Gujarat High Court
Gujarat Carbon & Industries Ltd vs Asstt.Commissioner Of Income Tax on 12 February, 2014
Author: Akil Kureshi
Bench: Akil Kureshi, Sonia Gokani
C/SCA/5073/2005 JUDGMENT
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
SPECIAL CIVIL APPLICATION NO. 5073 of 2005
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR.JUSTICE AKIL KURESHI
and
HONOURABLE MS JUSTICE SONIA GOKANI
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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, 1950 or any
order made thereunder ?
5 Whether it is to be circulated to the civil judge ?
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GUJARAT CARBON & INDUSTRIES LTD.....Petitioner(s)
Versus
ASSTT.COMMISSIONER OF INCOME TAX....Respondent(s)
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Appearance:
MR MANISH J SHAH, ADVOCATE for the Petitioner(s) No. 1
MR KM PARIKH, ADVOCATE for the Respondent(s) No. 1
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CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI
and
HONOURABLE MS JUSTICE SONIA GOKANI
Page 1 of 9
C/SCA/5073/2005 JUDGMENT
Date : 12/02/2014
ORAL JUDGMENT
(PER : HONOURABLE MR.JUSTICE AKIL KURESHI)
1. The petitioner has challenged notice dated 25.7.2003 issued by the respondent Assessing Officer seeking to reopen the assessment of the petitioner for the assessment year 19971998.
2. The petitioner is a company registered under the Companies Act. For the assessment year 19971998, the petitioner filed its return of income. Such return was taken in scrutiny. The Assessing Officer framed scrutiny assessment under section 143(3) of the Income Tax Act, 1961 ("the Act" for short) on 27.3.2000. Beyond a period of four years from the end of relevant assessment year, the impugned notice came to be issued on 25.7.2003.
3. At the request of the petitioner, the Assessing Officer supplied the reasons recorded for issuing such notice. Such reasons read as under :
"In this case net profit as per account was Rs.5.5 crore. The said net profit arose only on account of profit on sale of assets shown in schedule 8 of the balance sheet to an extent of Rs.7.51 crores. However, no taxes were paid even under section 115JA on account of noting in schedule 12(3)(d) of the notes to the account, which stated that arrears of depreciation were to an extent of Rs. 6.25 crore.
2. It is also noticed that in schedule 12(3) of the notes to the account, the auditors have noted that Page 2 of 9 C/SCA/5073/2005 JUDGMENT During the year Carbon Black Unit of the Company has been sold and transferred to M/s. Philip Carbon Blank Ltd. (PCBL). The profit on sale of asset including the balance lying in revaluation reserve account in respect of Carbon Black Division after setting off losses of MEK and Foods Division as on 30.091993 is credited to profit and loss account.
The above accounting treatment shows that profit on sale of assets of Rs. 7.51 crore and taken to profit and loss account is only a netted figure after adjustment of brought forward losses of MEK and Foods Division as on 30.09.1993. What should have been taken to profit and loss account is the gross profit on sale of assets without such profit being reduced by losses of the other two units upto 30.9.1993.
3. It is also noticed that no disallowance u/s. 32A(5) in respect of investment allowance earlier granted to the assessee pertaining to its Caron Black Unit now sold is made.
4. It is also noted that in the agreement for sale dated 27.5.1996, the assessee company was to transfer raw material, work in progress, etc. of the business of book value (para 5(ii) of the agreement). Similarly the assessee was asked to transfer the packed finished goods at market rate (Para.5(iii) of the agreement. But from the assessment order, it is seen that finished goods of Rs. 1,04,22,912/ were transferred to PCBL by the assessee at book value. This is in violation of agreement stipulating transfer of finished goods at market rate."
4. The petitioner raised objections to the proceedings of reopening under a communication dated 7.10.2004. The Assessing Officer however, rejected such objection on Page 3 of 9 C/SCA/5073/2005 JUDGMENT 3.2.2005. Hence this petition.
5. Drawing our attention to the reasons recorded by the Assessing Officer in issuing notice for reopening, counsel for the petitioner contended that :
1) there was no new material available with the Assessing Officer to reopen the assessment which was previously framed after scrutiny.
2) there was no allegation in the reasons recorded that the income chargeable to tax had escaped assessment for the failure of the petitioner to disclose truly and fully all material facts.
3) even otherwise, drawing our attention to the material on record, it was contended that there was in fact no failure on part of the petitioner to disclose true and full facts at the time of scrutiny assessment.
5.1) In support of his contentions, counsel relied on the decision of this Court in case of Sadbhav Engineering Ltd. v. Deputy Commissioner of Incometax reported in (2011) 333 ITR 483(Guj) in which finding that there was no failure on part of the assessee to disclose fully and truly all material facts necessary for assessment, the Court quashed the notice for reopening.
6. On the other hand, learned counsel Shri Parikh for the department opposed the petition contending that the petitioner had transferred only one of the units but adjusted the brought forward loss of other units against Page 4 of 9 C/SCA/5073/2005 JUDGMENT the sale consideration of the unit sold. He however, submitted that mere mentioning of the method of accounting in the note appended by the auditor, would not satisfy the requirement of full and true disclosure particularly, seen in the background of explanation (1) of section 147 of the Act.
7. From the reasons recorded by the Assessing Officer, we notice that he had referred to three separate grounds on which, according to him, reopening of the assessment was required to be done.
7.1) First ground was regarding the profit on sale of assets of the petitioner company from which the petitioner received Rs. 7.51 crores. However, the petitioner set off loss of MEK and Foods Division against such profit and the remainder was credited to Profit and Loss account. According to the Assessing Officer, entire amount of Rs. 7.51 crores should have been taken to Profit and Loss account without netting the said figure after adjustment of the brought forwarded the loss of MEK and Foods Division.
7.2 The second reason pertained to disallowance under section 32A of the Act of the investment allowance earlier granted to the assessee with respect to Carbon Black unit which was sold. It was noted that no such disallowance was made though required.
7.3) The third ground was that as per the agreement to sale dated 27.5.1996, the assessee company was required Page 5 of 9 C/SCA/5073/2005 JUDGMENT to transfer the packed finished goods at market value. From the assessment order, however, it was seen that such goods were transferred at book value. This in the opinion of the Assessing Officer was in violation of the agreement stipulated for transfer of finished goods on market value.
8. From the reasons recorded, it can be immediately seen that the second and the third grounds relied upon by the Assessing Officer simply would not permit him to reopen the assessment that too after four years of end of relevant assessment year. The second ground itself is based on inaction on part of the Assessing Officer in the original assessment in not disallowing the investment allowance under section 32A(4) of the Act which was earlier granted to the assessee pertaining to its unit which was now sold. Whatever be the validity of such objection, it emanates from inaction on part of the Assessing Officer that it cannot be and nor is it attributed to failure on part of the petitioner to disclose true and full facts.
9. The ground no.3 not only emerges from the face of the record, is otherwise also not valid. The petitioner agreed to sale a certain unit. In the agreement parties decided to transfer the finished goods at market value. Eventually, however, it was found that along with the plant and machinery, the finished goods were also transferred on book value and not at market value. Such deviation from the agreement may either be by mutual consent, explicit or implied, or may even be in breach of terms of the agreement. In any case, when the admitted fact is that the assessee charged and received only the book value of its Page 6 of 9 C/SCA/5073/2005 JUDGMENT finished product, there was no reason for the Assessing Officer to tax the amount which the petitioner never received. There was simply no escapement of income chargeable to tax in this case.
10. This brings us to the more contested issue of reopening the assessment. Ground (1) pertains to sale of one of the unit of the petitioner company at Rs. 7.51 crores. According to the Assessing Officer, this entire sale proceeding should have been credited to Profit and Loss account. The petitioner instead adjusted the loss of MEK and Foods Division and only net amount was transferred to Profit and Loss account.
11. We are not concerned with sufficiency of the reasons recorded by the Assessing Officer. Whether the Assessing Officer's contention that due to such treatment given by the petitioner, income chargeable to tax had escaped assessment is true or not, is not our query. For the purpose of this petition, we are also prepared to proceed on the basis that the Assessing Officer had reason to believe that income chargeable to tax had escaped assessment. However, when the notice for reopening had been issued beyond a period of four years from the end of relevant assessment year, the additional requirement that such escapement of income was for the reason of failure of the assessee to disclose truly and fully all material facts necessary for assessment, must also be satisfied. In that context we may recall that the assessee's account contained schedule12(3) which were notes of accounts submitted by the auditor. Clauses(c) and (d) thereof read as Page 7 of 9 C/SCA/5073/2005 JUDGMENT under :
"(c) During the year, Carbon Black Unit of the Company has been sold and transferred to the M/s. Philips Carbon Black Limited (PCBL). The profit on sale of assets including the balance lying in Revaluation Reserve account in respect of Carbon and Food Division after setting off losses of MEK and Food Division as on 30.09.1993 is credited to the profit and loss account. The balance amount of Rs. 75.67 lakhs recoverable from PCBL included in Loans & Advances account is subject to confirmation/adjustment, if any. The accounts are subject to adjustment on final outcome of value of furniture and fixture transferred to PCBL.
(d) The arrears of depreciation calculated under section 205 of the Companies Act 1956 will however, have to be first set off against future profit of the Company and only balance profit will be available for distribution of dividend.
Such arrears of depreciation is Rs.625.10 lacs.
Sales of Rs.3363.06 lakhs is net of Discount Rs.162.43 lakhs allowed to customers (Previous year Rs.202.14 lakhs) and inclusive of Rs. 104.23 lakhs being the stock of Carbon Black transferred to Phillips Carbon Black Limited."
12. From such notes, it can clearly be seen that the reason why the assessee did not credit the entire sale consideration of Rs. 7.51 crores to the Profit and Loss account was explained. Explanation whether valid in law is not important at this stage. What is important is that the reason for such reduced amount being credited to Profit and Loss account was eloquently and elaborately stated in the notes. In the return filed by the assessee itself, thus Page 8 of 9 C/SCA/5073/2005 JUDGMENT there was clear explanation why and on what basis the assessee adjusted the loss of MEK and Foods Division against the sale proceeds of Carbon Black unit before crediting remainder to the Profit and Loss account. There was thus no failure on part of the assessee to disclose truly and fully all material facts. Quite apart from case of the assessee, thus not falling within explanation(1) of section 147, even in the reasons recorded, there was no suggestion that the income chargeable to tax had escaped assessment for the failure of the assessee to disclose truly and fully all material facts. We are prepared to concede for the purpose of this petition with contention of the counsel for the Revenue that recitation of such words in the reasons recorded or failure to do so by itself would not be crucial and what is to be judged is whether the reasons contained such averments and allegations. In our reading of the reasons, even such requirement is not satisfied. There was simply no hint in the reasons recorded by the Assessing Officer that there was failure on part o the petitioner in disclosing true and full facts. Independently, also we have found that full facts were disclosed.
13. In the result, impugned notice dated 25.7.2003 is quashed. Petition is disposed of. Rule made absolute.
(AKIL KURESHI, J.) (MS SONIA GOKANI, J.) raghu Page 9 of 9