Fenner (India) Ltd. vs Deputy Commissioner of Income Tax

R. Jayasimha Babu, J.—The petitioner is aggrieved by the issuance of notice by the respondent u/s 148 of the Income Tax Act, 1961. That

notice was issued on December 18, 1996, and it is in respect of the asessment year 1989-90. The notice was issued more than six years after the

end of the relevant assessment year.

The petitioner contends that the pre-condition for the issue of such notice not having been satisfied, the proceedings sought to be initiated by the

issuance of that notice are wholly without jurisdiction. The petitioner has, therefore, sought a writ of prohibition to prohibit the respondent from

taking any proceedings pursuant to that notice.

The petitioner is a company carrying on business in the manufacture and sale of industrial V-belts, automotive fan belts and oil seals, conveyor

belting and installation of material handling systems. The petitioner filed its return of income for the assessment year 1989-90 relevant to the

accounting year ended March 31, 198.9 on September 11, 1989. Revised returns were filed on April 27, 1990, and May 10, 1990, and in the

last of the returns an income of Rs. 20,64,850 was admitted.

The petitioner''s case was selected for a detailed scrutiny of accounts for that assessment year and notice was issued to the petitioner u/s 143(2)

of the Act. All the information in detail, required by the Assessing Officer was furnished by the assessee and thereafter regular assessment was

completed u/s 143(3) of the Act on March 25, 1992, determining a total income of Rs. 1,61,85,637 as against the sum of Rs. 20,64,850 admitted

by the petitioner in its revised return.

More than six years after the end of that assessment year 1989-90, the petitioner was served with the notice u/s 148 of the Act requiring the

petitioner to deliver a return of income in the prescribed form within 30 days on the ground that the Assessing Officer has reason to believe that the

income of the petitioner chargeable to tax has escaped assessment within the meaning of Section 147 of the Act. The petitioner has filed a return in

response to that notice on January 20, 1997, admitting income of Rs. 81,09,230. When the case was posted to November 17, 1997, the

petitioner, according to the averment in the affidavit of the general manager, came to know the reasons on the basis of which the notice u/s 148 of

the Act was issued. The petitioner has averred that the notice came to be issued after the audit had taken an objection to the assessment made on

the ground that there had been underassessment and that in the opinion of the audit the acceptance by the Assessing Officer of the accounting

procedure adopted by the petitioner in its accounts regarding its Central excise duty and the Modvat scheme had resulted in short levy of tax. The

audit, according to the petitioner had also taken an objection regarding the manner in which the interest had been levied u/s 234A of the Act and

further that excess deduction had been allowed u/s 32AB of the Act.

The petitioner has averred that it had fully and completely disclosed, at the time of assessment, all the material facts necessary for the assessment

and had also filed the returns required and, therefore, the preconditions required for the issue of notice under the proviso to Section 147 of the Act

were not fulfilled in this case.

In the counter affidavit filed by the Deputy Commissioner, the reasons recorded by the respondent for reopening the assessment have been set

out in paragraph six, which reads thus :

In this case, the assessment for the year (assessment year 1989-90) was completed on a total income of Rs. 1,61,85,637 as against the returned

income of Rs. 26,64,850 (as per third revised return--115J profit) and subsequently revised on August 14, 1992, to consider some of the asses-

see''s claim. The revised total income as per that order was Rs. 68,58,100. Deduction u/s 80HHC of Rs. 5,62,574 was allowed in the revision

order. Again the assessment was revised on September 16, 1992, to give effect to the order of the Commissioner of Income Tax (Appeals). While

computing the deduction allowable u/s 80HHC (vide revision order dated August 14, 1992), the profits from business for the purposes of

deduction u/s 80HHC was arrived at without deducting the depreciation and investment allowance of earlier years as per Sections 32(2) and

32A(3)(ii) respectively. As a result, relief u/s 80HHC has excessively been allowed resulting in underassessment. Since the income chargeable to

tax has thus escaped assessment within the meaning of Section 147 of the Act, action u/s 147 is called for.

(ii) In the assessment u/s 143(3) deduction u/s 32AB was allowed to the extent of Rs. 26,33,971 stating that it was restricted to the amount utilised

for the purchase of machinery. However, in annex-ure to the documents enclosed to the return of income, the amount eligible for deduction was

arrived at Rs. 25,52,973 in Form No. 3AA as a sum of Rs. 80,998 relates to purchases made prior to the accounting period, i.e., prior to

September 1, 1987. Thus, due to the allowance of excessive deduction u/s 32AB income chargeable to tax has escaped assessment to the extent

mentioned above within the meaning of Section 147.

(iii) The assessee has debited a sum of Rs. 1,331.72 lakhs (Rs. 592.18 + 739.54 lakhs) towards excise duty paid for the year ended March 31,

1989, including Modvat adjustment of Rs. 157.83 lakhs but the corresponding credit was not taken into account in the profit and loss account with

the result that the profit for the year was understated to that extent. This was not considered for the assessment for the year and thus income

chargeable to the extent of Rs. 157.83 lakhs has escaped assessment within the meaning of Section 147.

For the reasons stated above, action u/s 147 is called for in this case for the assessment year 1989-90.

Learned counsel for the petitioner-assessee submitted that even according to the respondent it has nowhere been recorded that the petitioner

had failed to set out all the material facts necessary for its assessment and, therefore, the power under the proviso to Section 147(1) was being

invoked. On this ground alone, it was submitted, the impugned notice deserves to be quashed. There is considerable substance in the submission

so made. The officer appears to have proceeded on the basis that the power can be exercised by him without regard to the proviso and, therefore,

it was unnecessary to record that there was any failure on the part of the assessee to fully and actually disclose the facts necessary for its

assessment. Counsel, in this context, relied on the decision of a Bench of the Gujarat High Court in the case of Kaira District Co-operative Milk

Producers Union Ltd. Vs. Asstt. Commissioner of Income Tax (No. 1), , wherein it was held that where the Assessing Officer had failed to record

anywhere his satisfaction or belief that the income chargeable to tax had escaped assessment on account of the assessee''s failure to disclose truly

and fully all material facts necessary for the assessment, a notice issued u/s 148 beyond a period of four years was wholly without jurisdiction and

could not be sustained.

Learned senior counsel for the Revenue contended that once reasons are recorded in conformity with the first paragraph of Section 147, it is

wholly unnecessary to record any further reasons for the purpose of satisfying the proviso and that it is for the assessee to demonstrate before the

officer that the circumstances referred to in the proviso did not exist and, therefore, the notice ought not to have been issued.

Section 147 of the Act, without the Explanations (which Explanations are not relevant for our present purposes) is extracted below :

If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may,

subject to the provisions of Sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped

assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss of or the

depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in Sections

148 to 153 referred to as the relevant assessment year) :

Provided that where an assessment under Sub-section (3) of Section 143 or this section has been made for the relevant assessment year, no action

shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax

has escaped assessment for such assessment year by reason of the failure on the part of the assesses to make a return u/s 139 or in response to a

notice issued under Sub-section (1) of Section 142 or Section 148 or to disclose fully and truly all material facts necessary for his assessment for

that assessment year.

The pre-condition for the exercise of the power u/s 147 in cases where power is exercised within a period of four years from the end of the

relevant assessment year is the belief reasonably entertained by the Assessing Officer that any income chargeable to tax has escaped assessment

for that assessment year. However, when the power is invoked after the expiry of the period of four years from the end of the assessment year, a

further pre-condition for such exercise is imposed by the proviso namely, that there has been a failure on the part of the assessee to make a return

u/s 139 or in response to a notice issued u/s 142 or Section 148 or failure on the part of the assessee to disclose fully and truly all material facts

necessary for his assessment for that assessment year. Unless, the condition in the proviso is satisfied, the Assessing Officer does not acquire

jurisdiction to initiate any proceeding u/s 147 of the Act after the expiry of four years from the end of the assessment year. Thus, in cases where the

initiation of the proceedings is beyond the period of four years from the end of the assessment year, the Assessing Officer must necessarily record

not only his reasonable belief that income has escaped assessment but also the default or failure committed by the assessee. Failure to do so would

vitiate the notice and the entire proceedings. The relevant words in the proviso are,

..... unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee ....

Mere escape of income is insufficient to justify the initiation of action after the expiry of four years from the end of the assessment year. Such

escapement must be by reason of the failure on the part of the assessee either to file a return referred to in the proviso or to truly and fully disclose

the material facts necessary for the assessment.

Whenever a notice is issued by the Assessing Officer beyond a period of four years from the end of the relevant assessment year, such notice

being issued without recording the reasons for his belief that income escaped assessment, it cannot be presumed in law that there is also a failure on

the part of the assessee to file the returns referred to in the proviso or a failure to fully and truly disclose the material facts. The reasons referred to

in the main paragraph of Section 147 would, in cases where the proviso is attracted, include reasons referred to in the proviso and it is necessary

for the Assessing Officer to record that any one or all the circumstances referred to in the proviso existed before the issue of notice u/s 147.

After an assessment has been made, in the normal circumstances, there would be no reason for anyone to doubt that the assessment has been

made on the basis of all relevant facts. If the Assessing Officer chooses to entertain the belief that the assessment has been made in the background

of the assessee''s failure to disclose truly and fully all material facts, it is necessary for him to record that fact, and in the absence of a record to that

effect, it cannot be held that a notice issued without recording such a fact is capable of being regarded as a valid notice. As to whether the material

facts disclosed by the assessee are full and true is always a question of fact and unless the facts disclosed had been examined in relation to the

extent of failure if any on the part of the assessee, it is not possible to form the opinion that there had been a failure on the assessee''s part to truly

and fully disclose the material facts. A notice issued without a record of the Assessing Officer''s reasonable belief that there was such failure on the

part of the assessee would be indicative of a failure on the part of the Assessing Officer to apply his mind to material facts, and on that ground also

the notice issued would be vitiated.

The reasons actually recorded and as set out by the officer in the counter affidavit are such, that even after close scrutiny they do not establish

even prima facie a failure on the part of the assessee to fully and truly disclose the material facts for the assessment.

The first reason set out in the counter affidavits is that excessive deduction had been allowed u/s 80HHC. The assessee has placed before the

Assessing Officer all statements, a perusal of which clearly shows that all the materials required for calculating the extent of benefits u/s 80HHC

and the actual calculation has been placed before the officer. The mistake, if any, is solely due to the mistake made by the officer and is not a

mistake that is attributable to any failure on the part of the assessee. This fact is not seriously disputed by learned counsel for the Revenue.

The second reason given is that there has been excessive allowance u/s 32AB of the Act, and, therefore some part of the income chargeable to

tax has escaped assessment. Here again the detailed working given to the Assessing Officer, a copy of which has been placed before the court,

shows that the mistake, if any, is a mistake committed by the Assessing Officer and is not a mistake that is attributable to the assessee''s failure to

place fully and truly the material facts.

It is the third and the last reason which was sought to be sustained by learned counsel for the Revenue as affording sufficient basis for the

notice u/s 147. This relates to the Modvat adjustment of Rs. 157.83 lakhs towards the excise duty paid by the assessee on the products

manufactured by it. In the view of the Assessing Officer, the assessee has failed to take into account the corresponding credit for Rs. 157.83 lakhs

in the profit and loss account, and, therefore, the profits for the year have been understated to that extent. Learned counsel for the Revenue

submitted that this failure was a failure on the part of the assessee, and, therefore, the reopening was justified. According to counsel, the assessee

cannot claim any part of the adjustment made by availing of the credit under the Modvat scheme towards the amount shown as ""assets"" in the

profit and loss account as the amount ""paid"" as ""excise duty"". Counsel submitted that it is only the amount paid through the deposit account that can

be termed as having been paid, and the adjustment from and out of the Mod-vat account cannot be described as amount paid towards the excise

duty. Learned counsel for the assessee/petitioner rightly pointed out that the assessee''s obligation under the Central Excise Act is to pay duty on

the goods manufactured by it and all amounts paid as duty can only be described as having been paid and by no other term, as any adjustment

made towards that payment will only result in the assessee not having to pay the same once over and the result of the adjustment is the discharge of

the assessee''s liability for payment of excise duty. The profit and loss account can only show the amount of excise duty paid by it on the products

manufactured by it and that is how the amount has been shown in the profit and loss account and the assessee, therefore, has not in any manner

failed to disclose any fact necessary for ascertaining the amount paid by it as excise duty.

Learned counsel for the Revenue also invited the attention of this court to two statements filed by the assessee before the Assessing Officer :

(1) Total excise duty paid during the year ended March 31, 1989, and

(2) Total P. L. A. abstract--Excise duty deposit account. In the statement, the total excise duty paid, the assessee has set out the following :

FENNER (INDIA) LIMITED

EXCISE DUTY PAID YEAR ENDED 31-3-1989

Assessment year 1989-90

Rs. in lakhs

Paid through deposit account 1,243.49

Modvat adjustment 157.83

1,401.32

Add : Provision for excise duty (since paid on 13-4-1989) 4.09

Duty paid direct to department on 13-9-1988 1.13

1,406.54

Less : Excise duty payments/deposit of excise duty, etc., not

charged in profit and loss account 74.82

1,331.72.

In the statement under the heading PLA abstract--Excise duty deposit account, the assessee has set out the following :

FENNER (INDIA) LIMITED

Assessment year 1989-90

PREVIOUS YEAH ENDED 31-3-1989 (19 MONTHS PERIOD)

PLA abstract-Excise duty deposit account :

Opening balance as on 1-9-1987 1,73,065

Amount deposited 12,46,17,916

12,47,90,981

Less : Duty paid 12,43,49,336

Closing balance as on 31-3-1989 4,41,645

Modvat accruals account :

Opening balance as on 1-9-87 3,14,168

Modvat credit taken 1,71,89,722

1,75,03,890

less : Utilised 1,57,83,004

Closing balance as on 31-3-1989 17,20,886"".

A perusal of this statement shows that the assessee had placed before the Assessing Officer every relevant detail regarding the excise duty paid

; the manner in which the payment was effected ; the amount paid through the deposit account ; the amount adjusted from the Modvat account ;

the opening balance in the Modvat accrual account ; the extent of the credit taken from that account ; the extent of the amount utilised from that

account as also the closing balance as on March 51, 1989. All the information required in relation to the account had been placed before the

Assessing Officer. The assessee could not have done anything more.

The argument advanced by learned counsel for the Revenue that Modvat adjustment cannot be regarded as payment is wholly fallacious.

Section 3 of the Central Excise Act, 1944, provides for the levy of excise duty on all excisable goods produced or manufactured in India. The duty

is to be ""levied and collected in such manner as may be prescribed"". The manner in which it is to be collected may be by one or more modes.

However, after such collection, the result is the discharge of the obligation of the manufacturer to pay the duty which it is required to pay u/s 3.

One of the modes of payment of the excise duty is by way of adjustment of the credit given to the manufacturer of the duty paid by it on excisable

goods used as inputs, towards the duty payable by the manufacturer on the finished product. Rule 57A of the Central Excise Rules, 1944,

provides for allowing credit of any duty of excise or the additional duty u/s 3 of the Customs Tariff Act as may be specified in the notification on

the goods used in or in relation to the manufacture of final products and for ""utilising the credit so allowed towards the payment of duty of excise

leviable on the final products ....."" The credit allowed is, therefore, a credit which is to be utilised towards the payment of duty. To state the

obvious, the utilisation of the Modvat credit results in the payment of the excise duty on the final products to the extent of the credit utilised. The

description given by the assessee to the payment so made as excise duty paid is the correct and normal term to describe the payment and no fault

can be found with the assessee for using that term and not bifurcating that amount into the amount paid through the deposit account and the amount

paid by adjustment of the Modvat credit. Moreover, the assessee had furnished detailed statements, which are extracted above, from which it is

clear that all the information that was required, had been placed before the Assessing Officer. The third reason set out by the respondent in his

counter affidavit as one of the reasons which led to forming a belief that the income had escaped assessment is certainly not a reason which can be

said to be in any way the result of any failure on the part of the assessee to disclose truly and fully any fact in relation to the Modvat account or the

amount of excise duty paid. If there has been any error in computing the extent of the assessee''s income, after taking note of the excise duty paid

and the extent of accrual in the Modvat account as also the extent of the credit utilised, that mistake is only attributable to the Assessing Officer and

not to the assessee.

It is not the case of the Revenue that it is a requirement of any statute, rule or regulation or requirement of any known accounting practice that

the excise duty paid and set out in the balance-sheet or profit and loss account should show the break-up of the Modvat adjustment or that the

extent of the credit in the Modvat accrual account should be shown as part of the income or of the profit in the profit and loss account. If the

Assessing Officer was of the view that the amount available in the Modvat accrual account was required to be treated as part of the assessee''s

income for the year of account, the Assessing Officer should have proceeded to compute the income by taking the same into account.

The duty of an assessee is limited to fully and truly disclosing all the material facts. The assessee is not required thereafter to prepare a draft

assessment order. If the details placed by the assessee before the Assessing Officer were in conformity with the requirements of all applicable laws

and known accounting principles, and material details had been exhibited before the Assessing Officer, it is for the Assessing Officer to reach such

conclusions as he considered was warranted from such data and any failure on his part to do so cannot be regarded as the assessee''s failure to

furnish the material facts truly and fully. Any lack of comprehension on the part of the Assessing Officer in understanding the details placed before

him cannot confer a justification for reopening the assessment, long after the period of four years had expired. On the facts of this case, it is clear

that the escapement of income, if any, on this account is not on account of any failure on the assessee''s part to disclose the material facts fully and

truly. The notice issued by the Assessing Officer in exercise of his power u/s 147, therefore, cannot be sustained.

As the error here is one of jurisdiction it is not necessary for the asses-see to have recourse to the remedies by way of appeal, revision, etc. It

is well settled that when a jurisdictional error is brought to the notice of this court such errors are capable of being corrected by this court in

exercise of the court''s powers under Article 226 of the Constitution of India. The Supreme Court in the case of Commissioner of Income Tax Vs.

Progressive Engineering and Annapurna Roller Flour Mills Pvt. Ltd., , held that when all the relevant facts were before the court and the law is

clear on the subject, it is the duty of the High Court to interfere. That was also a case where the proceedings were sought to be initiated against the

assessee u/s 147 of the Act.

The impugned notice is, therefore, quashed. The respondent is prohibited from taking any further proceedings, pursuant to that notice. The writ

petition is allowed, with costs of Rs. 2,000. Connected W. M. P.''s are closed.