Madras High Court
Polaris Financial Technology Limited vs The Assistant Commissioner Of ... on 29 August, 2022
Author: R. Mahadevan
Bench: R. Mahadevan, Mohammed Shaffiq
W.A.No.461 of 2020
IN THE HIGH COURT OF JUDICATURE AT MADRAS
Dated : 29.08.2022
CORAM
THE HONOURABLE MR. JUSTICE R. MAHADEVAN
AND
THE HONOURABLE MR. JUSTICE MOHAMMED SHAFFIQ
W.A. No.461 of 2020
Polaris Financial Technology Limited,
now known as Virtusa Consulting Services Private Limited,
Represented by its Chief Financial Officer,
34, IT Highway, Navalur,
Chennai-603 103. ... Appellant
Versus
1.The Assistant Commissioner of Income-tax,
Corporate Circle 5-2,
4th Floor Aayakaar Bhavan,
121, Mahatma Gandhi Road,
Nungambakkam, Chennai-600 034.
2.The Deputy Commissioner of Income Tax,
Corporate Circle 5-2,
4th Floor Aayakaar Bhavan,
121, Mahatma Gandhi Road,
Nungambakkam,
Chennai-600 034. ... Respondents
PRAYER : Writ Appeal filed under Clause 15 of the Letters Patent
Appeal against the order passed by this Court dated 13.03.2020 in
W.P.No.31722 of 2017.
For Appellant : Mr.Srinath Sridevan
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W.A.No.461 of 2020
For Respondents : Mr.Prabhu Mukunth Arunkumar
(Standing Counsel)
JUDGMENT
(Judgment of the Court was made by MOHAMMED SHAFFIQ, J.) The present writ appeal is filed against the order in W.P.No.31722 of 2017 rejecting / dismissing the challenge to the proceedings under Sections 147 r/w.148 of the Income Tax Act, 1961 as bad for want of jurisdiction.
2. Brief Facts:
The appellant is a public limited company and engaged in the business of Information Technology and Software Development. The appellant had engaged the services of a large number of software engineers for carrying out coding of software. The appellant filed its return for the Assessment Year 2012-13 wherein, it had claimed deduction under Section 80 JJAA under Chapter VI – A of the Income Tax Act, 1961, in respect of Rs.17,93,76,639/-, which represented additional wages paid to the software engineers who were understood and treated as ''workmen'' by the appellant for the purpose of claiming the benefits under Section 80 JJAA of the Income Tax Act, 1961.
3. The appellant's return was taken up for scrutiny and notice 2/18 https://www.mhc.tn.gov.in/judis W.A.No.461 of 2020 under Section 142 of the Income Tax Act, 1961 was issued on 01.01.2016. The 2nd respondent raised a query as to why a large deduction has been claimed under Chapter VI-A of the Income Tax Act. The appellant submitted a detailed reply to the said notice on 18.02.2016, wherein, reference was made to the provisions of Section 80 JJAA and submitted that the deduction under Section 80JJAA of the said Act is made only upon satisfying / complying with the conditions set out therein. The appellant stated that he had paid additional wages to the extent of Rs.59.79 Crores to new regular workmen employed during the year which has been debited in the Profit and Loss Account under the Head ''Salaries and Wages'' and claimed deduction at 30% of the said sum in terms of Section 80 JJAA. It was also submitted that the above sums represent additional wages paid to employees who in the view of the appellant would qualify as ''workmen'' under the Industrial Disputes Act and are not persons engaged in managerial or administrative capacity. The appellant also made it clear that they were engaged in the development and sale of computer software which would constitute an ''industrial undertaking'' engaged in the business of manufacture of sale of article or thing. The appellant also claimed an opportunity of being 3/18 https://www.mhc.tn.gov.in/judis W.A.No.461 of 2020 heard, in the event the assessing authority did not agree with the explanation offered. Thereafter, the appellant had vide its communication dated 03.03.2016, addressed to the 2nd respondent enclosed the details of computation of deduction under Section 80JJAA. The annexure to the said letter contained the list of employees, their designation and also indicated the nature of work viz, whether managerial or administrative or supervisory.
4. The 2nd respondent proceeded to frame an assessment under Section 143(3) r/w, Section 92 CA(3) of the Income Tax Act, 1961. A reading of the above order would suggest that while dealing with the other issues, the claim of deduction under Section 80JJAA with reference to which queries were raised and responded to by the appellant has not been dealt with (expressly) in the said order of assessment.
5. Whileso, the 2nd respondent issued a notice under Section 148 of the Income Tax Act, stating that the 2nd respondent had reasons to believe that the income chargeable to tax for the Assessment Year 2012-13 has escaped assessment within the meaning of Section 147 of the Income 4/18 https://www.mhc.tn.gov.in/judis W.A.No.461 of 2020 Tax Act, 1961. The appellant vide its letter dated 10.04.2017 submitted in response that the original return of income be treated as compliance to the notice issued under Section 148 of the Income Tax Act, 1961, while proceeding to draw the attention of the 2nd respondent to the decision of the Hon'ble Supreme Court in G.K.N Driveshafts and requested for providing the reasons for invoking the power of reassessment. The 2nd respondent vide communication dated 13.10.2017, set out the reasons for reopening the assessment under Section 147 of the Income Tax Act, 1961 for the Assessment Year 2012-13, wherein, it was stated as under:
''The assessee has claimed deduction u/s.80JJAA amounting to Rs.17,93,76,639/-. It was noticed that the assessee had treated many persons as a workmen, who were working in managerial or administrative capacity such as Senior Project Lead, Senior consultant, etc. As these employees are not regular ''workmen'', as contemplated in the Industrial Dispute Act (hereinafter read as I.D.Act), 1947, the payment made do not qualify for the deduction u/s.80JJAA of the I.T.Act. Further, the assessee failed to substantiate whether the said employees were actually receiving wages from the company less than Rs.6500 per month. As the said conditions (iii) &(iv) of the Section 2(s) of I.D.Act are not 5/18 https://www.mhc.tn.gov.in/judis W.A.No.461 of 2020 satisfied, the said payments do not qualify for deduction u/s.80JJAA of the I.T.Act.
The intention of the legislature as per the finance Act, 2013 was to provide deduction on the wages paid to blue collar workers employed in industrial undertakings & not to white collar employees like the employees of the assessee company. Therefore, the payments made as wages to such employees who do not come under the purview of I.D.Act are also eligible for deduction u/s.80JJAA of the I.T.Act. Hence, this amount of Rs.17,93,76,639/- need to be examined/disallowed in this year, i.e.A.Y.2012-13.
Hence, I have reason to believe that income escaped from the assessment for A.Y.2012-13 within the meaning of Sec.147 of I.T.Act, 1961.''
6. The appellant submitted its reply questioning / challenging the assumption of jurisdiction under Section 147 r/w.148 of the Income Tax Act, inter-alia on the following grounds:
a) Section 147 is premised on the assessing authority having ''reasons to believe'' that income has escaped assessment and such power cannot be exercised to initiate proceedings of reassessment on mere change of opinion.
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b) That the issue of the claim of deduction under Section 80JJAA was raised while issuing the notice under Section 142(1). The appellant was asked to explain the reasons for higher deduction claimed under Section 80JJAA. The assessee had submitted detailed explanation and also submitted computation which included the designation and wages paid to the regular workmen, thus, the assumption of jurisdiction in the absence of new or tangible material on the very issue raised already is impermissible.
c) Reference was also made to the CBDT circular explaining the scope of 'reason to believe' while also making a reference to judicial precedence in support of the proposition that reassessment on mere change of opinion is impermissible.
d) It was submitted that the reasons for reopening has not been provided within reasonable time by the assessing authority upon receiving a request by the assessee. Reliance was sought to be placed on the judgment of the Gujarat High Court in the case of Sahakari khand Udyog Mandal Limited v. ACIT, wherein it was held that 30 days would be reasonable time within which the reasons for reopening ought to be furnished.
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e) The appellant also proceeded to submit on the merits as to the correctness of their claim of deduction under Section 80JJAA while placing reference to the object behind Section 80JJAA, while also setting out the reasons / submissions in support of their claim of deduction under Section 80JJAA.
f) The appellant relied upon judgments of the various Courts including the Tribunal to show that the appellant would constitute ''industrial undertaking'' within the meaning of Section 80JJAA and also its employee would qualify as ''workmen'', and submitted that the Income Tax Appellate Tribunal had held that the applicability of wage limit of Rs.6500/- per month as per Industrial Disputes Act was applicable only to those employees employed in Supervisory capacity, while the deductions are claimed by the appellant in respect of employees who were not performing any supervisory, managerial or administrative functions. It was submitted that the above view had been upheld by the Bangalore and Chennai Income Tax Appellate Tribunal and thus judicial discipline requires the respondent to follow the same.
7. The 2nd respondent proceeded to reject the objections of the 8/18 https://www.mhc.tn.gov.in/judis W.A.No.461 of 2020 appellant dealing with each one of the objections raised vide letter dated 29.11.2017. The 2nd respondent submitted that the question of change of opinion would be an embargo against exercise of powers of reassessment only if an opinion was formed in the first place and an attempt was being made to change the same in exercise of the powers of reassessment. However, in the absence of any express finding in relation to the claim of deduction under Section 80JJAA, the defence of change of opinion may not be available to the appellant, while challenging the assumption of jurisdiction under Section 147 r/w.148. The submissions including on merits as to the legality / correctness of the claim under Section 80JJAA was also dealt with and the claim/submission of the assessee that the deductions are being claimed with reference to employees who were not exercising or holding supervisory functions/positions was also rejected. The 2nd respondent had rejected the objection on the assumption of jurisdiction as well as the submission on merits on the premise that the reopening of assessment is in accordance with the requirements set out in Section 147 and thus it was stated that the proceedings under Section 147 was being resumed.
8. Aggrieved the appellant challenged the rejection of the 9/18 https://www.mhc.tn.gov.in/judis W.A.No.461 of 2020 objection and the proposal / declaration of intent on the part of the assessing authority to proceed further under Section 147, in W.P.No.31722 of 2017. The challenge was inter-alia on the premise that the assumption of jurisdiction was bad as it was on the basis of mere change of opinion and the communication by the respondent in support of the exercise of reassessment does not disclose or reveal any new or tangible material warranting exercise of powers of reassessment.
9. It was submitted that the premise that the issue of the correctness / legality of the claim of deduction under Section 80JJAA was not dealt with nor can it be understood as expression of any opinion on the said issue while framing the assessment under Section 143(3) of the Income Tax Act, in the absence of any express finding accepting the claim of the appellant, is contrary to the material on record which would show that query was raised and responded to with regard to the above issue along with supporting material, and thus the impugned proceeding in relation to the claim under Section 80JJAA is mere change of opinion and thus proceeding for reassessment is unsustainable.
10. The learned Single Judge has proceeded to dismiss the order of 10/18 https://www.mhc.tn.gov.in/judis W.A.No.461 of 2020 reassessment by relegating the appellant to participate in the reassessment proceedings while leaving it open to the assessing authority to drop the proceedings for reassessment, if the circumstances do not justify invocation of reassessment proceeding on the strength of the following reasons:
a) Issuance of notice under Section 148 of the Income Tax Act is for passing an order of assessment under Section 147, however, the restrictions contained in Sec.147 of the Income Tax Act, would not govern or control the issuance of notice under Section 148.
b) The only requirement for issuance of notice under Section 148 is that it ought to be within the time limit prescribed under Section 149 of the Income Tax Act, 1961.
c) The decision of the Hon'ble Supreme Court in GKN Driveshafts (India) Ltd., v. Income Tax Officer and others reported in (2003) 1 SCC 72 only enables the assessee to seek reasons for reopening after filing the returns and the communication of reasons is merely to allow an assessee to participate in the reassessment proceedings by giving an effective reply. Importantly, the learned Single Judge proceeds to hold that over ruling of the objection in response to the 11/18 https://www.mhc.tn.gov.in/judis W.A.No.461 of 2020 notice u/s.148 is not an order u/s.147 of the Income Tax Act, 1961.
d) That the learned Judge after comparing and contrasting the provisions of Section 34 of the Income Tax Act, 1922, vis-a-vis., 148 of the Income Tax Act, 1961, concludes that for issuing a notice u/s.148 of Income Tax Act, the Assessing Officer has to only satisfy the requirements of Sec.149 of the Income Tax Act.
e) That Section 148 of Income Tax Act is a stand alone provision.
Reopening of assessment begins with a notice u/s.148 and culminates with an order u/s.147, either dropping or confirming the proposal. Section 148 is not curtailed by any restrictions which may be found in Section 147.
f) The learned Judge proceeded to compare and contrast the Sections 147 and 148 of the Income Tax Act, 1961 as it existed when the decisions of the Hon'ble Supreme Court in Calcutta Discount Company Ltd., Vs. Income Tax Officer, Companies District I, Calcutta and others reported in (1961) 2 SCR 241 and Income Tax Officer Vs. Lakhmani Mewal Das, reported in (1976) 3 SCC 757 was rendered to suggest that the provisions for reassessment are far more elaborate and comprehensive.
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g) The learned Judge was also of the view that the issue as to whether there was full and true disclosure is a matter which requires to be answered and mere filing of annexures by the appellant cannot be understood to satisfy the requirement of full and true disclosure if the information furnished was neither complete nor true.
h) The learned Judge after relegating the appellant to participate in the proceedings had concluded that if the circumstance do not justify invocation of Section 147 of the Income Tax Act, the 1 st respondent shall drop the proceedings.
11. We find that the order of the learned Single Judge suffers from the following infirmities and misconceptions:
a) The order of the learned Judge insofar as it proceeds to treat the notice u/s.148 as being independent and stand alone and unhindered/unfettered by the restrictions contained in Sec.147 is based on a misconception and may well distort the scheme of reassessment under the Income Tax Act.
b) While the power to assess income which has escaped assessment is under Sec.147. Sec.148 prescribes the procedure for initiation of reassessment and assumption of jurisdiction to reassess income 13/18 https://www.mhc.tn.gov.in/judis W.A.No.461 of 2020 escaping assessment. In other words, it appears to us that while the subtantive power of making a reassessment is traceable to Sec.147.
The procedure for exercising the power of reassessment is set out under Sec.148 and Sec.149 prescribes the time limit within which the powers of reassessment ought to be exercised.
c) Sections 147 to 153 of the Income Tax Act, 1961 must be understood as an integrated code which deals with various facets/aspects of reassessment and must be read harmoniously and in conjunction and not disjunctively as being independent of each other as interpreted and understood by the learned Judge.
d) It also appears to us that the judgment of the Supreme Court which mandates furnishing of reasons for reassessment when sought for, with an opportunity to the assessee to question the assumption of jurisdiction and casting an obligation on the assessing authority to dispose of such objection was not meant to be an empty formality or ritual without a purpose, but, was directed to ensure that the assessees do not have to go through the rigmarole of the entire process of reassessment, if the very assumption of the jurisdiction is bad.
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e) It is trite law that any proceeding which is lacking jurisdiction is a nullity and the discretion of judicial review would be exercised if it is shown that the proceedings are lacking jurisdiction. The learned Judge ought to have seen that the challenge to the proceedings dated 24.11.2017 was on the premise that the very assumption of jurisdiction was bad as it was on the basis of mere change of opinion which the Supreme Court has consistently held would not confer jurisdiction to exercise the powers of reassessment. As a matter of fact, the Supreme Court has while construing the power of reassessment held that the power to reassess must be understood to eschew such power being exercised on mere change of opinion lest the power of reassessment becomes vulnerable to challenge on the ground of being arbitrary.
f) The order of learned Judge suggesting that the question of whether there was true and full disclosure is still open, again appears to us to be misdirected / misplaced since while setting out the reasons for reassessment, the respondent has not even remotely suggested that there was no full and true disclosure on the part of the appellant. Thus it appears the order of the learned Single Judge is 15/18 https://www.mhc.tn.gov.in/judis W.A.No.461 of 2020 an improvement of the assessment proceeding which is quasi- judicial in nature and thus impermissible.
g) It is axiomatic that an authority cannot clutch at jurisdiction by assuming the existence of a non-existent jurisdictional fact or by deciding erroneously the existence of a jurisdictional fact. In the present case, if the case of the appellant that the reasons disclosed only indicated change of opinion is corect, then the very assumption of jurisdiction would be illegal and any orders passed would be bad for want of jurisdiction. The learned Judge has not examined or rendered any finding on the above aspect to the contrary directed the above question to be decided by the assessing authority in the course of exercise of power of reassessment. We are afraid that the above approach cannot be countenanced by us, since change of opinion has been repeatedly led by the Hon'ble Supreme Court and this Court as not warranting reassessment and reassessment on the basis of change of opinion has been frowned upon as an arbitrary and illegal exercise of power and has been held by the Hon'ble Supreme Court that such orders would no longer remain in the realm of reassessment, but, would be one of 16/18 https://www.mhc.tn.gov.in/judis W.A.No.461 of 2020 review and thus unjustified.
12. For all the above, we are of the considered opinion that the matter be remitted back to the learned Single Judge to examine as to whether the assumption to make reassessment of jurisdiction is bad for want of jurisdiction.
13. Accordingly, the Writ Appeal is disposed of. No costs.
[R.M.D., J.] [M.S.Q., J.]
29.08.2022
Index : Yes/No
Speaking/Non-Speaking Order
ssn
To
1.The Assistant Commissioner of Income-tax,
Corporate Circle 5-2,
4th Floor Aayakaar Bhavan,
121, Mahatma Gandhi Road,
Nungambakkam,
Chennai-600 034.
2.The Deputy Commissioner of Income Tax,
Corporate Circle 5-2,
4th Floor Aayakaar Bhavan,
121, Mahatma Gandhi Road,
Nungambakkam, Chennai-600 034.
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W.A.No.461 of 2020
R. MAHADEVAN, J.
and
MOHAMMED SHAFFIQ, J.
W.A.No.461 of 2020
29.08.2022
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