Garden Finance Ltd. vs Assistant Commissioner of Income Tax

Akil Kureshi, J.—These petitions arise out of a similar background involving the same assessee. They have been heard together and are disposed of by this common judgment. The brief facts may be noted as arising in Special Civil Application No. 489 of 2005.

(1.1) The petitioner-assessee is a company registered under the Companies Act and is regularly assessed to tax. For the assessment year 1996-97, the petitioner had filed its return of income on November 30, 1996. The petitioner had in that year as in the past claimed depreciation at the rate of 40 per cent, on the commercial vehicles purchased by the petitioner from time to time. The opening written down value of such purchases for the assessment year 1996-97 was Rs. 8.50 crores. On such written down value, the petitioner had claimed depreciation at the rate of 40 per cent. In the second half of the year relevant to the assessment year 1996-97, the petitioner had made fresh purchases of such commercial vehicles and supplied to one Shriram Transport Finance Co. Ltd. on lease. On such purchases of commercial vehicles, the petitioner claimed depreciation at the rate of 20 per cent, being 50 per cent, of available depreciation for full year.

(1.2) The return filed by the petitioner was taken in scrutiny. The Assessing Officer under his communication dated October 21, 1998, raised several queries with respect to various issues arising out of such return. In particular, with respect to depreciation on the vehicle, he called for the following details:

Details of vehicles on which depreciation at the rate of 40 per cent. is claimed.

(1.3) In response to such queries, the petitioner filed replies. Under reply dated February 22, 1999, the petitioner supplied full details of the depreciation claimed on the purchase of the vehicles. It would be useful to take note of the complete details thereof. The petitioner conveyed as under:

In reply to your letter dated October 21, 1998, we are submitting herewith a reply of query No. 19 as under:

The assessee-company is a non-banking finance company engaged in a business of leasing hire purchase and finance. The assessee-company had purchased and leased commercial vehicles during the financial years April 1, 1994, to March 31, 1995, and April 1, 1995, to March 31, 1996. The details as under:

The assessee-company had claimed depreciation at the rate of 40 per cent. on commercial vehicles. We have submitted a statement of depreciation along with the income tax return filed on November 30, 1996. As per the said statement, we have claimed depreciation on plant and machinery, commercial vehicles, furniture and equipment and building (residentials) as per the Appendix I see rule 5. We have claimed depreciation on commercial vehicles at the rate of 40 per cent, and on other vehicles we have claimed depreciation at the rate of 20 per cent. The working is reproduced as under:

We have purchased commercial vehicles and the said vehicles were given on lease. The lessee has used the said commercial vehicles for the business of running them on hire. We also draw your kind attention that, there is no requirement in section 32 or in the rules thereunder that the owner of the commercial vehicles shall use the vehicle himself for the business of hire. We rely on following decisions:

(1) (1997) 63 ITD 336 ;

(2) (1996) 59 ITD 570 ;

(3) (1997) 63 ITD 336 ;

You are, therefore, allowed the depreciation at the rate of 40 per cent. on commercial vehicles.

(1.4) In the ultimate assessment that the Assessing Officer framed u/s 143(3) of the Act on March 24, 1999, though he made several adjustments; with respect to claim of depreciation of the petitioner referred to above, he made no disallowances.

It is this assessment which the Assessing Officer desired to reopen for which he issued notice dated June 20, 2002. We may record in brief that previously the attempt on the part of the Assessing Officer to reopen the assessment came up for consideration before this court in a writ petition filed by the present petitioner. There was a difference of opinion between the two members of the Bench who heard such petition. Such difference was resolved through the third member''s opinion in the case of Garden Finance Ltd. Vs. Assistant Commissioner of Income Tax, who permitted the petitioner to raise objections to the proposal of reopening in terms of the decision of the apex court in the case of GKN Driveshafts (India) Ltd. Vs. Income Tax Officer and Others, . Thereupon the petitioner raised detailed objections before the Assessing Officer which were turned down the present petition came to be filed.

The Assessing Officer had recorded reasons for the impugned notice of reopening. Such reasons read as under:

The assessee-company is a non-banking finance company engaged in the business of financing, money-lending and trading in shares and financing on lease of motor vehicles. The assessee-company has shown source of income, viz., lease income, hire purchase income, bill discounting income, profit on sale of long-term investment, interest on deposits on loan, loan management fee, merchant banking income and income from other sources.

The assessee-company filed return of income on November 30, 1996, showing taxable income Rs. nil. Order passed u/s 143(3) of the Act on March 24, 1999, determining taxable income at Rs. 5,00,35,628. While passing the order, depreciation as per rule was allowed at Rs. 8,43,27,096.

On verification of the depreciation statement attached with the return of income, it is noticed that depreciation of Rs. 8,43,27,096 is inclusive of depreciation of Rs. 3,40,00,000 on motor vehicles (commercial) claimed at the rate of 40 per cent. on WDV/cost of Rs. 8,54,00,000. As per rule 5, the rate of depreciation on motor vehicle in the second column of the table in Appendix I are as under:

The assessee is a leasing company. The assessee-company has used the motor vehicles for lease and not for hiring. The assessee company is, therefore, entitled for depreciation at the normal rate of 20 per cent. on motor vehicles (commercial) and not at the higher rate of 40 per cent. as claimed and allowed while finalizing the assessment. Excess depreciation on motor vehicles (commercial) has been allowed by Rs. 1,70,00,000 while computing the taxable income, which has escaped assessment to that extent.

On the basis of the said facts on record, counsel for the petitioner vehemently contended that the notice for reopening which has been issued beyond the period of four years from the end of the relevant assessment year is wholly without jurisdiction. The petitioner had made true and full disclosures about its claim for depreciation at higher rate. The Assessing Officer had examined such claim and made no disallowance in the final computation in the scrutiny assessment that he farmed. Such assessment cannot be reopened beyond a period of four years for the reasons recorded by the Assessing Officer. Counsel submitted that even in the reasons, the Assessing Officer has nowhere stated that income chargeable to tax had escaped assessment for the failure on the part of the assessee to disclose truly and fully all material facts. Counsel lastly submitted that in the reasons, the Assessing Officer recorded that on verification of depreciation statement attached with the return of income, it was noticed that higher depreciation was claimed. It would thus emerge that there was no new material outside of the assessment proceedings on the basis of which the Assessing Officer could form a belief that income chargeable to tax has escaped assessment. He submitted that the notice was thus bad in law and, therefore, be quashed.

On the other hand, the learned counsel for the Revenue made an attempt to suggest that in the original assessment the assessee had not made true and full disclosure. Notice of reopening beyond four years also, therefore, was valid. He relied on the reasons recorded by the Assessing Officer to contend that income chargeable to tax had escaped assessment. He pointed out that this court in the case of Bhagwati Appliance Vs. Income Tax Officer, in terms held that when the vehicle is leased out and thereafter, run on hire by the lessee, higher rate of depreciation would not be available. Counsel pointed out that the said decision was subsequently followed in the case of Deputy Commissioner of Income Tax Vs. Pradip N. Desai (HUF), and in the case of Commissioner of Income Tax Vs. Aravali Finlease Ltd., .

At the outset we may record that, in the present case, we are not concerned with the validity of the belief of the Assessing Officer that income chargeable to tax had escaped assessment. We are far more concerned with the question whether the income chargeable to tax even if it can be stated to have escaped assessment, the same was for the reason of the assessee not disclosing truly and fully all material facts. This would be relevant because, in the present case, admittedly, the notice of reopening has been issued beyond a period of four years from the end of the relevant assessment year.

In this context, we may revisit the material on record. The assessee had lodged a claim of depreciation at the rate of 40 per cent. on the written down value of commercial vehicles purchased earlier. In addition thereto the petitioner had also claimed part depreciation at higher rate of vehicles purchased in second half of the year and which were leased out to another company. In the scrutiny assessment, the Assessing Officer examined various claims of the petitioner. With respect to depreciation claimed, he raised a specific query and called upon the petitioner to justify the claim by giving details of vehicles on which depreciation at the rate of 40 per cent. was claimed. In reply to such question, the assessee made a detailed representation under communication dated February 22, 1999. The petitioner stated that company had purchased and leased commercial vehicles during the financial years between April 1, 1994, to March 31, 1995, and April 1, 1995, to March 31, 1996. Details of such purchases were provided. It was also pointed out that the company was claiming depredation at the rate of 40 per cent. on the commercial vehicle. It was stated that on certain vehicles, the company had claimed depreciation at the rate of 20 per cent. This would have reference to the vehicles purchased by the company during the second half of the year and, therefore, half of otherwise available depreciation could be claimed. The company specifically pointed out that "we have purchased vehicles and the said vehicles were given on lease. The lessee has used the said commercial vehicle for the business of running them on hire. We also draw your kind attention that, there is no requirement in section 32 or in the rules thereunder that the owner of the commercial vehicles shall use the vehicle himself for the business of hire. We rely on the following decisions...".

Thus, full facts were laid before the Assessing Officer in the context of the petitioner company''s claim for depreciation at the higher rate on commercial use for running on hire. The petitioner in fact firmly asserted that though such vehicles were leased out the lessee had used such vehicles for the business of running them on hire and that, therefore, as per the statutory provisions and the decisions of the courts, the company would still be entitled to higher rate of depreciation. As already recorded, we are not concerned with the validity of the company''s legal submissions in this respect. We are only drawing a firm conclusion that the company had placed full facts before the Assessing Officer in the original assessment itself. In addition to filing the return, claiming depreciation at the rate the company thought was applicable during the course of scrutiny assessment, the company made detailed submissions why despite commercial vehicles have been leased out, higher rate of depreciation was justified. This is, therefore, not a case where income chargeable to tax can be stated to have escaped assessment for the reason of the assessee failing to disclose truly and fully all material facts. In that view of the matter, the mandatory condition to enable the Assessing Officer to reopen the assessment beyond the period of four years not having been satisfied, the impugned notice must be quashed.

In Special Civil Application No. 12251 of 2002, we are concerned with the later assessment year of 1997-98. Here also notice for reopening the assessment dated June 20, 2012, which is impugned in this petition, was issued beyond a period of four years from the end of the relevant assessment year. In the present case also, the assessee had claimed depreciation at higher rate on the vehicles purchased but leased out to another company. Here also during scrutiny assessment, such claim was not disallowed. Here also for identical reasons the Assessing Officer desired to reopen the assessment previously framed after scrutiny beyond a period of four years. Without, therefore, recording separate reasons in this case also we are of the opinion that notice for reopening was not valid. In the result both the petitions are allowed. The impugned notices both dated June 20, 2012, issued u/s 148 of the Act are quashed. Rule made absolute. No costs.