Rural Electrification Corporation Ltd v. Commissioner Of Income Tax-(Ltu) And Anr

THE HIGH COURT OF DELHI AT NEW DELHI %Judgment delivered on: 23.04.2013 +W.P.(C) 7944/2011 RURAL ELECTRIFICATION CORPORATION LTD. ..... Petitioner versus COMMISSIONER OF INCOME TAX-(LTU) AND ANR ..... RespondentsAND+W.P.(C) 7945/2011RURAL ELECTRIFICATION CORPORATION LTD...... PetitionerversusCOMMISSIONER OF INCOME TAX-(LTU) AND ANR ..... RespondentsAND+W.P.(C) 7946/2011RURAL ELECTRIFICATION CORPORATION LTD...... Petitionerversus COMMISSIONER OF INCOME TAX-(LTU) AND ANRAND ..... Respondents +W.P.(C) 7947/2011 RURAL ELECTRIFICATION CORPORATION LTD. versus COMMISSIONER OF INCOME TAX-(LTU) AND ANR ..... Petitioner..... Respondents Advocates who appeared in this case:For the Petitioner For the Petitioner: Mr M.S. Syali, Sr. Advocate with Mr Satyen Sethi,Mr Mayank Nagi and Mr Arta Trana Panda, Advocates.For the Respondent : Mr Kiran Babu, Sr. Standing Counsel. CORAM:-HON’BLE MR JUSTICE BADAR DURREZ AHMEDHON’BLE MR JUSTICE VIBHU BAKHRU JUDGMENT BADAR DURREZ AHMED, J (ORAL) 1.These writ petitions pertain to the assessment year 1999-2000, 2000-2001,2001-2002 and 2002-2003. In these petitions the common issue relates to theinitiation of reassessment proceedings by issuance of notices under Section 148of the Income Tax Act, 1961 (hereinafter referred to as ‘the said Act’). All thefour notices were issued on 23.03.2011. 2.The purported reasons for believing that income had escaped assessmenthave been disclosed as under:- “11.Reasons for the belief that income has escaped assessment.1.In this case assessment under section 147/148 was completedon 17.2.2005 at an income of Rs.249,38,81,974/-. The assesseecompany is a public financial institution engaged in business ofproviding finance for rural electrifications. 2.Information was received from Addl. CIT, KarimnagarRange,KarimnagarvidehisletterNo.Addl.CIT/KNR/Appeals/2010-11dated1.11.2010thattheassesseecompany had advanced a loan to M/s. The Cooperative ElectricalSupply Society Ltd., Siricilla. This Society has created a corpus ofspecial fund amounting to Rs.10 crores. The society earned interest on this special fund but did not disclose it in its return for the reasonthat the money belonged to M/s. REC i.e. Assessee Company andany income earned was also on behalf of Assessee Company. TheITAT, Hyderabad in its consolidated order in ITA No. 1112 to 1115& 1198 to 1199 of 2005, 1635 of 2008 and 570 of 2009 dated13.01.2010 for assessment year 1999-00 to 2006-07 had held thatthis income was not taxable in the hands of the society but ought tobe taxed in the hands of the assessee company.The ACIT-Cir-1,KarimnagarvidehisletterNo.F.No.CESS/ACIT/Knr.hasforwarded the details or such income at Rs.73,50,000/- on account ofinterest on REC Bonds & Rs.9,80,877/- on account of interest fromcommercial banks for the relevant assessment year. 3.Therefore,IhavereasonstobelievethatincomeofRs.83,30,877/- has escaped assessment within the meaning ofsection 147 which warrants issue of notice under section 148 r.w.s.150 of the Income tax Act, 1961.” 3.We may point out at this stage that subsequent to the reasons beingsupplied to the petitioner, objections were filed and the same had been rejectedby virtue of order dated 20.10.2011. Shortly thereafter these writ petitions werefiled before this court.At the initial stage, this court had directed that theproceedings may go on pertaining to the said notices under Section 148 of thesaid Act and orders may also be passed but the same shall not be given effect to.Subsequently, the Assessing Officer had passed assessment orders in respect ofeach of the years. Although those orders were served on the petitioner, we had,by virtue of an order dated 01.02.2012, indicated that those orders would be of noeffect. 4.Coming back to the purported reasons indicated by the Assessing Officer,which we have extracted above, we find that the assessments are sought to bereopened on the ground that the Income Tax Appellate Tribunal, Hyderabad had 4.Coming back to the purported reasons indicated by the Assessing Officer,which we have extracted above, we find that the assessments are sought to bereopened on the ground that the Income Tax Appellate Tribunal, Hyderabad had passed a consolidated order dated 13.01.2010 pertaining to assessment years1999-2000 to 2006-2007 and held that the interest income was not taxable in thehands of the Co-operative Electrical Supply Society Ltd., Siricilla but, wastaxable in the hands of the petitioner. As can be seen from the purported reasons,the petitioner had advanced loans to the said Co-operative Electrical SupplySociety Ltd. which created a special corpus fund.The said society earnedinterest on the special fund but did not disclose it in its returns of incomes on theground that the money, as mentioned in the purported reasons, actually belongedto the petitioner and that any income earned thereon was on behalf of thepetitioner. The Tribunal agreed with the submissions of the said Co-operativeElectrical Supply Society Ltd. and held that the said interest income was nottaxable in the hands of the society but ought to be taxed in the hands of thepetitioner. 5.The learned counsel for the petitioner pointed out that though the Tribunalhad returned a finding that the said interest income was not taxable in the handsof the said society, there was no specific or clear finding that the same should betaxed in the hands of the petitioner. The exact findings returned by the Tribunalare as under:- “… Applying the aforesaid tests to the facts of the case before us, itis clear that there is no diversion of income by overriding title byM/s. REC in favour of the assessee-society. The income by way ofinterest, etc. has accrued to M/s. REC in its own right. The amountso collected was retained by M/s. REC and was available with it foruse and application as per its directions. The income in this casenever reached the assessee by Virtue of any overriding title. Areading of various clauses of the Revised Rules on the Constitutionand Administration of Special Fund dated 30.1.1997 makes it clearthat the first charge on the Special Fund Account shall be of M/s.REC and that it shall be the outstanding loan against the assesseeand the assessee is merely a custodian of the amount in the Special Fund created as per instructions and rules framed by M/s. REC. Inthese facts of the case, we hold that there is no diversion of incomeat source by overriding title by M/s. REC in favour of the assesseesociety and the ownership of the special fund remains with M/sREC and therefore, the income from the special fund amount doesnot accrue to the assessee. In this view of the matter, we hold thatthe interest accrued on the special fund amount including the FDsmade there from does not accrue to the assessee society and theassessee is accordingly not liable to pay tax thereon. Accordingly,the grounds of appeal taken by the assessee in its appeals areallowed.” It is, therefore, apparent that the Tribunal had come to the clear conclusion thatthe interest income was not to be taxed in the hands of the said society but wastaxable in the hands of the petitioner. It is on this basis that the Assessing Officerissued the impugned notices under Section 148 seeking to reopen the assessmentsfor the assessment years 1999-2000 to 2002-2003. 6.Mr. Syali, senior advocate, appearing on behalf of the petitioner submittedthat all the notices under Section 148 had been issued beyond the period of sixyears stipulated in Section 149 of the said Act.He submitted that the bar oflimitation prescribed in Section 149 would be applicable unless the revenue wasable to establish that the present cases fell within Section 150 of the said Act readwith Explanation 3 to Section 153. 7.The relevant provisions need to be referred to at this juncture. They are asunder:- 6.Mr. Syali, senior advocate, appearing on behalf of the petitioner submittedthat all the notices under Section 148 had been issued beyond the period of sixyears stipulated in Section 149 of the said Act.He submitted that the bar oflimitation prescribed in Section 149 would be applicable unless the revenue wasable to establish that the present cases fell within Section 150 of the said Act readwith Explanation 3 to Section 153. 7.The relevant provisions need to be referred to at this juncture. They are asunder:- “150. Provision for cases where assessment is in pursuance ofan order on appeal, etc. – (1) Notwithstanding anything containedin section 149, the notice under section 148 may be issued at anytimefor the purpose of making an assessment or reassessment or recomputation in consequence of or to give effect to any finding ordirection contained in an order passed by any authority in anyproceeding under this Act by way of appeal, reference orrevision or by a Court in any proceeding under any other law. (2)The provisions of sub-section (1) shall not apply in any casewhere any such assessment, reassessment or recomputation as isreferred to in that sub-section relates to an assessment year inrespect of which an assessment, reassessment or recomputationcould not have been made at the time the order which was thesubject-matter of the appeal, reference or revision, as the case maybe, was made by reason of any other provision limiting the timewithinwhichanyactionforassessment,reassessmentorrecomputation may be taken.” xxxxxxxxxxxxxxxxxxxx“153. Timelimitforcompletionofassessmentsandreassessments. –xxxxxxxxxxxxxxxxxxxx(3)The provisions of sub-sections (1), (1A), (1B) and (2) shallnot apply to the following classes of assessments, reassessmentsand recomputations which may, subject to the provisions of sub-section (2A), be completed at any time— (i)xxxxxxxxxxxxxxxx (ii)where the assessment, reassessment or recomputation ismade on the assessee or any person in consequence of or togive effect to any finding or direction contained in an orderunder section 250, 254, 260, 262, 263, or 264 or in an orderof any court in a proceeding otherwise than by way of appealor reference under this Act;made on the assessee or any person in consequence of or togive effect to any finding or direction contained in an orderunder section 250, 254, 260, 262, 263, or 264 or in an orderof any court in a proceeding otherwise than by way of appealor reference under this Act; (iii)where, in the case of a firm, an assessment is made on apartner of the firm in consequence of an assessment made onthe firm under section 147.partner of the firm in consequence of an assessment made onthe firm under section 147. xxxxxxxxxxxxxxxxxxxx Explanation 2.— Where, by an order referred to in clause (ii) ofsub-section (3), any income is excluded from the total income ofthe assessee for an assessment year, then, an assessment of suchincome for another assessment year shall, for the purposesof section 150 and this section, be deemed to be one made inconsequence of or to give effect to any finding or directioncontained in the said order. Explanation 3.— Where, by an order referred to in clause (ii) ofsub-section (3), any income is excluded from the total income ofone person and held to be the income of another person, then, anassessment of such income on such other person shall, for thepurposes of section 150 and this section, be deemed to be one madein consequence of or to give effect to any finding or directioncontained in the said order, provided such other person was givenan opportunity of being heard before the said order was passed.” 8.After reading the said provisions, Mr Syali submitted that Section 150could be invoked only if the reassessment was sought to be done as aconsequence of or to give effect to any finding or direction contained in an orderpassed by any authority in any proceeding under the said Act by way of appeal,reference or revision or by a Court in any proceeding under any other law. 8.After reading the said provisions, Mr Syali submitted that Section 150could be invoked only if the reassessment was sought to be done as aconsequence of or to give effect to any finding or direction contained in an orderpassed by any authority in any proceeding under the said Act by way of appeal,reference or revision or by a Court in any proceeding under any other law. 9.Referring to the specific provisions of Section 150(1) of the said Act, MrSyali submitted that these provisions were in pari materia to the second provisoto Section 34(3) of the Income Tax Act, 1922 which had been interpreted by theSupreme Court in the case ofITO Vs. Murlidhar Bhagwan Das: 52 ITR 335(SC). For the sake of convenience the provisions of Section 34(3) of the 1922Act are reproduced below:- “(3)No order of assessment or reassessment, other than an orderof assessment under Section 23 to which clause (c) of sub-section(1) of Section 28 applies or an order of assessment or reassessmentin cases falling within clause (a) of sub-section (1) or sub-section (1) of this section shall be made after the expiry of four years fromthe end of the year in which the income, profits or gains were firstassessable: Provided that where a notice under clause (b) of sub-section(1) has been issued within the time therein limited, the assessmentor reassessment to be made in pursuance of such notice may bemade before the expiry of one year from the date of the service ofthe notice even if at the time of the assessment or re-assessment thefour years aforesaid have already elapsed: Provided further that nothing contained in this sectionlimiting the time within which any action may be taken or anyorder, assessment or reassessment may be made shall apply to a re-assessment made under Section 27 or to an assessment or re-assessment made on the assessee or any person in consequence ofor to given effect to any finding or direction contained in an order--under Section 31, Section 33, Section 33A, Section 33B, Section66 or Section 66-A.” (underlining added) The said decision was that of a Constitution Bench in which the Supreme Courttook the view that the said proviso was applicable in respect of an order passedagainst the person whose assessment was sought to be reopened and only to suchother persons who were intimately connected such as a partner or member of theHUF. The Supreme Court held as under:- “We would, therefore, hold that the expression “any person” in thesetting in which it appears must be confined to a person intimatelyconnected in the aforesaid sense with the assessments of the yearunder appeal.” 10.As mentioned above, an illustration of such a category of ‘intimatelyconnected’ persons, the Supreme Court referred to a partner or partners of a firmand a member of a Hindu Undivided Family. The Supreme Court observed that insuch cases though the persons may not have been parties by name to the appeal,their assessments would depend on the assessments of the partnership firm or the Hindu Undivided Family. It is obvious that it would not include the assessmentof any other person who was not intimately connected with the person in whosecase the order had been passed. The Supreme Court also held that the saidproviso to Section 34(3) of the 1922 Act would not save the time limit prescribedunder Section 34(1) of the 1922 Act in respect of an escaped assessment of a yearother than that which was the subject-matter of the appeal or the revision, as thecase may be. Hindu Undivided Family. It is obvious that it would not include the assessmentof any other person who was not intimately connected with the person in whosecase the order had been passed. The Supreme Court also held that the saidproviso to Section 34(3) of the 1922 Act would not save the time limit prescribedunder Section 34(1) of the 1922 Act in respect of an escaped assessment of a yearother than that which was the subject-matter of the appeal or the revision, as thecase may be. 11.When the Income Tax Act, 1961 was enacted, Section 153 did not containthe Explanations 2 and 3. Those explanations were introduced subsequently in1964 after the Supreme Court decision in Murlidhar Bhagwan Das(supra). Itis therefore, apparent that the two explanations were added so as to supersede theview taken by the Supreme Court in respect of the 1922 Act. Explanation 2 inSection 153 makes it clear that even where any income is excluded from the totalincome of the assessee from a particular assessment year, then an assessment ofsuch income for another assessment year shall, for the purpose of Section 150 asalso of Section 153, be deemed to be one made in consequence of or to giveeffect to any finding or direction contained in the said order. In other words, afinding in respect of a different year can also be used for the purposes ofinvoking the provisions of Section 150 of the said Act, by virtue of the deemingprovision contained in Explanation 2 in Section 153 of the said Act. This wouldotherwise not have been available in view of the decision of the Supreme Courtin Murlidhar Bhagwan Das(Supra). Similarly, Explanation 3 stipulates thatwhere, by an order inter-alia passed by the Tribunal in an appeal, any income isexcluded from the total income of one person and held to be the income ofanother person, then, assessment of such income on such other person shall, forthe purposes of Section 150 as also Section 153, be deemed to be one made inconsequence of or to give effect to any finding or direction contained in the said order. However, this deeming provision is subject to a proviso that such otherperson ought to be given an opportunity of being heard before such an order ispassed. 12.Coming back to the factual matrix of the present case, Mr Syali submittedthat the provisions of Section 150 read with Explanation 3 in section 153 wouldapply only if an opportunity of hearing had been given to the petitioner herein,before the Tribunal passed the order dated 13.01.2010 in the case of the saidsociety wherein the Tribunal held that the interest income was not taxable in thehands of the said society but ought to have been taxed in the hands of thepetitioner herein. Mr Syali submitted that this was a condition precedent beforethe deeming clause could be invoked and thereby the provisions of Section 150could be attracted so as to lift the bar of limitation prescribed under Section 149of the said Act. 13.Mr Syali placed reliance on the decision of the Gujarat High Court in thecase of A.B. Parikh vs. Income - tax Officer: 203 ITR 186 (GUJ). In particular,he placed reliance on the following observations of the said High Court: “Section 149 lays down the time limits for issuance of notice undersection 148. Section 150(1) forms an exception to it and providesthat a notice under section 148 could be issued at any time for thepurpose of making an assessment or reassessment or recomputationin consequence of or to give effect to, any finding or directioncontained in an order in appeal, reference or revision under the Act.Similarly, section 153(3)(ii) using the same language as could beseen from the extract made above, provides that no time limitapplies for completion of assessment which is made in consequenceof, or to give effect to, any such finding or direction. Exclusion oftime limit will depend on the same contingencies in both the cases.Explanations 2 and 3 to section 153 deem certain assessments to “Section 149 lays down the time limits for issuance of notice undersection 148. Section 150(1) forms an exception to it and providesthat a notice under section 148 could be issued at any time for thepurpose of making an assessment or reassessment or recomputationin consequence of or to give effect to, any finding or directioncontained in an order in appeal, reference or revision under the Act.Similarly, section 153(3)(ii) using the same language as could beseen from the extract made above, provides that no time limitapplies for completion of assessment which is made in consequenceof, or to give effect to, any such finding or direction. Exclusion oftime limit will depend on the same contingencies in both the cases.Explanations 2 and 3 to section 153 deem certain assessments to have been made in consequence of, or to give effect to, a finding ordirection. We need not advert to Explanation 2, since it concernsthe very assessee covered by the order in question. Explanation 3referring to "another person" is relevant for our case, and the fictionenacted therein applies for the purposes of both section 150 andsection 153. This is evident from the user therein of the set ofexpressions "for the purposes of section 150 and this section.” There is no gainsaying that this specific reference gives no room forexclusion of the application of the fiction set forth in Explanation 3to section 153 even in respect of section 150. The result is for thepurpose of section 150, so as to enable the authority to issue thenotice under section 148 at any time without being curtailed by thetime limit prescribed under section 149, there must be satisfactionof the ingredients under Explanation 3 to section 153.Theendeavour of Mr. M.R. Bhatt, learned counsel for the respondent,was to bring the matter within the ambit of Explanation 3 to section153.” xxxxxxxxxxxxxxxxxxxx“Wemustpointoutthatthereisnodiscussioninthepronouncement of the implications of Explanation 3 to section 153.Even otherwise, we are unable to spell out any parity between thefacts of the case dealt with by the High Court of Patna and the factsof the present case. There the parties were very much in the picturefrom the inception putting forth the stand with reference to statusand, in that view, it was held that they were vitally interested in thefirm in which they were partners and in that context Explanation 3to section 153 would come to the rescue of the Revenue and againstthe assessee. Our analysis of the implications of the provisions ofthe Act relevant for the purpose of our case, as done above, has leftus with no other alternative but to allow this special civilapplication. Since we have sustained the first point relating to bar oflimitation and that has served the cause of the petitioner, we havenot gone to the second point. Accordingly, we allow this special civil application and the impugned show cause notice as perannexure A is quashed. We make no order as to costs.” civil application and the impugned show cause notice as perannexure A is quashed. We make no order as to costs.” 14.It is apparent from the said decision that before a notice under Section 148can be issued beyond the time limits prescribed under Section 149, theingredients of Explanation 3 to Section 153 have to be satisfied.Thoseingredients require that there must be a finding that income which is excludedfrom the total income of one person must be held to be income of another person.The second ingredient being that before such a finding is recorded, such otherperson should be given an opportunity of being heard.In the context of thepresent case, when the Tribunal held in favour of the said society by concludingthat the interest income was not taxable in its hands and held against thepetitioner by concluding that the said interest income ought to have been taxed inthe hands of the petitioner, an opportunity of hearing ought to have been given tothe petitioner.The fact that such an opportunity was not given, has beenrecognized by the revenue in the order disposing of the objections dated20.10.2011, where it has been observed that there was no need to have affordedan opportunity to the petitioner. Even in the counter affidavit, the revenue hastaken the stand that it was not at all necessary for the Income Tax AppellateTribunal to have allowed an opportunity of hearing to the petitioner because thatwas in respect of the assessment proceedings pertaining to the said society. 15.From the above, it is clear that no opportunity of hearing was given to thepetitioner prior to the passing of the order dated 13.01.2010 by the Income TaxAppellate Tribunal, Hyderabad in the cases of the said society.As such, oneessential ingredient of Explanation 3 was missing and, therefore, the deemingclause would not get triggered. That being the position, Section 150 would notapply and, therefore, the bar of limitation prescribed by Section 149 is not lifted. 16.The learned counsel for the revenue submitted that an opportunity ofhearing could not be given to the petitioner because at the stage when theTribunal at Hyderabad was hearing the appeal pertaining to the said society, therewas no way to ascertain as to whether the decision would go in favour of the saidsociety or not.In particular, the learned counsel for the respondent / revenuesubmitted that the question as to whether the interest income could be taxed at thehands of the petitioner would only come to be decided after the Tribunal came tothe conclusion that it was not to be taxed in the hands of the society and, till thatstage, there was no question of granting any opportunity of hearing to thepetitioner. Be that as it may, the specific condition for attracting the deemingprovision of Explanation 3 to Section 153 requires that the person ought to begiven an opportunity of being heard before an order is passed whereunder anyincome is excluded from the total income of one person and held to be theincome of another person.It is not as if the revenue is being faulted or theTribunal is being faulted for not granting an opportunity of hearing to thepetitioner. The placing of a blame is not the issue. What is relevant is whetherthe petitioner had been given an opportunity of hearing before the Tribunalconcluded that the interest income was taxable in its hands and not in the handsof the society. It is obvious that this flows from the general principle that noprejudice should be caused to anybody without that person having been heard. 17.In view of the fact that the deeming provision provided in Explanation 3 toSection 153 does not get attracted in the present case because an opportunity ofhearing had not been given to the petitioner, the provisions of Section 150 wouldalso not be attracted.In such a situation, the normal provisions of limitationprescribed under Section 149 of the said Act would apply.Those provisionsrestrict the time period for reopening to a maximum of six years from the end of 17.In view of the fact that the deeming provision provided in Explanation 3 toSection 153 does not get attracted in the present case because an opportunity ofhearing had not been given to the petitioner, the provisions of Section 150 wouldalso not be attracted.In such a situation, the normal provisions of limitationprescribed under Section 149 of the said Act would apply.Those provisionsrestrict the time period for reopening to a maximum of six years from the end of the relevant assessment year.In the present writ petitions, the notices underSection 148 have all been issued beyond the said period of six years. Therefore,we are of the view that the said notices are time barred. 18.Consequently, the writ petitions are allowed. The impugned notices underSection 148 of the said Act are set aside and so, too, are all the proceedingspursuant thereto, including the assessment orders that have been passed. Thereshall be no order as to costs. BADAR DURREZ AHMED, JVIBHU BAKHRU, JAPRIL 23, 2013‘RK’