find any erroron this aspect. (c) The assessee had spent a further sum of Rs.3.39 croretowards the product development expenditure during theassessment year 2007-08. The said amount being a revenueexpenditure, the assessee has deducted it while computing incomefor the purpose of income tax. This computation was allowed inthe original assessment order. Before the completion of theoriginal assessment, scrutiny was also made and the assessee hasfurnished all the particulars demanded by the Assessing Officer.After thorough scrutiny of all the materials available with theAssessing Officer, the original assessment was made. Therefore,no material was concealed by the assessee and hence, we do notfind any justifiable reason to reopen the assessment underSections 147 and 148 of the Act. (d) Further, a perusal of the reassessment order made underSection 147 would make it clear that the Assessing Officer hasstated that the assessee has only shown a sum of Rs.1.33 croreas product development expenditure under the profit and lossaccount and therefore, the assessee is entitled to claim incometax benefit only to the extent of Rs.1.33 crore and hence, he (d) Further, a perusal of the reassessment order made underSection 147 would make it clear that the Assessing Officer hasstated that the assessee has only shown a sum of Rs.1.33 croreas product development expenditure under the profit and lossaccount and therefore, the assessee is entitled to claim incometax benefit only to the extent of Rs.1.33 crore and hence, he disallowed a sum of Rs.2.6 crores (3.39-1.33). It is highlyshocking to see the method of calculation made during the re-assessment under Section 147, as the same is without any basis.The assessee in his reply has clearly stated that a sum ofRs.1.33 crore is relating to the previous year, which is 1/3[rd] ofproduct development expenses for which they are amortizing thisyear. As the assessee had deducted its entire amount of Rs.4crores towards product development expenditure, while computingthe income tax during the year 2006-2007, it has rightly addedwhile computing the income for the income tax purpose. Thatapart, since the assessee has incurred a sum of Rs.3.39 crorestowards product development expenditure during the assessmentyear 2007-2008, as the same is revenue in nature, it hasdeducted the entire amount, while computing the income tax. (e) We do not see any error in the deduction made by theassessee and we could only find a lack of understanding on thepart of the Assessing Officer during the course of reassessmentunder Section 147. Unless the revenue authorities are wellversed with the accounts, these types of problems would bearising at all times. 15. All the submissions made by the department are relatingto the facts which both the Commissioner of Income Tax (Appeals)– I, and the Income Tax Appellate Tribunal have elaboratelydiscussed and the Tribunal has also given its findings as statedsupra. 16. In our considered opinion, the product developmentexpenditure incurred to the extent of Rs.3.39 crore by theassessee, is entitled to be amortized over the period of threeyears as per the accounting practice adopted by the Company andthe assessee has rightly amortized the same. 17. Further, we are of the clear view that the re-assessment provisions under Section 147 of the Act do notprovide for reassessment on a mere change of opinion. The re-assessment on a mere of change of opinion is not permissibleunder law. Such change of opinion amounts to review of theorder of the assessment, which is not permissible under law. Insupport of our opinion, we would like to press into service theJudgment of the Hon'ble Supreme Court in the case ofCommissioner of Income Tax, Delhi Vs. Kelvinator of India Ltd.,reported in (2010) 187 Taxman 312 or 320 ITR 561 (SC). Theextract of the relevant Paragraph No.4 which reads as follows:-“4.On going through the changes, quotedabove, made to Section 147 of the Act, we findthat, prior to direct Tax laws (Amendment) Act,1987, re-opening could be done under above twoconditions and fulfilment of the said conditionsalone conferred jurisdiction on the Assessing officer to make a back assessment, but inSection 147 of the Act [with effect from 1-4-1989], they are given a go-by and only onecondition has remained, viz., that where theAssessing Officer has reason to believe thatincome has escaped assessment, confersjurisdiction to re-open the assessment.Therefore, post 1-4-1989, power to reopen ismuch wider. However, one needs to give aschematic interpretation to the words “reason tobelieve” failing which, we are afraid, section147 would give arbitrary powers to the AssessingOfficer to re-open assessments on the basis of“mere change of opinion”, which cannot be per sereason to reopen. We must also keep in mind theconceptual difference between power to reviewand power to re-assess. The Assessing Officerhas no power to review; he has the power toreassess. But reassessment has to be based onfulfilment of certain pre-condition and if theconcept of “change of opinion” is removed, ascontended on behalf of the Department, then, inthe garb of re-opening the assessment, reviewwould take place. One must treat the concept of“change of opinion”as an in-built test to checkabuse of power by the Assessing Officer. Hence,after 1-4-1989, Assessing Officer has power toreopen, provided there is “tangible material” tocome to the conclusion that there is escapementof income from assessment. Reasons must have alive link with the formation of the belief. Ourview gets support from the changes made tosection 147 of the Act, as quoted hereinabove.Under the Direct Tax Laws (Amendment) Act, 1987,Parliament not only deleted the words “reasonsto believe” but also inserted the word 'opinion'in section 147 of the Act. However, on receiptof representations from the Companies againstomission of the words “reason to believe”,Parliament re-introduced the said expression anddeleted the word “opinion”on the ground that itwould vest arbitrary powers in the AssessingOfficer. We quote herein below the relevantportion of Circular No.549, dated 31.10.1989,which reads as follows:-“7.2. Amendment made by the Amending Act,1989 to reintroduce the expression 'reason tobelieve' in section 147.- A number ofrepresentations were received against theomission of the words 'reason to believe' from section 147 and their substitution by the'opinion' of the Assessing Officer. It waspointed out that the meaning of the expression,'reason to believe' had been explained in anumber of court rulings in the past and was wellsettled and its omission from section 147 wouldgive arbitrary powers to the Assessing Officerto reopen past assessments on mere change ofopinion. To allay these fears, the Amending Act,1989, has again amended section 147 toreintroduce the expression 'has reason tobelieve' in place of the words 'for reasons tobe recorded by him in writing , is of theopinion'. Other provisions of the new section147, however, remain the same.” ” 18. In view of the reasons stated above, we do not find anyquestion of law for arising for our consideration in the presentcase and we do not find any irregularity or illegality in theorder passed by both the Commissioner of Income Tax (Appeals) –I, Coimbatore, and the Income Tax Appellate Tribunal. Hence,the present appeal filed by the appellant/department deserves tobe dismissed. 19. In the result, the Tax Case Appeal is dismissed and thequestions framed above in the present appeal filed by theRevenue are answered against the Revenue and in favour of theAssessee. No costs. Sd/- Assistant Registrar //True Copy// Sub Assistant Registrar To 1. The Appellate Tribunal D Bench, Chennai. Chennai. vsn ii (co)rr ii (14/09/2020)