Gujarat High Court
Adani Developers Pvt Ltd vs Income Tax Officer - Ward - 1 (1) on 30 November, 2015
Author: Akil Kureshi
Bench: Akil Kureshi, Mohinder Pal
C/SCA/5440/2015 JUDGMENT
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
SPECIAL CIVIL APPLICATION NO. 5440 of 2015
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR.JUSTICE AKIL KURESHI Sd/-
and
HONOURABLE MR.JUSTICE MOHINDER PAL Sd/-
===========================================================
1 Whether Reporters of Local Papers may be allowed
to see the judgment ?
2 To be referred to the Reporter or not ?
3 Whether their Lordships wish to see the fair copy of
the judgment ?
4 Whether this case involves a substantial question of
law as to the interpretation of the Constitution of
India or any order made thereunder ?
1 to 4: NO
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ADANI DEVELOPERS PVT LTD....Petitioner(s)
Versus
INCOME TAX OFFICER - WARD - 1 (1)....Respondent(s)
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Appearance:
MR B S SOPARKAR, ADVOCATE for the Petitioner(s) No. 1
MRS MAUNA M BHATT, ADVOCATE for the Respondent(s) No. 1
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CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI
and
HONOURABLE MR.JUSTICE MOHINDER PAL
Date : 30/11/2015
ORAL JUDGMENT
(PER : HONOURABLE MR.JUSTICE AKIL KURESHI) Page 1 of 14 HC-NIC Page 1 of 14 Created On Thu Dec 03 01:12:25 IST 2015 C/SCA/5440/2015 JUDGMENT
1. Petitioner has challenged notice dated 28.03.2014 as at Annexure-A to the petition issued by the respondent/Assessing Officer seeking to reopen the assessment of the petitioner for the assessment year 2010-2011 which was previously completed after scrutiny. The sole ground pressed in service by the petitioner is that the notice for reopening has been issued by the Assessing Officer under the directives of the Audit party. To appreciate this contention, brief facts may be noted.
2. The petitioner is a Company registered under the Companies Act and is regularly assessed to tax. For the assessment year 2010-2011, the petitioner filed return of income which was taken in scrutiny by the Assessing Officer. The Assessing Officer framed assessment under section 143(3) of the Income Tax Act, 1961 (for short, "the Act") on 22.03.2013. To reopen such assessment previously framed under scrutiny, the Assessing Officer issued the impugned notice on 28.03.2014. The reasons recorded by the Assessing Officer for issuing such notice contained three separate grounds. The first was with respect to non-deduction of TDS under section 194-A of the Act. After recording the background, the Assessing Officer noted as under:
"As per the TDS returns no TDS has been made u/s 194A of the Act from interest payments made to IFCI Ltd. Though TDS of Rs.49,988/- has been made from a payment/credit of Rs.4,41,200/- made to IFCI Ltd. on 06.06.2009,,, the same is made u/s.194J of the Act apparently Page 2 of 14 HC-NIC Page 2 of 14 Created On Thu Dec 03 01:12:25 IST 2015 C/SCA/5440/2015 JUDGMENT in respect of some professional services hence not from interest payment. As per Form No.26Q placed on record TDS on interest on term loan has been made of Rs.53,02,142/- which suffices to interest payment of Rs.5,12,01,542/-. The remaining interest expense of term loan which works out to Rs.13,82,25,530/- (189527072 - 51301542) needs to be disallowed u/s.40a(ia) of the Act....."
2.1 The second ground was of excess claim of depreciation and read as under:
"Excess claim of depreciation:
In the statement of total income forming part of the return of income the assessee has claimed depreciation of Rs.4,78,885/- and has offered the net income for taxation. The depreciation has been claimed u/s.32 of the Act on the basis of depreciation table which also forms its part of the statement of total income. However, on perusal of the final accounts and schedules to the accounts, it it seen that schedule 6t of the balance sheet reveals that depreciation of Rs.2,88,369/- has been claimed in the expenses incurred during the year and included in the WIP. The assessee's WIP therefore requires to be reduced to the extent of depreciation of Rs.2,88,369/- claimed therein whereas the assessee has disallowed the depreciation of Rs.2,43,512/- instead of Rs.2,88,369/- in computation of income filed along with revised return of income. Therefore, the difference of Rs.44,857/- (Rs.2,88,369 - Rs.2,43,512) is required to be disallowed...."
2.2 The third ground was of interest earned by the petitioner from associated concern which was not offered to tax. The relevant portion of this ground read as under:
"As per the company's accounting policy, only expenses incidental to the project would be included in the inventory and as regards interest, only "interest on borrowings" is earmarked to be included in the inventory. Therefore, any interest receipt should not have project Page 3 of 14 HC-NIC Page 3 of 14 Created On Thu Dec 03 01:12:25 IST 2015 C/SCA/5440/2015 JUDGMENT cost and should therefore be offered as income on accrual basis.
It would not be out of place to point out that the income to be later on earned from the project would be income from business and would be thus covered u/s.28 of the Act whereas, interest income earned from surplus funds before implementation of the project would be charged as interest from other sources and would be covered u/s.56 of the Act. The entire interest income of Rs.1,52,44,044/- should have therefore been assessed to tax as against Rs.13,63,547/- offered by the assessee. An underassessment of Rs.1,38,60,497/- is, therefore, observed with regard to interest income earned during the year on accrual basis."
3. The Assessing Officer in the concluding portion of the said recorded reasons, noted as under:
"In view of the above facts, I have reasons to believe that the income of Rs.15,21,30,884/- (13,82,25,530 + 44,857 + 1,38,60,497) has escaped the assessment within the meaning of provisions of section 147 of the I.T.Act and hence notie u/s.148 of Income Tax Act is issued".
4. The petitioner raised objections under communication dated 01.07.2014 to the notice of reopening. Such objections, however, were rejected by the Assessing Officer by his order dated 20.08.2014. The petitioner has, therefore, filed this petition challenging the notice of reopening issued by the Assessing Officer.
5. Learned counsel for the petitioner drew our attention to the correspondence on record to contend that the notice for reopening has been issued only at the instance of the audit party. The Assessing Officer did not hold any independent belief that any Page 4 of 14 HC-NIC Page 4 of 14 Created On Thu Dec 03 01:12:25 IST 2015 C/SCA/5440/2015 JUDGMENT income chargeable to tax had escaped the assessment. He contended that the action of Assessing Officer in issuing such notice under the directives of the audit party was wholly without jurisdiction. Counsel relied on the decision of Division Bench of this Court in case of Adani Exports v. Deputy Commissioner of Income-Tax (Assessments) reported in (1999) 240 ITR 224 in which on the finding that notice of reopening was issued by the Assessing Officer at the instance of the audit party, the Court held that such notice was impermissible. Counsel pointed out that this view was reiterated in case of Commissioner of Income-tax, Ahmedabad v. Shilp Gravures Ltd. Reported in (2013) 40 Taxmann.com.309 (Gujarat). Counsel also relied on the decision of Division Bench of this Court in case of Damodar H.Shah v. Assistant Commissioner of Income-tax reported in (2000) 245 ITR 774 in which it is observed that the nature of power of reopening of assessment under section 147 is different from that of of the power under section 154 for rectifying any mistake which is apparent from the record.
6. Learned counsel Ms.Mauna Bhatt for the Department, however, opposed the petition contending that the Assessing Officer had formed his independent belief. Merely because certain issues which were omitted during the original scrutiny of assessment were brought to his notice by the audit party would not vitiate his decision. She relied on the decision of the Supreme Court in case of Commissioner Of Income Tax vs P.V.S. Beedies Pvt. Ltd. reported in 237 ITR Page 5 of 14 HC-NIC Page 5 of 14 Created On Thu Dec 03 01:12:25 IST 2015 C/SCA/5440/2015 JUDGMENT
13.
7. Having heard learned counsel for the parties and having perused the documents on record, we find that the law on the subject is sufficiently clear. It is by now well settled by series of judgments that exercise of issuing notice for reopening by the Assessing Officer has to be based on reasons for reopening to be recorded by him. Such reasons have to reflect his belief that income chargeable to tax has escaped assessment. As Assessing Officer he is exercising quasi-judicial functions. As an authority exercising such quasi-judicial function, his discretion cannot be governed by any outside or external agency, not even by a higher authority. In case of Adani Exports (supra), Division Bench of this Court, referring to the decision of the Supreme Court in case of Indian and Eastern Newspaper Society v. CIT reported in 119 ITR 996, observed as under:
"..... The ratio fully governs the present case and the record illuminates the failure of the AO to adhere to this principle while issuing notice under s. 148 in the present case.
It is true that satisfaction of the AO for the purpose of reopening is subjective in character and the scope of judicial review is limited. When the reasons recorded show a nexus between the formation of belief and the escapement of income, a further enquiry about the adequacy or sufficiency of the material to reach such belief is not open to be scrutinised. However, it is always open to question existence of such belief on the ground that what has been stated is not correct state of affairs existing on record. Undoubtedly, in the face of record, burden lies, and heavily lies, on the petitioner who challenges it. If the petitioner is able to demonstrate that in fact the AO did not have any reason to believe or did not hold such belief in good faith or the belief which is projected in papers is not belief held by him in fact, the exercise of Page 6 of 14 HC-NIC Page 6 of 14 Created On Thu Dec 03 01:12:25 IST 2015 C/SCA/5440/2015 JUDGMENT authority conferred on such person would be ultra vires the provisions of law and would be abuse of such authority. As the aforesaid decision of the Supreme Court indicates that though audit objection may serve as information, the basis of which the ITO can act, ultimate action must depend directly and solely on the formation of belief by the ITO on his own where such information passed on to him by the audit that income has escaped assessment. In the present case, by scrupulously analysing the audit objection in great detail, the AO has demonstrably shown to have held the belief prior to the issuance of notice as well as after the issuance of notice that the original assessment was not erroneous and so far as he was concerned, he did not believe at any time that income has escaped assessment on account of erroneous computation of benefit under s. 80HHC. He has been consistent in his submission of his report to the superior officers. The mere fact that as a subordinate officer he added the suggestion that if his view is not accepted, remedial actions may be taken cannot be said to be belief held by him. He has no authority to surrender or abdicate his function to his superiors, nor the superiors can arrogate to themselves such authority. It needs hardly to be stated that in such circumstances conclusion is irresistible that the belief that income has escaped assessment was not held at all by the officer having jurisdiction to issue notice and recording under the office note on 8th February, 1997 that he has reason to believe is a mere pretence to give validity to the exercise of power. In other words, it was a colourable exercise of jurisdiction by the AO by recording reasons for holding a belief which in fact demonstrably he did not held that income of assessee has escaped assessment due to erroneous computation of deduction under s. 80HHC, for the reasons stated by the audit. The reason is not far to seek. "
8. This view flowing from the judgment of the Supreme Court in case of Indian & Eastern Newspaper Society (supra) and elaborated by this Court in Adani Exports (supra) has been consistently followed by this Court.
9. We are not unmindul of the decision of the Supreme Court in case of P.V.S. Beedies Pvt. Ltd. (supra) where a distinction has been drawn in a case wherein it was held and observed as Page 7 of 14 HC-NIC Page 7 of 14 Created On Thu Dec 03 01:12:25 IST 2015 C/SCA/5440/2015 JUDGMENT under:
"We are of the view that both the Tribunal and the High Court were in error in holding that the information given by internal audit party could not be treated as information within the meaning of Section 147(b) of the Income Tax Act. The audit party has merely pointed out a fact which has been overlooked by the Income Tax Officer in the assessment. The fact that the recognition granted to this charitable trust had expired on 22-9-1992 was not noticed by the Income Tax Officer. This is not a case of information on a question of law. The dispute as to whether reopening is permissible after audit party expresses an opinion on a question of law is now being considered by a larger Bench of this Court. There can be no dispute that the audit party is entitled to point out a factual error or omission in the assessment. Reopening of the case on the basis of a factual error pointed out by the audit party is permissible under law. In view of that we hold that reopening of the case under Section 147(b) in the facts of this case was on the basis of factual information given by the internal audit party and was valid in law. The judgment under appeal is set aside to this extent. "
10. In view of such legal position, it will be necessary for us to examine in the present case whether reopening of assessment is ordered by the Assessing Officer on the basis of the belief that he found that the income chargeable to tax had escaped the assessment, or whether he acted solely upon the directives of the audit party.
11. It is undisputed that the entire issue arose upon scrutiny by the internal audit party. On 24.09.2013, the audit party wrote to the Assessing Officer in which following three issues were raised:
(1) disallowance under section 41-A of the Act, (2) excess claim of depreciation, and (3) interest earned from associated concern.Page 8 of 14
HC-NIC Page 8 of 14 Created On Thu Dec 03 01:12:25 IST 2015 C/SCA/5440/2015 JUDGMENT The audit party outlined its objections on these three counts.
12. In response to such communication, the Assessing Officer replied to the audit party on 03.12.2013 and contended in no uncertain terms giving detailed reasons that he did not agree to any of the audit objections cited in such communication dated 24.09.2013, except in case of excess claim of depreciation. With respect to this, he pointed out that the assessee has disallowed depreciation of Rs.2,43,512 instead of 2,88,369 in computation of income and the assessee has stated that by mistake it had disallowed the amount pertaining assessment year 2009-2010 instead of 2010- 2011. It was concluded on this issue that:
"on verification of the reply of the assessee and facts of the case, it is seen that the mistake is being apparent from the record and disallowance of depreciation should be made of Rs.2,88,369 instead of Rs.2,43,512. Therefore, such mistake may be rectified by passing order under section 154 of the I.T.Act".
12.1 In the concluding portion of the said communication, the Assessing Officer stated as under:
"In view of the above, the audit objection raised by the internal audit party on various issues is not acceptable, except the issue of excess claim of depreciation. Reply dated 12.11.2013 of the assessee along with enclosure is attached for kind perusal,,"
12.2 Despite such clear stand by the Assessing Officer, the audit party once again wrote on 14.2.2014 and stated as under: Page 9 of 14
HC-NIC Page 9 of 14 Created On Thu Dec 03 01:12:25 IST 2015 C/SCA/5440/2015 JUDGMENT "2. In this connection, the AO vide above referred letter dated 03.12.2013 has stated that looking to the facts of the case and reply of the assessee, on issue (I) a, b, c (non-deduction of the TDS), no further verification is required. In this regard, I am directed to state that the AO's reply is acceptable with regard to issue (1)(b) & (c) of this report. As regard the reply submitted in respect of issue (1) (a) regarding non-deduction of TDS from interest payment of Rs.18,95,27,072/- made to IFCI Ltd., the same is not acceptable due to the following reasons:
(i) IFCI Ltd. ceases to fall under the category provided in section 194A3(iii)(b) following its Repeal Act in 1993 and since then is a public limited company.
(ii) The A.O. has accepted the assessee company's submission which is relied on an opinion given by a Chartered Accountant vide letter dated 15.05.2007. The said opinion is relied on clause 5 & 6 of the IFCI Repeal Act 1993. However, from the said clause definite interpretation cannot be drawn that TDS was not required to be made from interest payments made to this company.
3. I am further directed to state that the A.O.'s report with regard to point No.(1)(b) & © of the report is accepted in view of details submitted & are hence treated as dropped. On issue (ii), AO has stated that the mistake in respect of excess depreciation allowed may be rectified by passing order u/s 154 of the I.T.Act. On issue (III) regarding interest earned from associate concern, the reply submitted in the A.O's report is not acceptable as the assessee has snot been able to prove that earning such interest was the company's normal business activity or the interest earned was incidental to the business activity carried out by the assessee company or was inextricably linked to the project.
4. I am, therefore, directed to request you to kindly direct the AO to take appropriate action and submit an action taken report on Page 10 of 14 HC-NIC Page 10 of 14 Created On Thu Dec 03 01:12:25 IST 2015 C/SCA/5440/2015 JUDGMENT finalisation of the proceedings, with supporting evidences through proper channel, i.e. forward the same along with comments of the Addl./Jt.CIT, Range-1, Ahmedabad and the administrative CIT as required under per Para IV (4) (viii) of Instruction No.3/2007, to this office for consideration of the objections to treated as settled/dropped or otherwise."
13. Learned counsel for the revenue pointed out from original records that in response to such letter of the audit party, the Assessing Officer had replied on 20.02.2014 (a copy of which is taken on record). Perusal of such letter shows that, in the first portion the Assessing Officer has recorded the stand of the audit party on different contentious issues. After reproducing the contents of the letter of the audit party dated 14.02.2014 at length, his response was confined to the following expression:
"In view of above, the internal audit party has not accepted the reply on the above-said issues, except the issue mentioned in (10(b) & (c"
He thereafter referring to the three remedies of rectification, reopening of assessment and revision, in the concluding portion of the said letter, stated as under:
"Considering the facts of the case, the most suitable remedial action, in my opinion, would be reopening of assessment u/s.147 of the IT Act. Therefore, necessary approval for the same may kindly be granted, if deemed fit."
14. Bare perusal of the correspondence reveals that the assessment was completed and, upon scrutiny, the internal audit party found certain errors. These errors were highlighted and pointed Page 11 of 14 HC-NIC Page 11 of 14 Created On Thu Dec 03 01:12:25 IST 2015 C/SCA/5440/2015 JUDGMENT out to the Assessing Officer for his consideration. The Assessing Officer in his letter dated 03.12.2013 in no uncertain terms wrote back to the audit party stating that he did not agree to most of the objections of the audit party. He agreed to a limited extent of the excess claim of depreciation which the assessee had pointed out was a mistaken claim and agreed for rectification. The Assessing Officer, therefore, believed that this was the only ground which merited consideration and that too by way of exercising the power of rectification. This was abundantly clear and quite undisputably emerges from his letter dated 03.12.2013. Despite the clear stand of the Assessing Officer, the audit party persisted with the issues. On 14.02.2014, the audit party did not accept the view of the Assessing Officer and, as noted above, directed the Assessing Officer to take appropriate action and submit an action taken report on finalization of the proceedings, with supporting evidences through proper channel. This was a clear directive to the Assessing Officer not only to initiate action but also to finalize the same and report finalization with supporting evidences. As if this much was not enough to hold that the Assessing Officer was being controlled by the audit party, his letter dated 20.02.2014 to the audit party left no possibility of any doubt. In such letter, he recorded the objection of the audit party at length and finally meekly stated that, in view of the above, the internal audit party has not accepted the reply on the said issues and ultimately proceeded to record that the most suitable remedial action in such case would be to reopen the assessment under section 147 of the Act Page 12 of 14 HC-NIC Page 12 of 14 Created On Thu Dec 03 01:12:25 IST 2015 C/SCA/5440/2015 JUDGMENT which is contrary to his earlier view where on a limited ground of depreciation he had advocated measures of rectification.
15. This is a clear case where reopening of the assessment is under the directives of the audit party. The Assessing Officer has not acted merely on the opinion supplied by the audit party. He held a firm belief that there was no possibility of any further scrutiny on the count that income chargeable to tax escaped assessment. He so stated to the audit party in writing. The audit party did not accept his stand and virtually directed him to act further. Even while so accepting the dictates of the audit party, the Assessing Officer did not record any of his independent reasons. His only reason was that his reply has not been accepted by the audit party. As held by the Supreme Court and this Court in a number of judgments in such a situation, reopening of assessment would simply not be permissible. The notice of reopening is clearly bad in law. The contention that the Assessing Officer himself had also agreed to an error in allowing the claim of depreciation and therefore on that count at least notice must be saved cannot be accepted. The Assessing Officer believed that there is possibility of correction by exercising the power of rectification. In fact, on this count, even the audit party agreed to the view of the Assessing Officer. If that be so, we simply fail to understand how the Assessing Officer later on could change his opinion and form a belief that the entire assessment requires reopening on this count. In fact, as noted, the assessee itself had Page 13 of 14 HC-NIC Page 13 of 14 Created On Thu Dec 03 01:12:25 IST 2015 C/SCA/5440/2015 JUDGMENT agreed to the apparent error which can be rectified.
16. For the reasons recorded, the impugned notice dated 28.03.2014 is quashed. Petition is disposed of accordingly.
Sd/-
(AKIL KURESHI, J.) Sd/-
(MOHINDER PAL, J.) KMGThilake) Page 14 of 14 HC-NIC Page 14 of 14 Created On Thu Dec 03 01:12:25 IST 2015