Samvardhana Mothersoninternational Ltd v. Assistant Commissioner Ofincome Tax & Anr

$~8 & 9 *IN THE HIGH COURT OF DELHI AT NEW DELHIDate of decision: 25[th]October 2017 8 + W.P.(C) 480/2016 SAMVARDHANA MOTHERSONINTERNATIONAL LTD ..... PetitionerThrough:Dr.RakeshGupta,Mr.AshwaniTaneja,Mr.SomilAgarwal,Mr.RohitKumarGuptaandMr.Lakashya Goyal, Advocates. versus ASSISTANT COMMISSIONER OFINCOME TAX & ANR. ..... RespondentsThrough:Mr.AshokManchandaandMr.Raghvendra Singh, Advocates. AND 9 + W.P.(C) 526/2016 SAMVARDHANA MOTHERSON INTERNATIONAL LTD.(FORMERLY KNOWN AS(M/S SAMVARDHANA MOTHERSONFINANCE LTD.)AUTHORISED SIGNATORY, SHRI MANOJMAHESHWARI,..... Petitioner ..... PetitionerThrough:Dr.RakeshGupta,Mr.AshwaniTaneja,Mr.SomilAgarwal,Mr.RohitKumarGuptaandMr.Lakashya Goyal, Advocates. versus ASSITANT COMMISSIONER OF INCOME TAX, CIRCLE 22(1) & ANR. ..... Respondents W.P.(C) 480/2016 & W.P.(C) 526/2016 Through:Mr.AshokManchandaandMr.Raghvendra Singh, Advocates. CORAM:HON'BLE MR. JUSTICE SANJIV KHANNAHON'BLE MS. JUSTICE PRATHIBA M. SINGH SANJIV KHANNA, J. (ORAL) We with the consent of the parties have heard the arguments and thewrit petitions are taken up for final disposal. 2.M/s. Samvardhana Motherson International Ltd. (formerly known asSamvardhana Finance Ltd.) has filed the present writ petitions impugningtwo notices dated 30[th]March, 2015, issued by the Additional Commissionerof Income Tax, Circle 22(1), New Delhi under Section 148 of the IncomeTax Act, 1961 (‘the Act’ for short) relating to Assessment Years (‘AY’)2010-2011 and 2011-2012. 3.The Petitioner has also placed on record a copy of the order dated 16[th]December, 2015 passed by the Assessing Officer (‘AO’) disposing ofobjections of the Petitioner against reopening of assessments under Section147/148 of the Act on the ground of `change of opinion'. 4.The undisputed position is that the Petitioner company is engaged inthe business of establishing subsidiaries, making majority or minorityinvestments and/or to promote technical collaborations and to act as aholding company. The Petitioner in paragraph 4 of the petition has statedthat the Petitioner company makes strategic investments. W.P.(C) 480/2016 & W.P.(C) 526/2016 Original Assessment proceedings for AY 2010-11. 5.For the AY 2010-2011, the return filed by the Petitioner company haddisclosed dividend income of Rs. 20,48,37,585/- which it claimed as exemptfrom tax under Section 10(34) of the Act. The Assessee had disallowedexpenditure amounting to Rs. 9,75,26,937/- for earning the exempt incomeunder Section 14A of the Act for AY 2010-11. 6.The return was taken up for scrutiny assessment after issue of noticeunder Section 143(2) of the Act. In terms of notice dated 16[th]May, 2012under Section 142(1) of the Act, the Petitioner was required to furnishseveral details, including details of dividend income received, and details ofexpenses attributable for earning of this income. The aforesaid notice wasfollowed by another notice dated 18[th]October, 2012 by which the Petitionerwas asked to give a detailed calculation of the disallowance under Section14A of the Act read with Rule 8D of the Income Tax Rules, 1962 (‘theRules’ for short). 7.In response to the first notice, the Petitioner filed a reply dated 12[th]June, 2012 stating that it had received dividend income of Rs.20,48,37,585/-which was claimed as exempt under Section 10(34) of the Act. In itssubsequent reply dated 11[th]February, 2013, the Petitioner submittedcalculation of disallowance under Section 14A read with Rule 8D of theRules and computation of the disallowance made by them. For the sake ofconvenience, since counsels for both parties rely on the same, we would liketo reproduce the aforesaid computation, which reads as under: Samvardhana Motherson Finance LimitedExpenditure in relation to Dividend Income 7.In response to the first notice, the Petitioner filed a reply dated 12[th]June, 2012 stating that it had received dividend income of Rs.20,48,37,585/-which was claimed as exempt under Section 10(34) of the Act. In itssubsequent reply dated 11[th]February, 2013, the Petitioner submittedcalculation of disallowance under Section 14A read with Rule 8D of theRules and computation of the disallowance made by them. For the sake ofconvenience, since counsels for both parties rely on the same, we would liketo reproduce the aforesaid computation, which reads as under: Samvardhana Motherson Finance LimitedExpenditure in relation to Dividend Income 8.After examining the aforesaid information and details, the assessmentorder for AY 2010-11 dated 18[th]February, 2013 was passed under Section143(3) of the Act, accepting the returned income of the Assessee ofRs.88,56,759/-. Original assessment proceedings for AY 2011-12 9.For the AY 2011-12, the return filed by the Petitioner company haddisclosed dividend income of Rs.28,55,09,111/-, which it claimed as exemptfrom tax under Section 10(34) of the Act. The Assessee had disallowedexpenditure amounting to Rs. 12,44,11,096/- for earning the exempt incomeunder Section 14A of the Act for the AY 2011-12. 10.The case was taken up for scrutiny. During the course of theassessment proceedings, the Assessing Officer (AO) issued a questionnaire, W.P.(C) 480/2016 & W.P.(C) 526/2016Page 5 of 15 enclosed as Annexure 3 to the writ petition, which had required thePetitioner to file detailed computation of disallowance made under Section14A of the Act, in the computation of the total income. 11.In response to the aforesaid questionnaire, the Petitioner filed its replydated 29[th]January, 2014, enclosed therewith as Annexure 16, enclosingdetailed computation of disallowance under Section 14A of the Act. For thesake of convenience, since counsels for both the parties rely on the same, wewould like to reproduce the aforesaid computation, which reads as under: Samvardhana Motherson Finance LimitedAnnexure to Form 3 CDClause 17(1) Expenditure in relation to Dividend Income Working Interest expense allocated Interest Cost Allocated = Interest * Average Value of Investment Average of Total Assets InterestTotal Interest Cost as per Balance Sheet165,983,855Less: Expenses incurred to earn Interest Income44,402,599Less: Interest on delay in ITDSExpenses made directly for Investment121,581,256 Average Value11,304,258,957Average of Total AssetsFixed Assets380,948162,378Investments11,359,310,55111,529,017,479Current Assets, Loans and Advances649,670,082218,130,657Deffered Tax Asset181,144______________________________12,009,361,58111,747,491,657Average Value11,878,426,619Total disallowanceTotal Expenses251,139,740Less:Interest Expenses to earn Interest Income44,402,599206,737,141Less:Expenses for Consultancy & others32,397,824174,339,317Less:Expenses which is disallowed as perProvisions of PGBPDonation1,300,000Provision for diminution in the value ofInvestment43,841,819Provision for Leave Encashment745Loss on Sale of InvestmentGratuity Provision490,436Interest Paid on TDS45,633,000128,706,317Less:Interest Expenses un allocated121,581,2567,125,060 12.Vide assessment order dated 28[th]February, 2014, the AO assessed theincome of the Assessee for the assessment year 2011-12 at Rs.3,59,35,409.The disallowance made by the Assessee of Rs.12,44,11,096/- under Section W.P.(C) 480/2016 & W.P.(C) 526/2016 Page 8 of 15 14A of the Act was accepted. Reassessment proceedings; Reasons to believe 13.To examine the contention of the Petitioner and the respondent on thequestion of change of opinion, we would like to reproduce the reasons tobelieve recorded by the AO for AY 2010-11 and 2011-12. The relevantportions have been underlined. Reasons recorded for initiating proceedings u/s 147/148 AY2010-2011 12.Vide assessment order dated 28[th]February, 2014, the AO assessed theincome of the Assessee for the assessment year 2011-12 at Rs.3,59,35,409.The disallowance made by the Assessee of Rs.12,44,11,096/- under Section W.P.(C) 480/2016 & W.P.(C) 526/2016 Page 8 of 15 14A of the Act was accepted. Reassessment proceedings; Reasons to believe 13.To examine the contention of the Petitioner and the respondent on thequestion of change of opinion, we would like to reproduce the reasons tobelieve recorded by the AO for AY 2010-11 and 2011-12. The relevantportions have been underlined. Reasons recorded for initiating proceedings u/s 147/148 AY2010-2011 "In this case, the assessment proceedings u/s 143 (3) of the I.T.Act,1961 for the A.Y. 2010-11 was completed on 18.02.2013 at anincome of Rs.88,56,759/-. On scrutiny of records it was found that an-amount of Rs.2,68,94,092/ has escaped assessment on account ofincorrect computation of disallowance u/s 14A of the I.T. Act, 1961.It was noticed that the assessee had claimed deduction of Rs.20,48,37,585/- on account of Dividend income and disallowedexpenditure amounting to Rs.9,75,26,937/- u/s 14A. Further scrutinyrevealed that the assessee had major income from Dividend and hadinvestments of Rs. 8,92,38,21,953/-(as on 31.03.2009) and Rs.11,52,90,17,479/-(on31.03.2010)respectively.Thetotaldisallowance u/s 14A r/w Rule 8D should be amounted to--Rs.12,44,21,029/, however assessee restricted it to Rs.9,75,26,937 /in contravention to Section 14A of the I.T. Act, 1961.Hence itresultedinunderassessmentofincomeRs.2,68,94,092/-(Rs.12,44,21,029- Rs.9,75,26,937). In this case, it has also been observed that the assesseehad itself calculated disallowance u/s 14A amountingtoRs.12,44,21,029/- but restricted the same to Rs. 9,75,26,967 /-. AsSection 14A of the I.T. Act, 1961 r/w Rule 8D does not permit anyrestriction in this regard andtherefore the whole amount of Rs.12,44,21,029/-, shouldhave been disallowed. In view of the above mentioned facts, it is clear that theassessee company has not disclosed fully and truly all material facts W.P.(C) 480/2016 & W.P.(C) 526/2016 before the A.O. resulting in under assessment of income. Hence, Ihave reasons to believe that a sum of Rs.2,68,94,092/- has escapedassessment in the case of assessee relevant to A.Y. 2010-11, withinthe meaning of Section 147 of the IT Act." Reasons recorded for initiating proceedings u/s 147/148 for AY 2011-2012. "In this case, the assessment proceedings u/s 143 (3) of the I.T. Act,1961 for the A.Y. 2011-12 was completed on 28.02.2014 at anincome of Rs.3,59,35,409/-. On scrutiny of records it was found thatan amount of Rs.5,00,95,760/- has escaped assessment on account ofincorrect computation of disallowance u/s 14A of the I.T. Act, 1961.It was noticed that the assessee had claimed deduction of Rs.28,55,09,111/- on account of Dividend income and disallowedexpenditureamountingtoRs.12,44,11,096/-u/s14A.Furtherscrutiny revealed that the assessee had major income from Dividendand had investments of Rs. 11,52,90,17,479 (as on 31.03.2010) andRs. 11,35,93,10,551/- (as on 31.03.2011) respectively. The totaldisallowance u/s 14A r/w Rule 8D should be amounted toRs.17,45,06,856/-,howeverassesseerestrictedittoRs.12,44,11,096/- in contravention to section 14A of the I.T. Act, 1961.Hence it resulted in underassessment of income of Rs. 5,00,95,760/- (Rs. 17,45,06,856 - Rs.12,44,11,096). In this case, it has also been observed that the assessee haditselfcalculateddisallowanceu/s14AamountingtoRs.17,38,07,331/- but restricted the same to Rs. 12,44,11,096/-. Assection 14A of the I.T. Act, 1961 r/w Rule 8D does not permit anyrestriction in this regard and therefore the whole amount of Rs.-17,45,06,856/, should have been disallowed. (Rs. 17,45,06,856 - Rs.12,44,11,096). In this case, it has also been observed that the assessee haditselfcalculateddisallowanceu/s14AamountingtoRs.17,38,07,331/- but restricted the same to Rs. 12,44,11,096/-. Assection 14A of the I.T. Act, 1961 r/w Rule 8D does not permit anyrestriction in this regard and therefore the whole amount of Rs.-17,45,06,856/, should have been disallowed. In view of the above mentioned facts, it is clear that the assesseecompany has not disclosed fully and truly all material facts beforethe A.O. resulting in under assessment of income. Hence, I havereasons to believe that a sum of Rs. 5,00,95,760/- has escapedassessment in the case of assessee relevant to A.Y. 2011-12, withinthe meaning of Section 147 of the IT Act." (emphasis supplied) Analysis and Findings: 14.The contention of the respondent-Revenue is that this is not a case ofchange of opinion because the Assessee had made an incorrect or wrongcalculation which was accepted by the AO. In particular, reliance is placedupon the computation charts submitted by the Petitioner in response to thequestionnaire/queries raised, which have been reproduced above. Hence, itis the Revenue's submission that in the present case the assessmentproceedings have been validly initiated under the provisions of Section 147read with Section 148 of the Act and the judgment of the full Bench of theDelhi High Court in the case of Commissioner of Income Tax v. UshaInternational, (2012) 348 ITR 485 (Del) (hereafter ‘Usha International’)would support the case of Revenue and not the case of the Petitioner. 15.There could not be a more clear and obvious case of change ofopinion. The AO doing the original assessment had focused himself andexamined the question of appropriateness of the expenditure which wasdisallowed by the Assessee under Section 14A of the Act. The AO wasaware of the difference between the disallowance of expenditure made bythe Assessee in its computation under Section 14A of the Act, anddisallowance if made by applying Rule 8D of the Rules. The AO not onlyraised a specific query but did so twice in respect of the disallowances forthe AY 2010-11. The details called for in the two notices/questionnaires forAY 2010-11 read as under: "Notice dated 16.5.2012: 21. Details of dividend received, if any. Also give details ofexpenses attributable for earning this income." W.P.(C) 480/2016 & W.P.(C) 526/2016 "Notice dated 18.10.2012: -Calculation of Disallowance U/s 14A read with Rule 8D." In AY 2011-12, the AO had asked for the details vide questionnaire datedNIL as under: “Questionnaire dated NIL: 45. Detailed computation of Disallowance made u/s 14A ofthe Act as per the Computation of Total Income.” 16.From the queries raised during the course of assessment proceedingsand the replies thereto, there can be no doubt that the AO specificallyexamined and went into the question of disallowance of expenditure underSection 14A of the Act as the Assessee had declared substantial dividendincome, which was exempt from tax. The AO was certainly conscious andaware of the nature of business activities undertaken by the Petitioner as astrategic investor in shares, making majority or minority investments. 17.In the aforesaid circumstances, principle of change of opinion asenunciated in Usha International (supra) would be applicable. The majorityopinion in Usha International (supra) holds:- "12. It is, therefore, clear from the aforesaid position that:(1) Reassessment proceedings can be validly initiated incase return of income is processed under Section 143(1) and noscrutiny assessment is undertaken. In such cases there is nochange of opinion; (2) Reassessment proceedings will be invalid in case theassessment order itself records that the issue was raised and isdecided in favour of the assessee. Reassessment proceedingsin the said cases will be hitbyprincipleof"changeofopinion". (3) Reassessment proceedings will be invalid in case anissue or query is raised and answered by the assessee in 17.In the aforesaid circumstances, principle of change of opinion asenunciated in Usha International (supra) would be applicable. The majorityopinion in Usha International (supra) holds:- "12. It is, therefore, clear from the aforesaid position that:(1) Reassessment proceedings can be validly initiated incase return of income is processed under Section 143(1) and noscrutiny assessment is undertaken. In such cases there is nochange of opinion; (2) Reassessment proceedings will be invalid in case theassessment order itself records that the issue was raised and isdecided in favour of the assessee. Reassessment proceedingsin the said cases will be hitbyprincipleof"changeofopinion". (3) Reassessment proceedings will be invalid in case anissue or query is raised and answered by the assessee in W.P.(C) 480/2016 & W.P.(C) 526/2016 Page 12 of 15 original assessmentproceedingsbutthereaftertheAssessing Officer does not make any addition in the assessmentorder. In such situations it should be accepted that the issuewas examined but the Assessing Officer did not find any groundor reason to make addition or reject the stand of the assessee.He forms an opinion. The reassessment will be invalid becausethe Assessing Officer had formed an opinion in the originalassessment, though he had not recorded his reasons. 13. In the second and third situation, the Revenue is not withoutremedy. In case the assessment order is erroneous andprejudicial to the interest of the Revenue, they are entitled toand can invoke power under Section 263 of the Act. This aspectand position has been highlighted in CIT vs. DLF PowersLimited, ITA 973/2011 decided on 29th November, 2011 andBLB Limited vs. ACIT Writ Petition (Civil) No. 6884/2010decided on 1st December, 2011. In the last decision it has beenobserved: 13. Revenue had the option, but did not take recourse toSection 263 of the Act, inspite of audit objection.Supervisory and revisionary power under Section 263 ofthe Act is available, if an order passed by the AssessingOfficer is erroneous and prejudicial to the interest of theRevenue. An erroneous order contrary to law that hascaused prejudiced can be correct, when jurisdictionunder Section 263 is invoked. 14. Thus where an Assessing Officer incorrectly or erroneouslyapplies law or comes to a wrong conclusion and incomechargeable to tax has escaped assessment, resort to Section263 of the Act is available and should be resorted to. Butinitiation of reassessment proceedings will be invalid on theground of change of opinion." (emphasis supplied) 18.The Supreme Court recently in Godrej and Boyce ManufacturingCompany Limited v.Deputy Commissioner of Income Tax, Mumbai &Anr., (2017) 7 SCC 421 on the question of disallowance under Section 14A W.P.(C) 480/2016 & W.P.(C) 526/2016Page 13 of 15 of the Act and the effect of Rule 8D of the Rules has held as under: "37. We do not see how in the aforesaid fact situation a differentview could have been taken for Assessment Year 2002-2003. Sub---sections (2) and (3) of Section 14A of the Act read with Rule 8D oftheRulesmerelyprescribeaformulafordeterminationofexpenditure incurred in relation to income which does not form partof the total income under the Act in a situation where the assessingofficer is not satisfied with the claim of the assessee. Whether suchdeterminationis to be made on application of the formula-prescribed under Rule 8D or in the best judgment of the assessingofficer, what the law postulates is the requirement of a satisfaction inthe assessing officer, what the law postulates is the requirement of asatisfaction in the assessing officer that having regard to theaccounts of the assessee, as placed before him, it is not possible togenerate the requisite satisfaction with regard to the correctness ofthe claim of the assessee. It is only thereafter that the provisions ofSections 14-A(2) and (3) read with Rule 8-D of the Rules or a bestjudgment determination, as earlier prevailing, would becomeapplicable. 38. In the present case, we do not find any mention of the reasonswhich had prevailed upon the assessing officer, while dealing withAssessment Year 2002-2003, to hold that the claims of the assesseethat no expenditure was incurred to earn the dividend income cannotbe accepted and why the orders of the Tribunal for the earlierassessment years were not acceptable to the assessing officer,particularly, in the absence of any new fact or change ofcircumstances. Neither any basis has been disclosed establishing areasonable nexus between the expenditure disallowed and thedividend income received. That any part of the borrowings of theassessee had been diverted to earn tax free income despite theavailability of surplus or interest free funds available (Rs 270.51crores as on 1-4-2001 and Rs 280.64 crores as on 31-3-2002)remains unproved by any material whatsoever. While it is true thatthat the principle of res judicata would not apply to assessmentproceedings under the Act, the need for consistency and certaintyand existence of strong and compelling reasons for a departure froma settled position has to be spelt out which conspicuously is absent inthe present case. In this regard, we may remind ourselves of what W.P.(C) 480/2016 & W.P.(C) 526/2016 has been observed by this Court in Radhasoami Satsangv. CIT(1992) 1 SCC 659: (1992) 193 ITR 321. “16. We are aware of the fact that strictly speaking res judicatadoes not apply to income tax proceedings. Again, each assessmentyear being a unit, what is decided in one year may not apply in thefollowing year but where a fundamental aspect permeating throughthe different assessment years has been found as a fact one way orthe other and parties have allowed that position to be sustained bynot challenging the order, it would not be at all appropriate to allowthe position to be changed in a subsequent year.” (emphasis supplied) 19.The chronology of events leading up to the passing of the ordersunder Section 143(3) of the Act, clearly shows that the AO was `satisfiedwith the claim of the assessee' while passing the original orders. Rule 8D istriggered only in a case where the AO is not satisfied with the deductionmade by the Assessee. The reasons to believe assume and are predicated onthe belief that the AO should not have accepted the Petitioner’s deduction asexplained and justified, albeit should have applied Rule 8D. Thus, the viewand opinion formed by the AO, while passing the original assessment ordersis doubted as erroneous. This is obviously a case of change of opinion. 20.In view of the aforesaid position, we allow the present writ petitionand quash the reassessment notices dated 30[th]March, 2015 in the case of thePetitioner for the AYs 2010-11 and 2011-12. In the facts of the case, therewill be no order as to costs. SANJIV KHANNA, J OCTOBER 25, 2017/dk PRATHIBA M. SINGH, J W.P.(C) 480/2016 & W.P.(C) 526/2016 Page 15 of 15