Wp/139/2010 Of Aventis Pharma Limited v. Assistant Commissioner Of Income Tax 8(1), Mumbai And 2 Ors

IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTION WRIT PETITION NO.139 OF 2010 Aventis Pharma Ltd.Aventis House, 54/A Sir, Mathuradas Vasanji Road, Andheri (East), Mumbai – 400 093. Aventis Pharma Ltd.)Aventis House, 54/A Sir, )Mathuradas Vasanji Road, )Andheri (East), Mumbai – 400 093.)..Petitioner. V/s.1.The Assistant Commissioner of )Income Tax 8 (1), having his )office at room No.210/260A, )Aayakar Bhavan, M.K. Marg, )Mumbai – 400 020.))2.The Additional Commissioner of )Income Tax 8 (1), having his office )at room No.210/260A, Aayakar )Bhavan, M.K. Marg, )Mumbai – 400 020.))3.The Union of India through )Central Govt. Advocate, )having its office at Aayakar )Bhavan, Marine Lines, Mumbai.)..Respondents. V/s. Mr. J.D. Mistry with R. Murlidhar and B.D. Damodar i/b. M/s. Kanga & Co. for petitioner. Ms. Suchitra Kamble i/b. Suresh Kamble for respondents. CORAM : DR. D.Y.CHANDRACHUD AND J.P.DEVADHAR, JJ. DATED : 8TH MARCH, 2010 ORAL JUDGMENT ( PER, DR. D.Y.CHANDRACHUD J.) 1)Rule, by consent made returnable forthwith. Counsel for the respondents waives service. With the consent of counsel, the petition is taken up for final hearing. 2)By a notice dated 16[th ]March, 2009, issued under Section 148 of the Income Tax, 1961, an assessment for assessment year 2004-05 is sought to be reopened on the ground that income chargeable to tax has escaped assessment within the meaning of Section 147. 3)The reasons for reopening the assessment are two. Firstly, according to the Additional Commissioner of Income Tax, the assessee had written off a long term capital loss of Rs.11.14 crores from the sale of certain land at Mulund. The Assessing Officer after discarding the value adopted by the assessee worked out long term capital gains at Rs.10.66 crores. The Assessing Officer allowed a deduction of Rs.2.89 crores on account of an amount paid as “tank land liability”. This amount is according to the Assessing Officer not allowable as a deduction in computing long term capital gains under Section 148. Secondly, the Assessing Officer added back, after disallowing an amount of Rs.64.62 lakhs on account of depreciation on obsolete assets which was worked out at the rate of 20%. The correct depreciation to be disallowed is claimed to be 25% and there is alleged to be an under assessment of an amount of Rs.16.15 lakhs on this count. These are the only two reasons which weighed with the Assessing Officer. The assessee lodged its objections to the reopening of the assessment on 11[th] December, 2009. The objections were disposed of and rejected by an order of the same date. 4)The submission which has been urged on behalf of the assessee is that a full disclosure was made in the return of income. Pursuant thereto, the Assessing Officer passed an order of assessment under Section 143(3). It was urged that the Assessing Officer applied his mind specifically to both the aspects of the case noted earlier and to the explanation furnished by the assessee during the course of assessment proceedings. It has been urged that there was no tangible material before the Assessing Officer on the basis of which he could have formed a reason to believe that income chargeable to tax had escaped assessment. Consequently, it has been urged that the assessment is sought to be reopened on a mere change of opinion, which is not permissible. During the course of submission, counsel appearing on behalf of the assessee assisted the Court in perusing the entire record before the Court, including in particular the disclosures which were made during the course of the assessment. In order to obviate a repetition it would be proper to refer to the relevant aspects of the record while dealing with the submissions which have been urged on behalf of the assessee. change of opinion, which is not permissible. During the course of submission, counsel appearing on behalf of the assessee assisted the Court in perusing the entire record before the Court, including in particular the disclosures which were made during the course of the assessment. In order to obviate a repetition it would be proper to refer to the relevant aspects of the record while dealing with the submissions which have been urged on behalf of the assessee. 5)An affidavit in reply has been filed in these proceedings on behalf of the Revenue, with which it would be necessary to deal at the relevant stage. 6)Each of the two reasons which weighed with the Assessing Officer in seeking to reopen the assessment would have to be considered separately. A.Deduction of Rs.2.89 crores on account of “tankland liability” in computing long term capital gains. 7)In the return of income filed by the assessee for assessment year 2004-05, certain disclosures were made in respect of the transfer of development rights in respect of the land at Mulund. The assessee disclosed that it had entered into an MOU on 31[st] March, 2000 with Nirmal Lifestyle Pvt. Ltd. for granting development rights in respect of the land, which admeasures 115,050 square meters, for a total consideration of Rs.35.82 crores. The consideration was stated to have been received in three phases for different tranches of land. 8)The computation appended to the return included a statement of the profits on the sale of fixed assets. The sale proceeds received from the purchaser for Phase III during the course of the previous year relevant to the assessment year in question were disclosed as Rs.10.62 crores. A deduction was claimed in respect of the expenses incurred on the transfer of the property. Amongst those deductions were towards (i) Consultancy fees in the amount of Rs.27.50 lakhs and (ii) An amount of Rs.2.89 crores obtained to have been paid towards meeting the dues of the Government of Maharashtra. In the statement of long term capital gains, a deduction was claimed in respect of the consultancy fees and in respect of the amount which was paid to the purchaser towards the demand of unearned increment raised by the Government of Maharashtra. Those were claimed as selling expenses and / or as adjustment of sale consideration. 9)During the course of the assessment proceedings, the Assessing Officer raised a query as to why the transaction for sale of the land at Mulund under a development agreement should not be treated as a business transaction for computing business income, instead of treating the transaction on capital account, in turn giving arise to capital gains, as claimed by the assessee. The assessee furnished an explanation to the Assessing Officer on 22nd September,2006. Subsequently, on 30[th] November, 2006 the assessee furnished a further explanation in pursuance of a hearing that took place before the Assessing Officer, on the question as to whether Section 50 C would be attracted. 10)The Assessing Officer passed an order of assessment under Section 143(3). Para 15 of the order is titled “computation of long term capital gains”. The computation of the assessee furnished with the return of income in which a deduction was sought in respect of consultancy fees of Rs.27.50 lakhs and of Rs.2.89 crores paid to the purchaser towards meeting the demand of the State Government towards unearned increment was accepted. The Assessing Officer considered the question of fair market value in paragraphs 15.2 10)The Assessing Officer passed an order of assessment under Section 143(3). Para 15 of the order is titled “computation of long term capital gains”. The computation of the assessee furnished with the return of income in which a deduction was sought in respect of consultancy fees of Rs.27.50 lakhs and of Rs.2.89 crores paid to the purchaser towards meeting the demand of the State Government towards unearned increment was accepted. The Assessing Officer considered the question of fair market value in paragraphs 15.2 and 15.3 of the order and the application of Section 50C in para 15.5. In paragraph 15.15, the Assessing Officer recomputed the capital gains. While doing so, the Assessing Officer amalgamated the amount of Rs.2.89 crores which represented the deduction sought towards meeting the claim of the State Government towards unearned increment and the amount of Rs.27.50 lakhs towards consultancy fees; which together were shown to amount Rs.3,16,50,000/-. On this foundation, the principal objection which was raised by the assessee before the Assessing Officer to the reopening of the assessment and which has been reiterated in this proceedings is that there was full disclosure by the assessee in the return of income, of the amount claimed towards deduction on account of consultancy fees and what is described as “tank land liability”. The material before the Court would show that there was a full disclosure in the return. The Assessing Officer considered the question as to whether the assessee would be entitled to a deduction in respect of the two items. The computation of capital gains was reworked after accepting the total deduction claimed in the amount of Rs.3.16 crores in respect of the aforesaid two items. There is merit in the submission which has been urged on behalf of the assessee that there was no tangible material before the Assessing Officer on the basis of which the assessment could have been reopened and what is sought to be done is to propose a re-assessment on the basis of a mere change of opinion. This, in view of the settled position of law is impermissible. No tangible material is shown on the basis of which the assessment is sought to be reopened. In the absence of tangible material, what the Assessing Officer has done while reopening the assessment is only to change the opinion which was formed earlier on the allowability of the deduction. The power to reopen an assessment is conditional on the formation of a reason to believe that income chargeable to tax has escaped assessment. The power is not akin to a review. The existence of tangible material is necessary to ensure against an arbitrary exercise of power. There is no tangible material in the present case. B.Disallowance of depreciation on obsolete assets 11)The assessee submitted a tax audit report under Section 44AB. Under item 17 (a) of the report, the amount debited to the profit and loss account is shown to include expenditure of a capital nature, being a loss on obsolete assets of Rs.21.98 lakhs. This amount was added back in the computation of income for assessment year 2004-05. In the B.Disallowance of depreciation on obsolete assets 11)The assessee submitted a tax audit report under Section 44AB. Under item 17 (a) of the report, the amount debited to the profit and loss account is shown to include expenditure of a capital nature, being a loss on obsolete assets of Rs.21.98 lakhs. This amount was added back in the computation of income for assessment year 2004-05. In the assessee’s letter dated 22[th] September, 2006 a working of depreciation on obsolete assets was enclosed, without prejudice to contention of the assessee that depreciation on the written down value of obsolete assets has to be allowed. A without prejudice working of depreciation on obsolete assets to be disallowed was furnished to the Assessing Officer. In that statement, depreciation to be disallowed on obsolete assets for financial year 2003-04 was calculated at 20% and computed at Rs.64.62 lakhs. In another letter dated 29[th] September, 2006, reliance was sought to placed on the decision of the Mumbai Bench of the Tribunal in (2006 ) 101 ITD 360. The assessee set out its case, supported by the decision, that even if an asset is discarded or becomes defunct, it would still form part of the block of assets. Consequently, in the submission of the assessee, depreciation could not have been disallowed on the written down value which includes the written down value of obsolete assets. 12)The Assessing Officer, in the course of the assessment order noted that the assessee had written off certain assets as obsolete, but depreciation thereon had been claimed. The Assessing Officer noted that the assessee had added back the amount written off in the computation of its total income. The Assessing Officer however observed that on similar facts, right from assessment years 1999-2000 and 2003-04 depreciation had not been allowed on obsolete assets. The Assessing Officer noted that the assessee was called upon to show cause as to why depreciation should not be disallowed in respect of obsolete assets which have been written off to which the assessee responded. On the ground that a similar submission was not accepted in the earlier assessment years, the Assessing Officer disallowed depreciation claimed on the written down value of obsolete assets at the rate of 20%. The disallowance of Rs.64.62 lakhs made by the Assessing Officer was in terms of the without prejudice statement that was submitted by the assessee, as noted earlier. 13)The Assessing Officer now proposes to reopen the assessment by contending that the correct depreciation to be disallowed would be at the rate of 25% instead of 20%. This it has been submitted on behalf of the assessee, would constitute a mere change of opinion without any tangible material. We may note that in the affidavit in reply filed in this proceeding, the Assistant Commissioner of Income Tax has stated that the rate of depreciation was taken at 20% in the original assessment against 25% provided in clause III(1) to part-A to Appendix I of Rule 5(1) of the Income Tax Rules, 1962. There is merit in the submission which has been urged on behalf of the assessee that under the aforesaid Rules, the reference is to the rate at which depreciation is liable to be allowedon plant and machinery; whereas, in the present case, the issue relates to the disallowancewhich was to be effected in respect of the depreciation which was claimed on obsolete assets which had been written off. Consequently, the basis which has been suggested in the affidavit in reply is lacking in substance, apart from the fact that the reasons that have been furnished by the Assessing Officer while reopening the assessment do not even advert thereto. 14)The view which we have taken of the provisions of Section 147 is consistent with the law laid down by the Supreme Court in Commissioner of Income Tax V/s. Kelvinator of India Ltd.[1] The Supreme Court has held that: 14)The view which we have taken of the provisions of Section 147 is consistent with the law laid down by the Supreme Court in Commissioner of Income Tax V/s. Kelvinator of India Ltd.[1] The Supreme Court has held that: “...Therefore, post-1[st] April, 1989, power to re-open is much wider. However, one needs to give a schematic interpretation to the words ”reason to believe” failing which we are afraid Section 147 would give arbitrary powers to the Assessing Officer to re-open assessments on the basis of “mere change of opinion”, which cannot be per se reason to re-open. We must also keep in mind the conceptual difference between power to review and power to reassess. The Assessing Officer has no power to review; he has the power to re-assess. But re-assessment has to be based on fulfillment of certain pre-condition and if the concept of “change of opinion” is removed, as contended on behalf of the Department, then, in the garb of re-opening the assessment, review would take place. One must treat the concept of “change of opinion” as an in-built test to check abuse of power by the Assessing Officer. Hence, after 1[st] April, 1989, Assessing Officer has power to re-open, provided there is “tangible material ” to come to the conclusion that there is escapement of income from assessment. Reasons must have a link with the formation of the belief. “ 15)Before concluding, it would be necessary to record two further submissions which have been urged on behalf of the assessee. The first submission is based on the proviso to Section 147 which provides that the Assessing Officer may assess or reassess such income which is chargeable to tax and has escaped assessment, other than income involving matters which are the subject matter of any appeal, reference or revision. Counsel for the assessee submitted that against the order of assessment, the assessee had filed an appeal before the CIT(A). The grounds in the appeal specifically include a challenge to the order of assessment on the ground that the Assessing Officer, erred in disallowing depreciation of Rs.64.62 lakhs by holding that the same represented depreciation on obsolete assets which are not used in business and included in the written down value of the block of assets. Similarly, another point in the appeal is that the Assessing Officer erred in determining long term capital gains arising on the sale ofphase III-land at Mulund to the extent of Rs.10.66 crores. The contention is that in view of the proviso to Section 147, the Assessing Officer is precluded from reopening the assessment on an issue which is the subject matter of a pending appeal. The second submission was based on Section 120 of the Act and it was urged that since the original order of assessment was passed by the Additional Commissioner of Income Tax, Range 8(1), Mumbai, it was not within the jurisdiction of the Assistant Commissioner, who is a sub-ordinate authority, to reopen the assessment. 16)For the reasons already indicated, on the question as to whether the Assessing Officer had reason to believe that income had escaped assessment within the meaning of Section 147, we have come to the conclusion that there was no tangible material before the Assessing Officer to hold so and that the reasons recorded for reopening the assessment constitute a mere change of opinion. In the circumstances, it is not necessary to decide upon the additional submissions which have been urged on behalf of the assessee as noted earlier. 17)For these reasons, the petition is allowed. Rule is made absolute by quashing and setting aside the notice dated 16th March, 2009 issued by the first respondent. In the circumstances of the case, there shall be no order as to costs. (J.P.DEVADHAR, J.) (DR. D.Y.CHANDRACHUD, J.)