The Commissioner Of Income Tax, Chennai v. M/S.tractor And Farm Equipment Ltd

IN THE HIGH COURT OF JUDICATURE AT MADRAS CORAM THE HON'BLE MR.JUSTICE M. DURAISWAMYANDTHE HON'BLE MRS.JUSTICE R.HEMALATHA Tax Case Appeal No.1024 of 2014 The Commissioner of Income Tax,Chennai.... AppellantVs. M/s.Tractor and Farm Equipment Ltd.,35, Nungambakkam High Road,Nungambakkam, Chennai – 600 034. ... Respondent Prayer Tax Case Appeal filed under Section 260A of the IncomeTax Act, 1961 against the order of the Income Tax AppellateTribunal, Madras "A" Bench, dated 25.05.2012 passed inI.T.A.No.608/Mds/2012 for the assessment year 2003-04. Preferred against the order of the Office of theCommissioner of Income Tax (Appeals) III, No.121, MahatmaGandhi Road, Chennai 600 034 ITA.No.827/10-11/A-III, dated30.12.2011, GI No/PAN No. , Year of Assessment 2003-2004 and dated of order 30.12.2011. and Against the order of the Office of the Commissioner ofIncome Tax (Appeals)-III, No.121, Mahatma Gandhi Road, Chennai600034,ITA.No.697/09-10//A.IIIdated30.12.2011,G.I.No/AAACT2761Q, year of assessment 2002-2003 and date oforder 30.12.2011 and Against the order of the Office of the AssessmentCommissioner of Income Tax, Company Circle III (2), Chennai-34, G.I.R.No./PAN. , staus Company, Assessment year31.03.2003 and date of Assessment order: 31.12.2010 and Against the order of the Office of the Deputy Commissioner ofIncome Tax, Company Circle III (2), Chennai, 600 034,GIR.No./PAN , Status Company, Assessment Year 2002-2003 and Date of Assessment Order 29 December 2009. For Appellant : Mr.M.Swaminathan, Senior Standing Counsel assisted by Ms.V.Pushpa, Standing Counsel For Respondent : Mr.Vikram Vijayaraghavanhttps://hcservices.ecourts.gov.in/hcservices/ J U D G M E N T (Delivered by M.DURAISWAMY, J.) Challenging the order passed in I.T.A.No.608/Mds/2012 inrespect of the assessment year 2003-04 on the file of theIncome Tax Appellate Tribunal, Madras "A" Bench, Chennai, theRevenue has filed the above appeal. 2.The brief case of the appellant - Revenue is asfollows: Against the order of the Office of the Deputy Commissioner ofIncome Tax, Company Circle III (2), Chennai, 600 034,GIR.No./PAN , Status Company, Assessment Year 2002-2003 and Date of Assessment Order 29 December 2009. For Appellant : Mr.M.Swaminathan, Senior Standing Counsel assisted by Ms.V.Pushpa, Standing Counsel For Respondent : Mr.Vikram Vijayaraghavanhttps://hcservices.ecourts.gov.in/hcservices/ J U D G M E N T (Delivered by M.DURAISWAMY, J.) Challenging the order passed in I.T.A.No.608/Mds/2012 inrespect of the assessment year 2003-04 on the file of theIncome Tax Appellate Tribunal, Madras "A" Bench, Chennai, theRevenue has filed the above appeal. 2.The brief case of the appellant - Revenue is asfollows: The assessee – Company is engaged in the business ofmanufacture and sale of Tractors engineering plastic componentand two wheeler batteries and trade in trailers, implementsand accessories. The assessee – Company filed its return ofincome for the assessment year 2003-04 on 28.11.2003 declaringa total income of Rs.32,40,89,880/-. The return was processedunder Section 143(1) of the Income Tax Act, 1961 on30.03.2004. The assessment under Section 143(3) was completedon 14.02.2006. Subsequently, the assessment was re-opened. Theassessee claimed expenditure towards commission of sale,consultancy charges and others in the return of income filedfor the assessment year 2003-04. While finalizing theassessment under Section 143(3) for the assessment year 2006-07 and 2007-08, it has come to light that the consultancycharges paid by the assessee is nothing but fee for technicalservices and accordingly, the same has been disallowed underSection 40(a)(i). Similarly, payment of commission on salesand payments made under “others” also were liable to taxdeduction under Section 195 and as the assessee failed todeduct tax, the expenditure claimed towards the above weredisallowed under Section 40(a)(i). The assessee has claimeddepreciation on brand equity at Rs.1,23,95,833/-, however, thedetails of agreement and terms and conditions therein have tobe examined to ascertain the correctness or otherwise of thedepreciation claimed. The assessee has not disclosed all thematerial facts fully and truly necessary for the assessment atthe time of scrutiny as per the explanation 1 to Section 147.On 29.03.2010, a notice under Section 148 was served on theassessee. In response to the said notice, the assessee filed areply on 28.09.2010 stating that the return of income filedfor the assessment year 2003-04 on 30.11.2003 may be treatedas one filed in response to the notice under Section 148. By aletter dated 21.10.2010, reasons for re-opening the assessmentwas sent to the assessee. A notice under Section 143(2) dated23.09.2010 was served on the assessee. The assessee objectedto the re-opening and the Assessing Officer has considered thesame and completed the assessment. The Assessing Officerfinalized the assessment and arrived at the revised totalincome at Rs.36,20,86,590/-. Aggrieved over the assessmentorder, the assessee filed an appeal before the Commissioner ofIncome Tax (Appeals) and the Appellate Authority allowed theappeal and held that re-opening of the assessment was nothttps://hcservices.ecourts.gov.in/hcservices/valid. Aggrieved over the order passed by the CIT(Appeals), the Revenue filed an appeal before the Income Tax AppellateTribunal and the Appellate Tribunal held that the re-openingof the assessment was done beyond four years from the relevantassessment years and as per proviso to Section 147, thereasons recorded has not shown any failure on the part of theassessee and dismissed the departmental appeal. Aggrieved overthe order passed by the Income Tax Appellate Tribunal, theRevenue has filed the above appeal. 3.The above appeal was admitted on the followingsubstantial questions of law: the Revenue filed an appeal before the Income Tax AppellateTribunal and the Appellate Tribunal held that the re-openingof the assessment was done beyond four years from the relevantassessment years and as per proviso to Section 147, thereasons recorded has not shown any failure on the part of theassessee and dismissed the departmental appeal. Aggrieved overthe order passed by the Income Tax Appellate Tribunal, theRevenue has filed the above appeal. 3.The above appeal was admitted on the followingsubstantial questions of law: “1)Whether on the facts and in thecircumstances of the case, the Income Tax AppellateTribunal was right in upholding the orders of CIT(A)who held that the re-opening of assessment was notvalid? 2)Is not the finding of the Tribunal bad byholding that the reassessment proceedings initiatedwere invalid especially when the Assessing Officerdid not deal with disallowances made under Section40(a)(i) and disallowance of depreciation on brandequity while dealing in the original assessmentproceedings and therefore could not have formed anyopinion on the said issues in the first instance?” 4.Heard Mr.M.Swaminathan, learned senior standing counselappearing for the appellant – Revenue and Mr.VikramVijayaraghavan, learned counsel appearing for the respondent –assessee. 5.When the appeal is taken up for hearing,Mr.M.Swaminathan, learned senior standing counsel appearingfor the appellant – Revenue fairly submitted that thequestions of law that were framed in the above appeal at thetime of admission were already decided against the Revenue bythe Hon'ble Supreme Court of India in the judgment reported in[2010] 320 ITR 561 (SC) [Commissioner of Income Tax, Delhi Vs.Kelvinator of India Ltd.] held as follows: “... 2. A short question which arises for determinationin this batch of civil appeals is, whether theconcept of "change of opinion" stands obliteratedwith effect from 1st April, 1989, i.e., aftersubstitution of Section 147 of the Income Tax Act,1961 by Direct Tax Laws (Amendment) Act, 1987?3. To answer the above question, we need to note thechanges undergone by Section 147 of the Income TaxAct, 1961 [for short, "the Act"]. Prior to DirectTax Laws (Amendment) Act, 1987, Section 147 reads asunder:“147.Income escaping assessment.-https://hcservices.ecourts.gov.in/hcservices/If- [a] the Income-tax Officer has reason to believethat, by reason of the omission or failure on thepart of an assessee to make a return under Section139 for any assessment year to the Income-taxOfficer or to disclose fully and truly all materialfacts necessary for his assessment for that year,income chargeable to tax has escaped assessment forthat year, or [b] notwithstanding that there has been no omissionor failure as mentioned in Clause (a) on the part ofthe assessee, the Income- tax Officer has inconsequence of information in his possession reasonto believe that income chargeable to tax has escapedassessment for any assessment year, he may, subjectto the provisions of Sections 148 to 153, assess orreassess such income or recompute the loss or thedepreciation allowance, as the case may be, for theassessment year concerned (hereafter in Sections 148to 153 referred to as the relevant assessment year).”3.1.After enactment of Direct Tax Laws (Amendment)Act, 1987, i.e., prior to 1st April, 1989, Section147 of the Act, reads as under: [b] notwithstanding that there has been no omissionor failure as mentioned in Clause (a) on the part ofthe assessee, the Income- tax Officer has inconsequence of information in his possession reasonto believe that income chargeable to tax has escapedassessment for any assessment year, he may, subjectto the provisions of Sections 148 to 153, assess orreassess such income or recompute the loss or thedepreciation allowance, as the case may be, for theassessment year concerned (hereafter in Sections 148to 153 referred to as the relevant assessment year).”3.1.After enactment of Direct Tax Laws (Amendment)Act, 1987, i.e., prior to 1st April, 1989, Section147 of the Act, reads as under: “147. Income escaping assessment.--If the AssessingOfficer, for reasons to be recorded by him inwriting, is of the opinion that any incomechargeable to tax has escaped assessment for anyassessment year, he may, subject to the provisionsof Sections 148 to 153, assess or reassess suchincome and also any other income chargeable to taxwhich has escaped assessment and which comes to hisnotice subsequently in the course of the proceedingsunder this section, or recompute the loss or thedepreciation allowance or any other allowance, asthe case may be, for the assessment year concerned(hereafter in this section and in Sections 148 to153 referred to as the relevant assessment year).”3.2. After the Amending Act, 1989, Section 147 readsas under: “147.Income escaping assessment - If the AssessingOfficer has reason to believe that any incomechargeable to tax has escaped assessment for anyassessment year, he may, subject to the provisionsof Sections 148 to 153, assess or reassess suchincome and also any other income chargeable to taxwhich has escaped assessment and which comes to hisnotice subsequently in the course of the proceedingsunder this section, or recompute the loss or thedepreciation allowance or any other allowance, asthe case may be, for the assessment year concerned(hereafter in this section and in Sections 148 tohttps://hcservices.ecourts.gov.in/hcservices/153 referred to as the relevant assessment year).” “147.Income escaping assessment - If the AssessingOfficer has reason to believe that any incomechargeable to tax has escaped assessment for anyassessment year, he may, subject to the provisionsof Sections 148 to 153, assess or reassess suchincome and also any other income chargeable to taxwhich has escaped assessment and which comes to hisnotice subsequently in the course of the proceedingsunder this section, or recompute the loss or thedepreciation allowance or any other allowance, asthe case may be, for the assessment year concerned(hereafter in this section and in Sections 148 tohttps://hcservices.ecourts.gov.in/hcservices/153 referred to as the relevant assessment year).” 4. On going through the changes, quoted above, madeto Section 147 of the Act, we find that, prior toDirect Tax Laws (Amendment) Act, 1987, re-openingcould be done under above two conditions andfulfillment of the said conditions alone conferredjurisdiction on the Assessing Officer to make a backassessment, but in Section 147 of the Act [witheffect from 1st April, 1989], they are given a go-byand only one condition has remained, viz., thatwhere the Assessing Officer has reason to believethat income has escaped assessment, confersjurisdiction to re-open the assessment. Therefore,post-1st April, 1989, power to re-open is muchwider. However, one needs to give a schematicinterpretation to the words "reason to believe"failing which, we are afraid, Section 147 would givearbitrary powers to the Assessing Officer to re-openassessments on the basis of "mere change ofopinion", which cannot be per se reason to re-open.We must also keep in mind the conceptual differencebetween power to review and power to re-assess. TheAssessing Officer has no power to review; he has thepower to re-assess. But re-assessment has to bebased on fulfillment of certain pre-condition and ifthe concept of "change of opinion" is removed, ascontended on behalf of the Department, then, in thegarb of re-opening the assessment, review would takeplace. One must treat the concept of "change ofopinion" as an in-built test to check abuse of powerby the Assessing Officer. Hence, after 1st April,1989, Assessing Officer has power to re-open,provided there is "tangible material" to come to theconclusion that there is escapement of income fromassessment. Reasons must have a live link with theformation of the belief. Our view gets support fromthe changes made to Section 147 of the Act, asquoted hereinabove. Under the Direct Tax Laws(Amendment) Act, 1987, Parliament not only deletedthe words "reason to believe" but also inserted theword "opinion" in Section 147 of the Act. However,on receipt of representations from the Companiesagainst omission 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 relevant portionof Circular No. 549 dated 31st October, 1989, whichreads as follows: “7.2 Amendment made by the Amending Act, 1989, toreintroduce the expression `reason to believe' inSection 147.--A number of representations werereceived against the omission of the words `reasonhttps://hcservices.ecourts.gov.in/hcservices/to believe' from Section 147 and their substitution “7.2 Amendment made by the Amending Act, 1989, toreintroduce the expression `reason to believe' inSection 147.--A number of representations werereceived against the omission of the words `reasonhttps://hcservices.ecourts.gov.in/hcservices/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 a numberof court rulings in the past and was well settledand its omission from Section 147 would givearbitrary powers to the Assessing Officer to reopenpast assessments on mere change of opinion. To allaythese fears, the Amending Act, 1989, has againamended Section 147 to reintroduce the expression`has reason to believe' in place of the words `forreasons to be recorded by him in writing, is of theopinion'. Other provisions of the new Section 147,however, remain the same.” 5. For the afore-stated reasons, we see no merit inthese civil appeals filed by the Department, hence,dismissed with no order as to costs.” 6.Mr.Vikram Vijayaraghavan, the learned counsel appearingfor the respondent – assessee submitted that in view of theratio laid down by the Hon'ble Apex Court in [2010] 320 ITR561 (SC), the questions of law may be decided against theRevenue and the appeal may be dismissed. 7.In view of the submissions made by the learned counselon either side, following the ratio laid down by the Hon'bleSupreme Court of India in the judgment reported in [2010] 320ITR 561 (SC) [Commissioner of Income Tax, Delhi Vs. Kelvinatorof India Ltd.], cited supra, the questions of law are decidedagainst the Revenue and in favour of the assessee. The TaxCase Appeal is dismissed. No costs. Sd/- Assistant Registrar (CS-III) //True Copy// va Sub Assistant Registrar To 1. Income Tax Appellate Tribunal, Madras "A" Bench. 2.The Commissioner of Income Tax, (Appeals)-III, No. 121, Mahatma Gandhi Road, Chennai 34. No. 121, Mahatma Gandhi Road, Chennai 34. 3.The Assistant Commissioner of Income Tax, Company Circle III (2), Chennai 34. https://hcservices.ecourts.gov.in/hcservices/ 4.The Deputy Commissioner of Income tax, Company Circle III (2), Chennai 600 034. Tax Case Appeal No.1024 of 2014 JP II(CO)GN(16/08/2021)