Income Tax Appellate Tribunal - Chennai
Sri Venkatalakshmi Spinners (P) Ltd., ... vs Assessee
IN THE INCOME-TAX APPELLATE TRIBUNAL
CHENNAI 'D' BENCH, CHENNAI.
Before Shri U.B.S. Bedi, J.M. & Shri N.S. Saini, A.M.
I.T.A. No. 337/Mds/2010
Assessment Year: 2004-05
Sri Venkatalakshmi Spinners (P) The Assistant Commissioner of
Ltd., Anthiyur, Pulankinar, Income Tax,
Udumalpet - 22. Salary Circle I, Coimbatore.
Vs.
[PAN:AACCS7183F]
(Appellant) (Respondent)
Assessee by : Shri T. Banusekar
Revenue by Shri K.E.B. Rengarajan,
:
Jr. Standing Counsel
ORDER
PER U.B.S. Bedi, J.M.
This appeal of the assessee is directed against the order passed by the ld. CIT(A) II, Coimbatore dated 14.12.2009 relevant to the assessment year 2004- 05, whereby the assessee challenged the order of the ld. CIT(A) mainly on the ground that the ld. CIT(A) has failed to appreciate that the order of the Assessing Officer is without jurisdiction, opposed to the principles of equity, justice and fair play and that apart, the ld. CIT(A) has failed to appreciate that the expenditure incurred towards modernization and replacement is allowable as deduction under section 37 to the extent the expenditure has not resulted in increase in the production capacity and if expenditure is to be treated as capital expenditure, depreciation is required to be allowed for this assessment year and the subsequent assessment years.
2. The assessee filed an application dated 27.05.2010 raising two additional grounds with the prayer for permission to file additional grounds of appeal and at 2 ITA No.337 No.337/Mds/ 337/Mds/1 /Mds/10 the time of hearing, the ld. Counsel for the assessee submitted that the ground being raised as additional grounds are legal grounds relatable to challenge regarding reopening of the assessee being bad in law and by relying upon various decisions including decision of National Thermal Power Co. Ltd. v. CIT 229 ITR 383 (SC), it was pleaded for admission of additional grounds. Whereas, such plea of the assessee was contested by the ld. DR, who pleaded that the assessee did not agitate this point either before the Assessing Officer or before the ld. CIT(A) and in the grounds raised before the Tribunal also, the assessee has not raised such ground and no cogent reason has been given for not raising this grounds earlier. Therefore, the prayer of the assessee should not be accepted.
3. We have heard both the sides, considered the material on record and find it as a matter of fact that the assessee did not raise any objection with regard to reopening of the assessment either before the Assessing Officer nor taken any ground in this regard before the ld. CIT(A) during first appeal proceedings and before us also, the assessee has raised no such ground in the memorandum of 2nd appeal and this issue was raised as additional grounds before us for the first time and assessee could not give any cogent reasons for not raising this issue before the lower authorities. But, since the challenge regarding reopening of the assessment is legal issue, therefore, in our considered view, it would meet the ends of justice if such request for admission of additional ground is allowed and these grounds are admitted for hearing, as such, while accepting the application of the assessee, we admit such legal grounds for adjudication. 3 ITA No.337
No.337/Mds/ 337/Mds/1 /Mds/10
4. The assessee counsel, at the threshold of the argument submitted that in this case return of income was processed under section 143(1) and there was no assessment having been framed or made under section 143(3), and moreover at that time, the issue in relation to expenditure incurred towards modernization and replacement of machinery was a revenue expenditure and not capital expenditure, which was not disturbed while processing the return and later on, initiation of reopening of the assessment by invoking the provisions as contained under section 147 was neither proper nor justified because no fresh evidence or material came before the Assessing Officer in as much as, all the material and details, on the issue on which reopening was done, were already there with the Assessing Officer having been filed along with return, so this is mere a change of opinion on the basis of which, reopening could not be done . Reliance in this regard was placed on CIT v. Kalvinator of India Ltd. [2002] 256 ITR 1 (Del)(FB), CIT v. Kelvinator of India Ltd. [2010] 320 ITR 561 (SC), ACIT v. Meenakshi Narayanan Investments Pvt. Ltd. in ITA No. 1507/Mds/2002, CIT v. Meenakshi Narayanan Investments Pvt. Ltd. 2007-TIOL-78-HC-MAD-IT, ACIT v. Prabhu Spg. Mills (P) Ltd. [2008] 2 DTR 77 (Chennai), Union of India and Others v. Kamalakshi Finance Corporation Ltd. 55 ELT 433 (SC), ACIT v Bengal Tiger Line (India) Pvt. Ltd. in ITA No. 2517/Mds/2006, ACIT v. Sri Vignesh Yarns Pvt. Ltd. in ITA No. 2232/Mds/2008, CIT v. Hindustan Textiles [2010] 36 DTR (SC) 131, CIT v. Sugavaneeshwara Spg Mills Ltd. [2009] 227 CTR (SC) 439, and CIT v. Bhojaraj Textile Mills Ltd. 2010-TIOL-22-SC-IT-LB. Further reliance was placed on Prashant S Joshi & Others v. ITO & Others 2010-TIOL-146-HC-MUM-IT, in the case of CIT v. Sri Karthikeya Spinning & Weaving Mills Ltd. 265 ITR 285 4 ITA No.337 No.337/Mds/ 337/Mds/1 /Mds/10 (Mad) and ITAT decision in ITA Nos. 1427 to 1429/Mds/2002 dated 28.02.2003, it was pleaded for holding the initiation of reassessment proceedings by resorting to provisions of section 147 to be bad in law. It was also submitted that while making reference to notice under section 148 to plead that firstly, the Assessing Officer has not recorded its belief that income has escaped assessment and secondly, all material facts and details were already filed with the Assessing Officer along with the return of income, so already completed proceedings should not be reopened. It was thus, pleaded for quashing the order of the Assessing Officer for initiating the reassessment proceedings.
5. The ld. DR strongly opposed the move of the assessee's counsel and pleaded that the year involved is 2004-05 and reassessment proceedings have been initiated vide notice dated 21.02.2008 served on the assessee on 29.02.2008, which period is within 4 years from the end of the assessment year involved and since processing u/s 143(1) cannot be treated as assessment, therefore, the plea of the assessee that it is change of opinion is not sustainable at all because, there was no assessment under section 143(3) having been made by the Assessing Officer in this case before initiating action u/s 147. So, how could he frame the opinion, which could be said to be change of opinion when assessment was reopened by initiating proceedings under section 147 and he placed reliance on the Hon'ble Supreme Court's decision in the case of ACIT vs. Rajesh Jhaveri Stock Brokers (P) Ltd. 291 ITR 500 (SC) and further submitted that such decision is being followed by the Hon'ble Madras High Court and other Benches of the Tribunal in Chennai. Therefore, the plea of the 5 ITA No.337 No.337/Mds/ 337/Mds/1 /Mds/10 assessee in this case is not legally correct, which should be dismissed and initiation of the assessment may be held to be valid.
6. The ld. Counsel for the assessee, in order to counter the submission of the ld. DR, has submitted that in this case, the ratio of the decision in the case of ACIT v. Rajesh Jhaveri Stock Brokers (P) Ltd. (supra) is not applicable and moreover there is a Hon'ble Bombay High Court's decision and Chennai Tribunal decisions which are in support of the plea of the assessee, therefore, it was pleaded for quashment of the order of the assessment.
7. We have heard both the sides, considered the material on record and relevant provisions of law as well as precedents relied upon by rival sides. It is undisputed fact that notice under section 148 was issued to the assessee on 21.02.2008 and served upon the assessee on 29.02.2008 and at the second page of the said notice following stipulation is there:
"Reasons: Deduction of Rs.47,32,587/- claimed on account of replacements of costs of machinery is to be disallowed as the same is not an eligible deduction."
7.1 It is also an undisputed fact that return in this case has been processed by the Assessing Officer under section 143(1) on 06.07.2005, when the same came to be filed on 01.11.2004, admitting loss of Rs.17,38,842/- under normal provisions of Act and book profit of Rs.21,10,469/- under section 115JB of the Act.
7.2 It is found from the record that after processing of the return no assessment order u/s 143(3) was ever passed till notice under section 148 was issued/served upon the assessee for the year under consideration. It is also not in the dispute that the A.O. recorded reasons before issuing the notice u/s148. 6 ITA No.337
No.337/Mds/ 337/Mds/1 /Mds/10 The Hon'ble Supreme Court, while interpreting the provisions of section 147 in force with effect from April 1, 1989, has opined in the case of Rajesh Jhaveri Stock Brokers P. Ltd.(supra) that present section 147 confers jurisdiction on formation of belief within subjective satisfaction of the Assessing Officer where only return has been processed under section 143(1) and relevant portion of the judgment reads as under:
"The scope and effect of section 147 as substituted with effect from April1, 1989 as also sections 148 and 152 are substantially different from the provisions as they stood prior to such substitution. Under the old provisions of section 147, separate clause (a) and (b) laid down the circumstances under which income escaping assessment for the past assessment years could be assessed or reassessed. To confer jurisdiction under section 147(a) two conditions were required to be satisfied: firstly the Assessing Officer must have reason to believe that income, profits or gains chargeable to income tax have escaped assessment, and secondly he must also have reason to believe that such escapement has occurred by reason of either omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for his assessment of that year. Both these conditions were conditions precedent to be satisfied before the Assessing Officer could have jurisdiction to issue notice under section 148 read with section 147(a). But under the substituted section 147 existence of only the first condition suffices. In other words if the Assessing Officer for whatever reason has reason to believe that income has escaped assessment it confers jurisdiction to reopen the assessment. It is, however, to be noted that both the conditions must be fulfilled if the case fails within the ambit of the proviso to section 147. The case at hand is covered by the main provision and not the proviso.
So long as the ingredients of section 147 are fulfilled, the Assessing Officer is free to initiate proceeding under section 147 and failure to take steps under section 143(3) will not render the Assessing Officer powerless to initiate reassessment proceedings even when intimation under section 143(1) had been issued.
The inevitable conclusion is that the High Court has wrongly applied Adani's case [1999] 240 ITR 224 (Guj) which has no 7 ITA No.337 No.337/Mds/ 337/Mds/1 /Mds/10 application to the case on the facts in view of the conceptual difference between section 143(1) and section 143(3) of the Act."
7.3 In the case of CIT v. Ravindran Prabhakar reported in (2010) 326 ITR 363(Mad) decided on 11-01-2010, while following Hon'ble Supreme Court decision in the case of ACIT v. Rajesh Jhaveri Stock Brokers P. Ltd. (supra) has taken similar view and head notes are as under:
"Reassessment - original return accepted under section 143(1) - consideration of material filed in response to notices under sections 143(2) and 142(1) in reassessment proceedings - not a case of change of opinion - reassessment proceedings cannot be set aside - Income-tax Act, 1961, ss. 142, 143, 147, 148."
"....... In the absence of any entitlement for the Assessing Officer to form any opinion at the stage when the proceedings were pending under section 143(1), the Tribunal is not right in holding that there was a change of opinion. To support the above, we may refer to the following finding of the Apex Court in Asst. CIT v. Rajesh Jhaveri Stock Brokers P. Ltd. reported in [2007] 291 ITR 500 (SC)(page
509):
"In the scheme of things, as noted above, the intimation under section 143(1)(a) cannot be treated to be an order of assessment. The distinction is also well brought out by the statutory provisions as they stood at different points of time. Under section 143(1)(a), as it stood prior to April 1, 1989, the Assessing Officer had to pass an assessment order if he decided to accept the return, but under the amended provision, the requirement of passing of an assessment order has been dispensed with and instead an intimation is required to be sent. Various circulars sent by the Central Board of Direct Taxes spell out the intent of the Legislature, i.e., to minimize the Departmental work to scrutinize each and every return and to concentrate on selective scrutiny of returns, These aspects were highlighted by one of us (D.K. Jain J.) in Apogee International Ltd. Union of India [1996] 220 ITR 248 (Delhi)). It may be noted above that under the first proviso to the newly substituted section 143(1), with effect from June 1, 1999, except as provided in the provision itself, the acknowledgement of the return shall be deemed to be an intimation under section 143(1) where (a) either no sum is payable by the assessee, or (b) no refund is due to him. It is significant that the acknowledgement is not done by any Assessing Officer, but mostly by ministerial staff. Can it be said that any 'assessment' is done by them? The reply is an emphatic 'no'. The intimation under section 143(1)(a) was deemed to be a notice of demand under section 156, for the apparent purpose of making machinery provisions relating to recovery of tax applicable. By such application only recovery indicated to be payable in the intimation became permissible. And nothing more can be inferred from the deeming provision. Therefore, 8 ITA No.337 No.337/Mds/ 337/Mds/1 /Mds/10 there being no assessment under section 143(1)(a), the question of change of opinion, as contended, does not arise."
In view of the above, the orders of the Tribunal setting aside the orders of reassessment passed by the Assessing Officer only on the ground that there was a change of opinion cannot be sustained. Accordingly, the orders questioned in all these appeals are set aside. As there was no consideration on the merits and as already pointed out, all the appeals are disposed of only on the ground of change of opinion, we will have to necessarily remit the matter to the Tribunal for fresh consideration on the merits of the case and without reference to the issue of change of opinion. Accordingly, all the appeals are allowed, the substantial questions of law are answered in favour of the Revenue and against the assessee. No costs."
7.4 The ITAT Chennai 'B' Bench - Special Bench in the case of ACIT/DCIT v. Mahindra Holidays and Resorts (India) Ltd. & others [2010] 3 ITR (Trib) 600 (Chennai)[SB] has held as under:
"Held, (i) that since admittedly the assessments for the assessment years 1999-2000 to 2001-02 were completed under section 143(1) it could not be said that a definite opinion had been expressed by the Assessing Officer. As a matter of fact, considering the wide scope given in Explanation 2 to section 147, the Assessing Officer could be said to be of the view that income chargeable to tax had been under-assessed. The tangible material available with the Assessing Officer was that the assessee had received certain subscription from customers only a portion of which had been declared as income. Therefore, it could be said that the Assessing Officer had reason to believe about the escapement of income. The fact that the material was available in an earlier assessment year 1997-98, on the basis of which a view had been taken, was not relevant for the years in question. Therefore, the reopening of the assessments for the assessment years 1999-2000 to 2001-02 was valid."
7.5 Similarly in the case of WCI (Madras) (P) Ltd. V. ACIT (2010) 324ITR181 (Mad) it is held as under
"Assessment - intimation under section 143(1) - cannot be treated as assessment order - Income-Tax Act, 1961, s. 143(1).
Reassessment - non-disclosure of material facts - finding that income escaped assessment - plea of limitation of four years to be rejected - Income-Tax Act, 1961."
7.6 Therefore, in view of the ratio of aforesaid decisions, of the Hon'ble Apex and that of jurisdictional High Court as well as of Chennai special bench, and in 9 ITA No.337 No.337/Mds/ 337/Mds/1 /Mds/10 view of the facts and circumstances of the case, it can be held that in the absence of assessment having been made in this case earlier, the Assessing Officer came to subjective satisfaction, as indicated in the reasons recorded followed by notice under section 148,so, the contention of the assessee about Assessing Officer having no jurisdiction to consider the matter or to initiate reassessment proceedings, once the proceedings are concluded, is not valid. As laid down by the Hon'ble Supreme Court, the condition precedent is that the Assessing Officer has to come to the conclusion that taxable amount has escaped assessment. In other words, if the Assessing Officer has reasons to believe that certain income assessable to tax has escaped assessment, it confers jurisdiction to initiate the assessment proceedings and since the case of the assessee does not fall within the ambit of proviso to section 147, therefore, it cannot be said that the contention of the ld. Counsel for the assessee that the Assessing Officer has no jurisdiction to reopen the assessment is justified or proper. As the assessee has claimed certain expenditure as a revenue deduction on account of replacements of costs of machinery, which is not eligible deduction under relevant provisions, therefore, the Assessing Officer has rightly proceeded to reopen the assessment and his action being legally and factually correct is liable to be upheld.
7.7 So far as the decision in the case of CIT v. (1) Kelvinator of India Ltd. & (2) Eicher Ltd. [2010] 320 ITR 561 (SC), heavily relied upon by the ld. Counsel for the assessee, is concerned, it is found that it relates to two appeals before the Hon'ble Supreme Court and the first case is that of CIT v. Kelvinator of India Ltd. (C.A Nos. 2009-2011 of 2003), which has arisen from the Full Bench judgment of 10 ITA No.337 No.337/Mds/ 337/Mds/1 /Mds/10 Hon'ble Delhi High Court as reported in 256 ITR 1 (Delhi [FB] and if that judgment is looked into, it makes it clear that when a regular order of assessment is passed in terms of the sub-section (3) of section 143 a presumption can be raised that such an order has been passed on application of mind and the assessment year involved in that case is 1987-88 and order of assessment under section 143(3) came to be passed on 12.11.1989 and subsequently notice under section 148 came to be issued. Whereas, in the second case is that of CIT v. Eicher Ltd. the civil appeal Nos. 2520 of 2008 too, which is from the judgment and order dated 22.05.2007 of the Delhi High Court in I.T.A. No. 309 of 2006 as reported in CIT v. Eicher Ltd. [2007] 294 ITR 310 (Delhi) where assessment year involved was 1993-94, assessment was earlier completed under section 143(3) and subsequently notice under section 148 came to be issued. So, the decision of Hon'ble Supreme Court is distinguishable on facts and material as considered and decided in as much as these cases do not involve reassessment after processing is done under section 143(1), which is held to be not assessment as per Hon'ble Supreme Court's decision in the case of Rajesh Jhaveri Stock Brokers P. Ltd. (supra). So this decision and other related decision, which followed this decision has no application in this case. 7.8. Therefore, keeping in view of facts, circumstances and material on record in the light of precedents relied upon and ratio of decision discussed above, it is held that the Assessing Officer could validly initiate reassessment proceedings by invoking provisions of section 147. The view taken herein is fortified by the latest jurisdictional High Court decision in the case of M/s. Kone Elevator India Pvt. Ltd. v. ITO in TC(A) No. 41 of 2008 dated 08.03.2011, in which, while 11 ITA No.337 No.337/Mds/ 337/Mds/1 /Mds/10 following the Hon'ble Supreme Court's decision in the case of Rajesh Jhaveri Stock Brokers P. Ltd. (supra), it has been clearly held that reassessment could be initiated, where return has been processed under section 143(1) and the Assessing Officer has reasons to believe that income has escaped assessment. 7.9 Since it is a fit case where reassessment proceedings could be validly initiated, so, the action of assessing officer in initiating such proceedings and making assessment u/s 143(3) read with sec 147 is found and held to be proper and justified. As such, the plea of the assessee in this regard as raised in the additional grounds, which is found to be untenable, is rejected and additional grounds are thus dismissed.
8. So far as the case on merit is concerned, the ld. Counsel for the assessee submitted that the issue in relation to replacement of machinery is squarely covered as has been dealt with by the Hon'ble Supreme Court in various decision and latest decision on this point comes from the decision of Hon'ble Supreme Court by Three Judges Bench in the case of CIT v. M/s. Narasimha Mills Ltd. in C.A. No. 4893 of 2010 dated 05.07.2010 in which the earlier decisions in the case of CIT v. Saravana Spinning Mills (P) Ltd. [2007] 211 CTR (SC) 281 and CIT vs. Ramaraju Surgical Cotton Mills 294 ITR 328, have been followed, wherein direction has been given that matter should go back to the ld. CIT(A) for considering availability of deduction under section 37(1), thus, it was pleaded that the matter should go back to the ld. CIT(A) in case appeal of the assessee on legal ground is not to be accepted with the direction to follow the Hon'ble Supreme Court's decisions taken in this regard and to this move of the ld. Counsel for the assessee, the ld. DR did not object and rather conceded that 12 ITA No.337 No.337/Mds/ 337/Mds/1 /Mds/10 the matter can go back to the file of the ld. CIT(A) for re-consideration as per the directions of the Hon'ble Supreme Court.
9. Considering the entirety of facts, circumstances and material on record on merits of addition made by the Assessing Officer and confirmed by the ld. CIT(A), we find that the Hon'ble Supreme Court in the case of CIT v. M/s. Narasimha Mills Ltd. (supra) has passed following judgment as under:
"The appeal above-mentioned being called on for hearing before this Court on the 5th Day of July, 2010, UPON perusing the record and hearing counsel for the parties herein, THIS COURT DOTH, Inter-alia, PASS the following ORDER:
"This matter is squarely covered by the judgments of this Court in the cases of Commissioner of Income Tax vs. Saravana Spinning Mills Private Limited, reported in [2007] 293 I.T.R. 201 and Commissioner of Income Tax vs. Ramaraju Surgical Cotton Mills reported in [2007]294 ITR 328.
Accordingly, the civil appeal filed by the Department is disposed of in terms of the judgements of this Court in Saravana Spinning Mills Private Limited [supra] and Ramaraju Surgical Cotton Mills [supra] with no order as to costs."
AND THIS COURT DOTH FURTHER ORDER that this ORDER be punctually observed and carried into execution by all concerned." 9.1 In the case of CIT v. Ramaraju Surgical Cotton Mills (supra), the head- notes, etc. are as under:
"Capital or revenue expenditure - replacement of assets without increase in production capacity - whether amounts to revenue expenditure - absence of details - old machine replaced by new machine
- whether constitutes advantage of an enduring nature - Supreme Court - matters remanded to Commissioner (Appeals) - Income-Tax Act, 1961, s.
37. From the decision of the High Court in CIT v. Janakiram Mills Ltd. [2005] 275 ITR 403 appeals were taken to the Supreme Court and it was contended by the assessee that replacement of assets without increasing the production capacity would amount to revenue expenditure and by the Department that expenditure for replacing an old machine by a new machine constituted an advantage of an enduring nature and would be capital in nature. Without expressing any opinion on the merits, the Supreme Court remanded the matters to 13 ITA No.337 No.337/Mds/ 337/Mds/1 /Mds/10 the Commissioner (Appeals) to decide them uninfluenced by the decision of the Madras High Court.
Decision of the Madras High Court in CIT v. Janakiram Mills Ltd. [2005] 275 ITR 403 set aside and matter remanded."
10. Following the above finding in the authoritative decisions of the Hon'ble Supreme Court, we set aside the order of the ld. CIT(A) and restore the matter back on his file with the direction to re-decide the issue on merits raised in the original grounds afresh after giving due opportunity to the assessee as well as to the Assessing Officer in the light of Hon'ble Supreme Court's decision. We hold and direct accordingly.
11. As a result, appeal of the assessee gets partly accepted for statistical purposes.
Order pronounced on 22.07.2011.
Sd/- Sd/- (N.S. SAINI) (U.B.S. BEDI) ACCOUNTANT MEMBER JUDICIAL MEMBER Vm/- Dated : 22.07.2011. Copy To: The assessee//A.O./CIT(A)/CIT/D.R.