Allanasons Ltd. vs Deputy Commissioner of Income Tax

M.S. Sanklecha, J.—The petition under article 226 of the Constitution of India, assails the notice dated January 10, 2005, issued under section 148 of the Income-tax Act, 1961 ("the Act"). By the impugned notice dated January 10, 2005, the Assessing Officer has sought to reopen the assessment for the assessment year 1998-99. The relevant facts necessary for disposing of the petition are as under:

(a) For the assessment year 1998-99, the petitioner filed its return of income declaring its income at Rs. 2.47 crores. The income of Rs. 2.47 crores was arrived at by claiming a deduction of Rs. 17.67 crores under section 80HHC of the Act.

(b) On March 7, 2001, the Assessing Officer passed an assessment order under section 143(3) of the Act determining the petitioner''s income at Rs. 9.57 crores. This was so determined after having reduced the deduction under section 80HHC of the Act to Rs. 10.67 crores.

(c) On January 10, 2005, the impugned notice under section 148 of the Act was issued, seeking to reopen the assessment for the assessment year 1998-99. Thereafter, on January 28, 2005, the reasons recorded for reopening were furnished to the petitioner. The reasons recorded at the time of issuing the impugned notice reads as under:

"The assessee has been allowed deduction under section 80HHC as under:

When the deduction was allowed the judgment of Mangalya Trading and Investment Ltd. (I.T.A. 6354/Mum./98 dated April 23, 2004) was not available at the time of completion of the assessment under section 143(3). The decision of the Income-tax Appellate Tribunal, Mumbai, has been endorsed by the hon''ble High Court in the case of Rohan Dyes and Intermediates Ltd. v. CIT dated August 9, 2004. In view of these judgments the deduction under section 80HHC would not available on the balance incentives, even where the 90 per cent, of the incentives exceeds the (net) loss from the exports. As per the judgment of IPCA Laboratory Ltd. Vs. Deputy Commissioner of Income Tax, Mumbai, and the losses in export of trading goods should be adjusted against the profits of manufacture goods for vis-a-vis while computing the deduction under section 80HHC. Therefore, in view of the decision of IPCA Laboratories Ltd. and Rohan Dye and Intermediates Ltd. the deduction under section 80HHCwill not available on the balance incentives if there is no net profit from trading and manufacturing export.

After adjusting the loss of Rs. 7,00,54,773 from manufacturing export against trading profit of Rs. 5,29,09,932, there is net loss of Rs. 1,71,44,841. Since the assessee do not have profit from exports, the deduction on incentives is not available in view of the decision of Rohan Dye and Intermediates Ltd. cited above. Therefore, I have reason to believe that income has escaped assessment. Approval has been granted by the CIT-I, Mumbai, vide letter dated January 6, 2005, for reopening the assessment under section 147. Therefore, assessment proceeding are reopened under section 147. Issue notice under section 148 of the Income-tax Act."

(d) The assessee filed its objections and in particular urged that the impugned notice dated January 10, 2005, is without jurisdiction. This was on the ground that the impugned notice is issued after the expiry of four years from the end of the assessment year 1998-99 and the reasons recorded do not indicate any failure on the part of the petitioner to fully and truly disclose all material facts necessary for assessment. Besides, other objections were also raised; and

(e) By an order dated February 28, 2005, the Assessing Officer rejected the petitioner''s objections to reopening of the assessment for the assessment year 1998-99. It was only in the order rejecting the objections that the Assessing Officer alleged for the first time that the petitioner had failed to truly and fully disclose all material facts necessary for assessment.

It is this notice dated January 10, 2005, and the consequent order dated February 28, 2005, rejecting the petitioner''s objections to reopening of the assessment for the assessment year 1998-99 which is challenged in this petition. This petition was admitted on April 19, 2005, and the Revenue was restrained by an interim order from acting on the impugned notice dated January 10, 2005.

Mr. Jain, learned counsel appearing in support of the petition, submits that:

(i) the reasons as recorded for issuing the impugned notice dated January 10, 2005, does not mention any failure on the part of the petitioner to fully and truly disclose all material facts necessary for assessment. Thus, in view of the decision of this court in Hindustan Lever Ltd. Vs. R.B. Wadkar, Assistant Commissioner of Income Tax and Others (No. 1), , the impugned notice is without jurisdiction;

(ii) in any case, the reasons as recorded for issue of impugned notice dated January 10, 2005, do not indicate any failure on the part of the petitioner to disclose fully and truly all material facts necessary for assessment. The aforesaid requirement is sine qua non for issue of a notice beyond a period of four years from the end of the relevant the assessment year, i.e., the assessment year 1998-99 for reassessment; and

(iii) the only basis for issuing the impugned notice dated January 10, 2005, as recorded in the reasons is subsequent decisions of tribunal and courts. It is a settled position in law that the decisions rendered by court subsequent to assessment orders do not by itself amounts to failure to fully and truly disclose all material facts necessary for assessment.

In view of the above, it is submitted that the petition be allowed.

As against the above, Mr. Suresh Kumar, learned counsel appearing for the respondent-Revenue, in support the impugned notice dated January 10, 2005, as well as the order rejecting the objections dated February 28, 2005, urges as under:

(i) It is open to the Assessing Officer to reopen the assessment passed under section 143(3) of the Act in view of the decision rendered subsequent to the assessment order passed by the Assessing Officer. In support, reliance is placed upon the decision of the apex court in the matter of A.L.A. Firm Vs. Commissioner of Income Tax, Madras, ; and

(ii) In any case, the reasons rejecting the objections on February 28, 2005, allege failure on the part of the petitioner to make full and true disclose all material facts necessary for assessment.

Therefore, the impugned notice is valid in law and the petition be dismissed.

It is well settled that in terms of the proviso to section 147 of the Act any assessment sought to be opened beyond a period of four years from the end of the relevant assessment year, the twin jurisdictional conditions have to be cumulatively satisfied:

(a) there must be a reason to believe that income chargeable to tax has escaped the assessment; and

(b) such escapement of income should have arisen on account of failure on the part of the assessee to fully and truly disclose all material facts necessary for assessment.

Further, as held by this court in Hindustan Lever Ltd. (supra), the exercise of jurisdiction has to be examined on the basis of the reasons recorded at the time of issuing the impugned notice. It is not open to the Revenue to substitute or make addition to the reasons recorded at the time of issuing the impugned notice.

In the light of the above position in law for exercise of jurisdiction, we would consider the present facts in the light of the submissions made before us.

We shall first examine the submission of Mr. Jain, the learned counsel for the petitioner, that in the absence of the reasons for reopening mentioning "failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment", the reopening notice under section 148 of the Act is without jurisdiction. In support, reliance is placed on the decision of Hindustan Lever Ltd. (supra). The observations which support is the petitioner are (page 337 of 268 ITR):

"The reasons recorded by the Assessing Officer nowhere state that there was failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment of that assessment year. It is needless to mention that the reasons are required to be read as they were recorded by the Assessing Officer. No substitution or deletion is permissible. No additions can be made to those reasons. No inference can be allowed to be drawn based on reasons not recorded. It is for the Assessing Officer to disclose and open his mind through reasons recorded by him. He has to speak through his reasons. It is for the Assessing Officer to reach the conclusion as to whether there was failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the concerned assessment year. It is for the Assessing Officer to form his opinion. It is for him to put his opinion on record in black and white. The reasons recorded should be clear and unambiguous and should not suffer from any vagueness. The reasons recorded must disclose his mind. Reasons are the manifestation of the mind of the Assessing Officer. The reasons recorded should be self-explanatory and should not keep the assessee guessing for the reasons. Reasons provide link between conclusion and evidence. The reasons recorded must be based on evidence. The Assessing Officer, in the event of challenge to the reasons, must be able to justify the same based on material available on record. He must disclose in the reasons as to which fact or material was not disclosed by the assessee fully and truly necessary for assessment of that assessment year, so as to establish the vital link between the reasons and evidence. That vital link is the safeguard against arbitrary reopening of the concluded assessment. The reasons recorded by the Assessing Officer cannot be supplemented by filing affidavit or making an oral submission, otherwise, the reasons which were lacking in the material particulars would get supplemented, by the time the matter reaches the court, on the strength of the affidavit or oral submissions advanced."

The aforesaid observations of our court must be read in the light of the reasons recorded by the Assessing Officer for reopening in the above case at paragraph 11 which reads as under (page 335 of 268 ITR):

"On being noticed, the respondents appeared and filed their counter-affidavit disclosing the reasons recorded prior to the issuance of the notice under section 118. The said reasons recorded read as under:

''From the notes to the audited accounts, it is seen that while valuing closing stock, Central excise and customs duty leviable on stock lying in godown was not considered as forming part of cost of the closing stock. Although no such duty was paid during the relevant previous year, liability to pay such duty arises immediately on manufacture of excisable goods. Also, the Board''s Instruction No. 1389, dated March 24, 1981, provides for inclusion of Central excise and customs duty in valuation of inventory. In view of this position, I have reason to believe that income chargeable to tax has escaped assessment inasmuch as excise and customs duty leviable, Rs. 5.85 crores has not been added to the value of the closing stock, while completing the scrutiny assessment under section 143(3) on January 29, 1999."

It would, therefore, be noticed that on reading of the reasons recorded as a whole it would not lead to a conclusion that there was any failure on the part of the assessee therein to disclose truly and fully all material facts necessary for assessment. It was in the above context that observations of non-averment of failure to disclose all facts truly and fully were made. We are of the view that the words "failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment" is not a magician''s mantra which alone would give jurisdiction to reopen an assessment. Just as it would not be open to the Revenue to urge that the mere use of the words "failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment", the absence of the above words will not by itself oust the jurisdiction to reassess. We are of the view that if on reading of the reasons recorded as a whole implies/points/evidences a failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment, then the exercise of jurisdiction cannot be faulted. We, therefore, do not accept the submission that the absence of the words "failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment" would make the issue of notice under section 148 of the Act without jurisdiction.

However, in the facts of the present case, the reasons as recorded, when read as a whole do not indicate even remotely any failure on the part of the petitioner to disclose fully and truly any material facts necessary for assessment. The only reason recorded in this case by the Assessing Officer for reopening is the subsequent decisions of tribunal and courts. There is no whisper of any facts indicating that the petitioner had not having disclosed any fact which led to a reasonable belief that income chargeable to tax has escaped assessment. Therefore, in the present facts, we are clearly of the view that the reasons as recorded for issuing the impugned notice dated January 10, 2005, do not satisfy the jurisdiction requirement in case of notice issued beyond a period of four years from the end of the relevant assessment year, i.e., 1998-99.

The contention of Mr. Suresh Kumar, learned counsel appearing for the Revenue, that the order rejecting the objections dated February 28, 2005, did allege failure to disclose truly and fully all material facts and the same would be, therefore, satisfy the jurisdictional requirement. In view of the decision of this court in Hindustan Lever Ltd. (supra) as found in paragraph 20 thereof quoted hereinabove, we are required to only examine the reasons recorded at the time of issuing the impugned notice dated January 10, 2005, under section 148 of the Act to ascertain whether or not the Assessing Officer has jurisdiction to reopen the assessment. On examination of the reasons, we have come to the conclusion that the impugned notice does not satisfy the jurisdictional requirement of reasonable belief that income chargeable to tax has escaped assessment on account of the assessee failure to disclose truly and fully material facts necessary for assessment.

Moreover, the reasons recorded at the time of issuing the impugned notice itself relied upon various decisions of the court rendered subsequent to the assessment year to conclude that there has been an escapement of income. This escapement of income by itself would not give jurisdiction to the Assessing Officer to open an assessment beyond a period of four years of assessment unless it is coupled with a failure to disclose truly and fully disclose all material facts necessary for the assessment. This court in the matter of DIL Ltd. Vs. Asst. Commissioner of Income Tax, Circle 6(2) and Others, while dealing with a petition where notice was issued beyond a period of four years on the basis of the amendment into section 115(j)(b) of the Act with retrospective effect from April 1, 2001, has observed that (page 299): "In view of the retrospective amendment of law by Parliament, the Assessing Officer may have reason to believe that income has escaped assessment. But that in itself is not sufficient for reopening an assessment beyond the period of four years. Beyond the period of four years when an assessment is sought to be reopened, there must be a failure on the part of the assessee to fully and truly disclose all material facts necessary for assessment". In the above facts, this court concluded that reopening of an assessment beyond a period of four years from the end of the assessment year in the absence of any failure on the part of the assessee to fully and truly disclose all material facts necessary for the assessment would not give jurisdiction to issue notice under section 148 of the Act.

Before parting, we may point out that the reliance placed by Mr. Suresh Kumar, learned counsel appearing for the Revenue, upon the decision of the apex court in the matter of A.L.A. Firm (supra) is not applicable to the present facts. For the reason that the above case did not deal with the decisions rendered by the court after the conclusion of the assessment year or after passing of the assessment order as in this case but it dealt with situation where the original assessment order was passed overlooking a binding decision of court in existence at the time when the order was passed. Besides, the decision dealt with the normal period of limitation and not the extended period of limitation as in the present case. Moreover, it dealt with the pre-amended section 147 of the Act. Therefore, the aforesaid decision is not applicable to the facts in the present case. In view of the above, we allow the petition in terms of prayer clause (a). No order as to costs.