Wp/951/2022 Of E-Land Apparel Ltd v. Assistant Commissioner Of Income Tax Central Circle-6(3) And 2 Ors

IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTIONWRIT PETITION NO. 951 OF 2022 E-Land Apparel Ltd. ….Petitioner V/s.Assistant Commissioner of Income TaxCentral Circle-6(3) & Ors.…Respondents ---- Mr. Nishant Thakkar a/w Mr. Hiten Chande i/b Lumiere Law Partners for PetitionerMr. Suresh Kumar for Respondents ---- CORAM : K.R. SHRIRAM & N.J. JAMADAR, JJ DATED : 21[st] FEBRUARY 2022 P.C. : 1Petitioner carried on business of manufacturing different types offabric and clothing. This business was carried on through two separateunits. In previous year relevant to A.Y.-2014-2015, the unit carrying on thebusiness of manufacturing of fabrics was transferred by petitioner under aslump sale agreement with all assets and liabilities to subsidiary ofpetitioner. The transfer of liabilities also included the loan taken bypetitioner from various banks in connection with the business of the saidunit. 2Petitioner received a consideration of Rs.46.49 crore for transferringthe fabric business factoring in the liabilities transferred by petitioner. Theslump sale agreement was approved by the Corporate Debt RestructuringCommittee in F.Y.-2014-2015 and thereafter an agreement was entered into by E-Land Fashion, the transferee, with various banks for taking over theliabilities payable to banks. The assets and liabilities including the interestpayable to banks and interest converted into a loan was transferred to thetransferee who took over the liabilities to various banks. Petitioner,therefore, was discharged of all its liabilities to the banks. 3During the Financial Year relevant to A.Y.-2015-2016, the transfereepaid outstanding interest which was originally payable by petitioner to thebanks. Petitioner claimed the deduction for the aforesaid paymentaggregating to Rs.28,59,25,817/- even though the payment was made bytransferee while filing the return of income for A.Y.-2015-2016. 4In the original return of income that petitioner filed on 30[th] November2015, petitioner declared the total income at Nil. Subsequently, case wasselected for scrutiny and assessment order under Section 143 (3) of the Actwas passed on 28[th] December 2017, with assessed loss of Rs.28,25,35,180/-after making various additions. In the assessment year, the assessed lossalso included deduction as interest paid on Rs.28,59,25,817/- on loss orborrowing from Public / State / Industrial financial institution as claimed bythe assessee vide Income Tax Return. This is an admitted position, as couldbe seen in the reasons recorded for reopening. 5Thereafter, petitioner received a notice dated 31[st] March 2021 underSection 148 of the Act from respondent no.1 stating that there were reasonsto believe that petitioner’s income chargeable to tax for A.Y.-2015-2016 hasescaped assessment. Petitioner was provided the reasons recorded for reopening vide communication dated 14[th] May 2021. As per the reasonsrecorded, the deduction of interest paid of Rs.28,59,25,817/- on loan orborrowing from Public / State / Industrial financial institution as claimed bypetitioner should not have been allowed because after slump sale, assetsand liabilities belonged to the transferee and it was the transferee who paidthe interest to these financial institutions in a subsequent Financial Year.Therefore, income of Rs.28,25,35,180/- which was the total loss that wasassessed, has escaped assessment within the meaning of Section 147 of theAct. 6In our view, the reasons expressly state that the Assessing Officer, whopassed the original assessment order, had allowed this deduction ofRs.28,59,25,817/- and, therefore, reopening in our view, is only due tochange of opinion, which, as held time and again by various courts, is notpermissible. Moreover, in the notes to the Form 3CD submitted bypetitioner alongwith its return of income expressly provided as under: 6In our view, the reasons expressly state that the Assessing Officer, whopassed the original assessment order, had allowed this deduction ofRs.28,59,25,817/- and, therefore, reopening in our view, is only due tochange of opinion, which, as held time and again by various courts, is notpermissible. Moreover, in the notes to the Form 3CD submitted bypetitioner alongwith its return of income expressly provided as under: “Pursuant to the slump sale in the previous year 13-14, the liability onaccount of interest payable and property tax payable was transferredto E-land Fashion India Private Limited. In case of E-land ApparelLimited, the said interest and property tax liability was disallowed u/s43B of the Income Tax Act 1961 and was remaining unpaid as at theend of the previous year 13-14. The assessee has relied on the decision in the case of CIT V DizaElectrical (222 ITR 156), wherein the deduction on payment has beengranted to the predecessor while the payment was made by successor. Accordingly, based on the payment of interest by E-land Fashion IndiaPrivate Limited, that was outstanding on the first day of the rpeviousyear 14-15, the deduction of interest paid of Rs.28,59,25,817 hasbeen claimed by the assessee u/s 43B of the Income Tax Act, 1961 inthe previous year 14-15.” 7Therefore, as held by this court in 3i Infotech Ltd. vs. AssistantCommissioner of Income Tax1, petitioner had brought to the attention of theAssessing Officer this facet while submitting the tax audit report as a part ofits return of income. This is not a case where petitioner can be regarded ashaving merely produced its books of account or other evidence during thecourse of the assessment proceedings on the basis of which materialevidence could have been deduced by the Assessing Officer with the exerciseof due diligence. Petitioner, under Section 139 of the Act had a mandatoryobligation to furnish with its return of income the report of audit. Petitionerfulfilled its obligation. Paragraphs 14 and 15 of 3i Infotech Ltd. (supra)read as under: 14. The third ground on which the assessment has been sought to bereopened is that from Annexure 2, clauses 20 and 22(b), of Form 3CDan amount of Rs.31.32 lakhs is found to be debited to the profit andloss account on account of prior period expenses. This according tothe Assessing Officer is not allowable under the Act and should beadded back. To this extent, the Assessing Officer has found that therewas an escapement of income. During the course of the submissions,the attention of the Court has been drawn by the learned counselappearing on behalf of the assessee to the particulars of income andexpenditure of the prior period, credited or debited to the account.Appended to the statement are the following notes : "(1) Based on the recommendations of the Institute of CharteredAccountant of India in its publication "Guidance note on tax auditunder Section 44AB of Income Tax Act, 1961" at para 44.2 of editionSeptember 1999, expenditure of earlier years means expenditurewhich arose or accrued in any earlier year and which excludes anyexpenditure of any earlier year for which the liability to pay hascrystallized during the year. (2) Excess/short provision of earlier year and income and expenditurecrystallized during the year though shown above has not beenconsidered as prior period item." 1. (2010) 192 Taxman 137 (Bombay) "(1) Based on the recommendations of the Institute of CharteredAccountant of India in its publication "Guidance note on tax auditunder Section 44AB of Income Tax Act, 1961" at para 44.2 of editionSeptember 1999, expenditure of earlier years means expenditurewhich arose or accrued in any earlier year and which excludes anyexpenditure of any earlier year for which the liability to pay hascrystallized during the year. (2) Excess/short provision of earlier year and income and expenditurecrystallized during the year though shown above has not beenconsidered as prior period item." 1. (2010) 192 Taxman 137 (Bombay) 15. These notes, according to the assessee are consistent with theguidance note issued by the Institute of Chartered Accountants on taxaudit under Section 44AB of the Act. By its note, the assessee hasrecorded that the expenditure of the earlier years means expenditurewhich arose or which accrued in any earlier year and excludes anyexpenditure of an earlier year for which the liability to pay hascrystallized during the year. Similarly, the assessee has clarified thatexcess/short of provision of an earlier year and income andexpenditure crystallized during the year, though shown in thestatement, have not been considered as prior period items. Theassessee, as the material on record would show, therefore brought tobear the attention of the Assessing Officer to this facet whilesubmitting the tax audit report as a part of its return of income. Thisis not a case where the assessee can be regarded as having merelyproduced its books of account or other evidence during the course ofthe assessment proceedings on the basis of which material evidencecould have been deduced by the Assessing Officer with the exercise ofdue diligence. Under Section 139 the assessee was under a mandatoryobligation to furnish with its return of income the report of auditunder Section 44AB. The assessee fulfilled the obligation. Thedisclosures which are made as part of the report under s. 44AB cannotfall within the interdict of Explanation (1) to Section 147. 8Similar view has been taken by the High Court of Delhi in RanbaxyLaboratories Ltd. Vs. Deputy Commissioner of Income Tax2 in which paragraphs 13 and 14 read as under: “13. Mr Maratha appearing on behalf of the respondents, vehementlysupported the re-opening of the assessment in respect of theassessment year 2003-04 and submitted that there was failure on thepart of the assessee to fully and truly disclose all material facts whichwere necessary for assessment. He strongly relied upon the 4threason, that is, of club expenses by stating that the assessee had notdisclosed this at the time of the assessment. On a pointed query, MrMaratha could not show as to which particular information ormaterial fact had not been disclosed by the assessee at the time of theoriginal assessment proceedings. He only sought to place reliance onExplanation 1 to Section 147 which reads as under:- "Explanation 1: Production before the Assessing Officer of accountbooks or other evidence from which material evidence could with duediligence have been discovered by the Assessing Officer will notnecessarily amount to disclosure within the meaning of the foregoingproviso." However, we do not see as to how Mr Maratha could place reliance onthe said Explanation. Insofar as all the purported reasons other thanthe reason pertaining to club expenses are concerned, specific querieshad been raised and the Assessing Officer had considered the material 2. (2013) 30 taxmann.com 410(Delhi) "Explanation 1: Production before the Assessing Officer of accountbooks or other evidence from which material evidence could with duediligence have been discovered by the Assessing Officer will notnecessarily amount to disclosure within the meaning of the foregoingproviso." However, we do not see as to how Mr Maratha could place reliance onthe said Explanation. Insofar as all the purported reasons other thanthe reason pertaining to club expenses are concerned, specific querieshad been raised and the Assessing Officer had considered the material 2. (2013) 30 taxmann.com 410(Delhi) placed by the petitioner before him. As regards club expenses, MrMaratha states that since no specific query had been raised,Explanation 1 would get triggered. We do not agree with thissubmission. This is so because the club expenses were specificallymentioned at serial No. 17(d) of the tax audit report in Form No. 3CDwhich was annexed along with the return. This was a clear statutorydisclosure on the part of the assessee with regard to the claim of clubexpenditure. It was not a piece of evidence which was hidden in somebooks of accounts from which the Assessing Officer could havepossibly, with due diligence, discovered the same. On the contrary,this was material which was placed before the Assessing Officer alongwith the return which the Assessing Officer was duty bound to gothrough before completing the assessment. Clearly this does not fall inthe category of material which is referred to in Explanation 1 toSection 147 of the said Act. 14. Having considered the matter at length, we find that this is clearlynot a case of failure on the part of the assessee to fully and trulydisclose all material facts necessary for the assessment. This is ofmaterial significance because the notice under Section 148 has beenissued after expiry of four years from the end of the relevantassessment year. Therefore, the notice is time barred. Apart from this,we also feel that it amounts to a mere change of opinion. On bothcounts, the petitioner is entitled to succeed. Consequently, theimpugned notice dated 29.03.2010 is quashed and all proceedingspursuant thereto are also quashed. The writ petition is allowed. Thereshall be no order as to costs.” 9In the case at hand, the reopening is proposed after the expiry of 4years after the end of relevant assessment year and assessment has beencompleted under Section 143(3) of the Act. Therefore, the proviso toSection 147 would apply and the onus is on respondents to show that therewas a failure on the part of petitioner to fully and truly disclose all materialfacts necessary for assessment. This has not been discharged byrespondents. 10In the affidavit in reply, as submitted by Mr. Suresh Kumar, what hasbeen merely submitted is that there was incorrectness of the claim on thepart of petitioner while filing its return of income, which has beendiscovered subsequent to the original assessment and, therefore, there is no change of opinion. We are afraid, we cannot agree with the view expressed by respondents. 11In the circumstances, we allow the petition and grant prayer clause (a) which reads as under: (a) that this Hon’ble Court be pleased to issue a writ of certiorari or awrit in the nature of certiorari or any other appropriate writ, order ordirection under Article 226 and/or Article 227 of the Constitution ofIndia calling for the records of petitioner’s case and after examiningthe legality and validity thereof quash and set aside the impugnednotice under Section 148 of the Act (Exhibit E) the impugned order(Exhbit I) passed by respondent no.1, the notice dated 14[th] May 2021issued under Section 143(2) (Exhibit G) and the Notice dated 18[th]October 2021 issued under Section 142(1) of the Act (Exhibit J). 12Petition disposed accordingly. (N. J. JAMADAR, J.) (K.R. SHRIRAM, J.)