Gujarat High Court
Adani Exports vs Income Tax Officer - Ward - 5 (2) (2) on 4 July, 2016
Author: Akil Kureshi
Bench: Akil Kureshi, A.J. Shastri
C/SCA/3595/2016 JUDGMENT
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
SPECIAL CIVIL APPLICATION NO. 3595 of 2016
With
SPECIAL CIVIL APPLICATION NO. 3596 of 2016
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR.JUSTICE AKIL KURESHI
and
HONOURABLE MR.JUSTICE A.J. SHASTRI
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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 or any order made thereunder ?
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ADANI EXPORTS....Petitioner(s)
Versus
INCOME TAX OFFICER - WARD - 5 (2) (2)....Respondent(s)
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Appearance:
MR.SAURABH N. SOPARKAR, SENIOR ADVOCATE with MR.MONAL J.
DAVAWALA and 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 A.J. SHASTRI
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Date : 04/07/2016
ORAL JUDGMENT
(PER : HONOURABLE MR.JUSTICE AKIL KURESHI)
1. These petitions arise in similar background. The assessee who is common in both the petitions has challenged separate notices issued by the respondent Assessing Officer seeking to reopen the petitioner's assessments for the assessment years 200809 and 200910. Facts being parallel, may be recorded from SCA No.3595 of 2016.
2. Petitioner is a partnership firm and is engaged in the business of manufacturing and exporting gold jewelery through a unit which is situated in Special Economic Zone ('SEZ' for short) Sachin, Surat. The petitioner claimed 100% deduction on the profits and gains derived from such business under section 10AA of the Income Tax Act, 1961 ('the Act' for short).
3. The petitioner had filed the return of income for the assessment year 200809 on 28.09.2008. The return was taken in scrutiny by the Assessing Officer who after detailed examination of the various claims made by the assessee framed scrutiny assessment under Page 2 of 16 HC-NIC Page 2 of 16 Created On Sat Jul 09 00:04:23 IST 2016 C/SCA/3595/2016 JUDGMENT section 143(3) of the Act on 11.05.2010. The declaration of income as per the return was accepted.
4. In order to reopen such assessment, the Assessing Officer issued impugned notice on 27.03.2015. This notice was thus, issued beyond a period of 4 years from the end of relevant assessment year. The Assessing Officer had recorded his reasons for reopening of assessment, which read as under:
" The assessee firm was engaged in the business of manufacturing of precious metal. The assessee filed its return of income 28.9.2008 declaring income of Rs.74,590/ after availing deduction of Rs.179,06,89,136/ u/s. 10AA of the I.T.Act 1961. The income was assessed to Rs.74,590/ u/s 143(3) on 11.05.2010.
2. As per the copy of partnership deed dated 8.5.2006 the assessee is a partnership firm consisting of two partners, viz. Adani Enterprise Limited (PAN:AABCA2804L) and Adani Agro Private Limited (PAN:AABCA3138G) with profit/loss sharing ratio of 99 percent and 1 percent respectively, came into existence from 1st day of June, 2006 having its registered office at Ahmedabad. As per the convents of the partnership deed simple interest at the rate of 9 percent per annum or such other rates prescribed under section 40(b)(iv) of the Income Tax Act i.e. @ 12 percent per annum shall be payable by the partnership on the balance amount to the credit of the capital and/or current account.
2.1 As per the convents of the partnership deed the partners were eligible for interest on the balance of their capital account at Page 3 of 16 HC-NIC Page 3 of 16 Created On Sat Jul 09 00:04:23 IST 2016 C/SCA/3595/2016 JUDGMENT the maximum rates permissible under section 40(b)(iv) of the Income Tax Act i.e. @12% per annum.
2.2 However, it was observed that the assessee had not provided for the interest to the partners during the year under consideration. Thus, by not providing for the interest and remuneration to the partners, the assessee firm had more profits than reasonable profits which would have accrued to the firm and consequently into higher claim of deduction u/s 10AA of the Act. This attracts the provisions section 80IA(10) r.w.s. 10AA(9) of the Act.
2.3 The details of amount of deduction claimed u/s 10AA, balance of capital account and interest not claimed during the period 200809 is detailed below:
Assessment Total Balance Interest not Deduction Total amount year in Capital claimed as claimed u/s to be account (Rs.) per section 10AA (Rs. disallowed u/s 40(b)(iv) @ 10AA(9) r.w.s.
12% on the 80IA (10) but
closing restricted to
balance of claim u/s
capital 10AA of the
account (Rs.) Act (Rs.)
2008-09 255,55,70,286 30,66,68,434 179,06,89,13 30,66,68,434
2.4 Thus, the assessee firm had made more profits than reasonable profits, which would have accrued resulting into higher claim of deduction u/s 10AA. As can be seen from the above table, the assessee had benefited by not providing for the interest to the partners to the extent of Rs.4,76,94,522 and during AY 200910. In view of the provisions of 80IA(10) r.w.s. Income taxable u/s 56(1) of the Act) from the business income eligible for deduction u/s 10AA of the Act. This being resulted into underassessment of income of Rs.30,66,68,434/.Page 4 of 16
HC-NIC Page 4 of 16 Created On Sat Jul 09 00:04:23 IST 2016 C/SCA/3595/2016 JUDGMENT 3.1 We observed from the records that during the year assessee firm had purchased 2,17,00,000 gram of gold (purity 0.995 per gram) on various occasions amounting to Rs.2164,58,45,237/ ($53,86,95,383/) from AEL, a sister concern and partner (partner sharing 99% profit). Scrutiny of the purchase records of gold by the assessee from AEL revealed that on most of the occasions the purchase of gold was made by the assessee at lower price than the prevailing market rate available for that day. Thus, by purchasing gold at lower rate from the partner of the firm, the assessee firm had more profits than reasonable profits which would have accrued to the firm under normal course of business and consequently resulting into higher claims of deduction u/s 10AA of the Act. Moreover, by this act the partner AEL had less profit in its individual capacity resulting into less tax liability in its capacity as company. However, the resultant profit so earned by the assessee firm was diverted back to the partners AEL (99%) and AAPL (1%) in the form of exempted income u/s 10(2A). Thus, owing to the close connection between the assessee firm and partner, the assessee earned more profit to the extent of Rs.28,48,40,727/ (as detailed in Statement 7 enclosed) than the ordinary profits which might be expected to arise in normal course of business attracting the provisions section 80IA(10) r.w.s. 10AA(9) of the Act.
3.2 Since, the assessee firm had made more profits to the extent of Rs.384840727/ than reasonable profits which would have accrued resulting into higher claim of deduction u/s 10AA. In view of the provisions of 80IA(10) r.w.s. 10AA(9) of the Act, an amount of Rs.38,48,40,727/ limited to exemption claimed u/s 10AA was required to be disallowed.
3.3 In view of the above, I have therefore
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reason to believe that the income chargeable to tax to the extent of Rs.69,15,09,161/ has escaped assessment for the A.Y.200809 due to the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. Hus, the case needs to be reopened by issuing notice u/s. 148 of the I.T.Act, 1961."
5. The petitioner upon being supplied such reasons, raised detailed objections under a communication dated 14.08.2015. Such objections however were rejected by the Assessing Officer by an order dated 01.02.2016.
6. Taking us through the reasons recorded by the Assessing Officer, counsel for the petitioner raised following contentions.
I. The notice was issued under the insistence of the audit party, though the Assessing Officer did not accept the audit objections.
II. There was no failure on the part of the assessee to disclose truly and fully all material facts and the notice for reopening which was issued beyond a period of 4 years was therefore invalid.
III. During the original scrutiny assessment, the Assessing Officer had raised detailed queries Page 6 of 16 HC-NIC Page 6 of 16 Created On Sat Jul 09 00:04:23 IST 2016 C/SCA/3595/2016 JUDGMENT with respect to the price of the gold purchased from Adani Exports Limited ("AEL" for short), one of the partners of the petitioner firm and any reopening on the basis of the same ground would therefore, not be permissible.
IV. It was the duty of the assessee to disclose primary facts. If on the basis of such disclosures, there was any occasion to apply disallowance in terms of section 80IA(10) of the Act, it was not the duty of the assessee to bring the same to the notice of the Assessing Officer. Once primary facts are disclosed, what conclusions in law should be drawn, would be the duty of the Assessing Officer and not that of the assessee.
V. The assessee had raised multiple grounds in the objections. The Assessing Officer while disposing of such objections did not deal with the assessee's grounds regarding the discrepancies in the price of gold purchased from AEL. Thus, he accepted the objections of the assessee and dropped the ground recorded in the reasons.
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7. On the other hand learned counsel for the department opposed the petition contending that the Assessing Officer has applied his mind independently on the issues brought to his notice by the audit party. Only upon being satisfied that the income chargeable to tax had escaped assessment, he had recorded his reasons and issued notice for reopening. The assessee failed to disclose true and full facts in the return filed as well as during the assessment proceedings. Mere production of books of accounts upon minute scrutiny of which evasion of tax could be detected, would not amount to true and full disclosure. There was no scrutiny on the two aspects mentioned by the Assessing Officer in the reasons, on the basis of which, the assessments have been reopened.
8. In background of such contentions, we may peruse the reasons recorded by the Assessing Officer more minutely. From such reasons, we gather that the assessee which is in the business of manufacturing an export of gold and diamond jewelery, was a partnership firm comprising of two partners viz. AEL and AAPL Page 8 of 16 HC-NIC Page 8 of 16 Created On Sat Jul 09 00:04:23 IST 2016 C/SCA/3595/2016 JUDGMENT which had profit/loss sharing ratio of 99:1% respectively. The reasons cite two different grounds for the Assessing Officer to form a belief that income chargeable to tax has escaped assessment. First was that, as per the partnership deed dated 01.06.2006, the partners would receive simple interest at the rate of 9% per annum or such other rates as may be prescribed under section 40(b)(iv) of the Act on the balance amount to the credit on the capital or current account of the firm. Despite this covenant, the assessee firm did not pay any interest to its partners which had the effect of increasing the assessee's profit from the eligible business. Thus, the assessee claimed higher deduction than what was justified. The second ground was that the assessee firm had made purchases of gold on various occasions from its sister concern and partner i.e. AEL. According to the Assessing Officer, such purchases were at a rate lower than the prevailing market rate, thus, once again inflating the assessee's profit from the eligible business. This would attract section 80IA(10) read with section 10AA(9) of the Act.
9. With this background, we have perused the Page 9 of 16 HC-NIC Page 9 of 16 Created On Sat Jul 09 00:04:23 IST 2016 C/SCA/3595/2016 JUDGMENT original files pertaining to the queries raised by the audit party. We notice that the Assessing Officer in his letter dated 23.03.2015, written to the Commissioner of Incometax, after taking note of the detailed objections of the audit party on these two issues had conveyed that the objections raised by the audit party are acceptable and that therefore the assessment is required to be reopened. However, this file also contains other correspondence between the audit party and the Assessing Officer which raises some doubt about the opinion of the Assessing Officer being free. For example, on 18.07.2013, the audit party had written to the Assessing Officer regarding the purchase price of gold and pointed out that through such purchases, AEL had made less profit in its individual capacity, reducing its tax liability. However, the profit of the assessee firm which was exempt from tax was routed back to the AEL since AEL shares 99% profit of the assessee partnership firm. The Assessing Officer was requested to verify these aspects and offer his comments. Though the immediate response of the Assessing Officer to this letter is not known, we have a letter dated 31.12.2013 written Page 10 of 16 HC-NIC Page 10 of 16 Created On Sat Jul 09 00:04:23 IST 2016 C/SCA/3595/2016 JUDGMENT by him to the audit party, in which he referred to the comments offered by the assessee clarifying the so called discrepancy in the price of gold i.e. the rate at which the assessee purchased from AEL at the prevailing market price and conveyed as under:
" It is further submitted by the assessee in his letter dated 26.12.2013, rate referred in column No.8 of the table is 'Rate as per MCX Ahmedabad (1.00 fineness)' and in column No.9 of the table is 'Rate as per MCX Ahmedabad (0.995 Fineness)'. The difference as worked out in column No.19 is difference between 'Total market rate per gram as per MCX rate for 1.00 fineness (column No.16)' and 'Total market rate per gram with 0.995 fineness (column No.18)', which is nothing but notional difference over the fineness rate and it is not difference in the books of the assessee firm or AEL.
On consideration of the above explanation, your honour will find a fact that the figure of Rs. 11.01 crore is nothing but notional difference and the audit objection requires to be dropped."
10. Thus, primafacie atleast at one stage, the Assessing Officer was convinced that the audit objection was not valid. However, for want of full clarity on this issue, we are not inclined to conclude the matter only on this aspect. It is by now well settled that if the Assessing Officer has recorded his own reasons uninfluenced by audit objection, such Page 11 of 16 HC-NIC Page 11 of 16 Created On Sat Jul 09 00:04:23 IST 2016 C/SCA/3595/2016 JUDGMENT action would not be bad in law merely because certain issues were brought to his notice by the audit party. It is equally well settled that when the Assessing Officer does not accept the audit objections, but has issued the notice for reopening based solely on the audit objections, such action would not be valid.
11. Coming to the remaining issues, we may recall that the notices for reopening were issued in both cases beyond the period of four years from relevant assessment year. Here also, both the assessments proceeded more or less along similar lines. We may therefore, record the events as they unfolded during assessment for the assessment year 200809. In this case, the assessee under letter dated 15.02.2010 had answered to various queries raised by the Assessing Officer during the assessment. In particular in para 5 of this letter, he provided following detail.
"5. Find attached herewith ledger accounts representing partners' capital accounts along with contra confirmation duly signed seal with their PAN details. (AnnexureD)"
12. Further, in its letter dated 02.03.2010, the assessee supplied further details to the Assessing Officer as under:
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HC-NIC Page 12 of 16 Created On Sat Jul 09 00:04:23 IST 2016 C/SCA/3595/2016 JUDGMENT "2. The report u/s 10AA of Income Tax Act in form no.56F dated 27/09/2008 along with Annexure A together with notes forming part of the said report in respect of claim of deduction u/s 10AA of eligible profit from newly established manufacturing unit at no.447, 448 and 449 in Surat S.E.Z., Sachin, Surat notified by the Government of India (Ministry of commerce Industry), vide the letter of approval no. SSEZ/11/05/2006 07/2116, dated 20th November, 2006 under provisions of the Special Economic Zone Act, 2005 (Annexure B)
3. In respect of payment made to specified person u/s 40A(2)(b) of the income Tax Act, the detail shown in Annexure - IV of the tax audit report from which your honour will appreciate that the firm has purchased goods viz. gold bar from Adani Enterprise Ltd. at Surat S.E.Z., Sachin, Surat. We are submitting here with the sample copies of comparable purchase and sale invoices of gold bar of AEL as against the said purchases the AEL has purchased gold bar from overseas buyers. From the above details your honour will appreciate that the AEL has more or less charged very nominal amount towards their services. In other word the transaction are at arm length price. (Annexure C)"
13. With respect to non payment of interest to the partners on the borrowed capital, counsel for the petitioner submitted that though the original partnership deed dated 01.06.2006 provided for such interest, this deed was amended on 06.01.2007 which deleted any reference to payment of interest to the partners. It is not clear whether this amended deed Page 13 of 16 HC-NIC Page 13 of 16 Created On Sat Jul 09 00:04:23 IST 2016 C/SCA/3595/2016 JUDGMENT was on record before the Assessing Officer during the original assessment. However, whether same was produced or not, in our opinion, would make no difference. If such amendment was not produced, it would imply that the Assessing Officer was guided by a partnership deed which made a specific provision for payment of interest to the partners for the borrowed capital. The fact that despite said covenant in the partnership firm, no such interest was paid was very much before him during the original assessment. On the other hand, if the amended partnership deed was produced, he could still have questioned the assessee about nonpayment of interest to a partner who had 99% profit sharing stake in the partnership business. He could have questioned the assessee within the purview of section 80IA(10) read with section 10AA(9) of the Act. This would be relevant since the notice for reopening is issued beyond a period of four years from the end of relevant assessment year. In any case therefore, there was no failure on the part of the assessee to disclose truly and fully all material facts in this regard.
14. Coming to the question of purchase of gold from Page 14 of 16 HC-NIC Page 14 of 16 Created On Sat Jul 09 00:04:23 IST 2016 C/SCA/3595/2016 JUDGMENT AEL at a rate lower than the prevailing market rate, counsel for the petitioner would argue that there was no failure on part of the assessee to disclose truly and fully all material facts. On the other hand, the counsel of the Revenue would refer to the explanation 1 to section 147 which provides that production before the Assessing Officer of books of accounts from which material evidence with due diligence could have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of the proviso to section 147 of the Act. However, we need not go into this controversy since the perusal of the record would reveal that during the original assessment, this question was examined by the Assessing Officer. We have reproduced the portions of the assessee's communications to the Assessing Officer. Particularly, in the letter dated 02.03.2010, the assessee pointed out that the firm had purchased gold bar from AEL. The assessee submitted sample copy of comparable purchases and sale invoices of gold bar of AEL and the purchases the AEL had made from the overseas buyers. On the basis of such material, the assessee had contended that the Page 15 of 16 HC-NIC Page 15 of 16 Created On Sat Jul 09 00:04:23 IST 2016 C/SCA/3595/2016 JUDGMENT transactions were at the arm's length price. Thus, according to the assessee, the supply of gold by AEL to the assessee firm was at the prevailing market price. This explanation had to have relation only to the question of proper pricing of gold purchased by the assessee from AEL. This issue thus, was examined by the Assessing Officer during the original assessment. It would thereafter, not be open for the Assessing Officer to reopen the assessment on this ground particularly after four years.
15. Under the circumstances, both the petitions are allowed. Impugned notices are quashed.
(AKIL KURESHI, J.) (A.J. SHASTRI, J.) ANKIT Page 16 of 16 HC-NIC Page 16 of 16 Created On Sat Jul 09 00:04:23 IST 2016