Gujarat High Court
Sumilon Industries Limited vs Income Tax Settlement Commission & on 5 July, 2017
Author: Akil Kureshi
Bench: Akil Kureshi, Biren Vaishnav
C/SCA/13218/2013 JUDGMENT
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
SPECIAL CIVIL APPLICATION NO. 13218 of 2013
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR.JUSTICE AKIL KURESHI
and
HONOURABLE MR.JUSTICE BIREN VAISHNAV
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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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SUMILON INDUSTRIES LIMITED....Petitioner(s)
Versus
INCOME TAX SETTLEMENT COMMISSION & 1....Respondent(s)
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Appearance:
MR B S SOPARKAR, ADVOCATE for the Petitioner(s) No. 1
MR SUDHIR M MEHTA, ADVOCATE for the Respondent(s) No. 2
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 BIREN VAISHNAV
Date : 05/07/2017
ORAL JUDGMENT
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HC-NIC Page 1 of 18 Created On Sun Jul 23 13:28:46 IST 2017 C/SCA/13218/2013 JUDGMENT (PER : HONOURABLE MR.JUSTICE AKIL KURESHI)
1. The petitioner has challenged an order dated 29.03.2012 passed by the Income Tax Settlement Commission ['the Settlement Commission' for short].
2. Brief facts are as under:
Petitioner is a company registered under the Companies Act. The company was engaged in manufacturing and selling of various kinds of polyester films, metalic yarn, imitation jarikasab etc. The company had its registered office at Surat and manufacturing units at various places around or near Surat city. A search operation was carried out by the Director of Income Tax (Investigation) at the business premises of the company and at the residential units of the Directors of the company. During such search operation, a statement of the Managing Director of the company, Shri Mahesh Jariwala, was recorded on 21.01.2009, in which, he declared undisclosed income of Rs. 15 crores. He also paid tax on such undisclosed income on 29.09.2009. However, in the return of income for the assessment year 2009-10 filed by the company on 30.09.2009, the disclosure of Rs. 15 crores was not made and the statement of the Director was retracted through a note appended to the return.
3. Consequent to the search, notices under section 153A of the Income Tax Act, 1961 ['the Act' for short] were issued on 27.09.2009 for carrying out assessment for the assessment years Page 2 of 18 HC-NIC Page 2 of 18 Created On Sun Jul 23 13:28:46 IST 2017 C/SCA/13218/2013 JUDGMENT 2003-04 to 2008-09. In response to such notices, instead of filing return, the assessee chose to approach the Settlement Commission by filing application on 26.11.2010 seeking settlement of all assessments for the assessment years 2003-04 to 2009-10.
4. After crossing various stages envisaged in Chapter XIX-A of the Act pertaining to settlement of cases, the Settlement Commission proceeded to pass final order dated 29.03.2012 in terms of section 245D (4) of the Act and took up various contentious issues. The petitioner has challenged the said order to the extent it is aggrieved.
5. The petitioner has three distinct grievances. We will address these three issues separately. For the present, we may briefly refer to them.
Issue No. 1: This pertains to the additions made by the Settlement Commission for its manufacturing units situated at Kim (Surat) referred to as unit Kim-1 for the assessment years 2003-04 to 2006-07. According to the assessee, these additions were made without there being any corresponding material being found during the search.
Issue No.2 : This issue pertains to disallowance of Rs. 34.24 lacs (rounded off) in respect of the assessee's claim under section 80IB of the Act on the ground that the manufacturing Page 3 of 18 HC-NIC Page 3 of 18 Created On Sun Jul 23 13:28:46 IST 2017 C/SCA/13218/2013 JUDGMENT activity undertaken by the assessee passes through three stages. Stage 1 does not amount to manufacturing and the expenditure relatable to such stage, therefore, would not qualify for deduction under section 80IB of the Act. The assessee contends that the unit paid excise duty on the entire activity of manufacturing and, in any case, no single activity can be isolated for examining whether it amounts to manufacturing or not?
Issue No. 3: This issue pertains to disallowance of Rs. 39.30 lacs (rounded off) by the Settlement Commission deduction of which, was claimed by the assessee under section 37 of the Act on the expenditure for higher studies of the Directors of the company.
6. We may address each issue individually.
Issue No.1: From the material on record and, in particular, the impugned order of the Settlement Commission, we gather that during the search and seizure operation, the department recovered laboratory registers B1-13, B1-14, B1-15 and B1-16 called Coating Sample Registers ('CSR' for short) which contained date wise details of samples of various rolls tested in the laboratory relevant to the assessment years 2006-07 and 2007-08. The search team questioned employees regarding these registers and gathered that every volume produced is tested and entered in these registers. The department, therefore, Page 4 of 18 HC-NIC Page 4 of 18 Created On Sun Jul 23 13:28:46 IST 2017 C/SCA/13218/2013 JUDGMENT linked these registers as production registers and compared them with the excise registers to work out the volume of unaccounted production for the said Kim-1 and Kim-2 units. The department also noted that number of employees found at the two establishments was more than that shown in the books of accounts. It was, therefore, prima facie found that the assessee was indulging into large scale unaccounted production.
7. During the course of the assessment, the Assessing Officer also took into account one more register marked as 'B1-19' pertaining to Kim-1 unit covering the period between 01.05.2008 and 09.01.2009. He compared the entries in this register with the excise register for the same period and found that unaccounted production was 69.67% of the accounted production. He extrapolated this data for the period between April 2008 and January 2009 i.e. up to the date the search and concluded that the unaccounted production for this period would be 72% of the accounted production.
8. On the basis of the comparisons between B1-13 to B1-16 registers and B1-19 register with the excise registers for the corresponding periods, the Assessing Officer worked out the data of accounted as well as unaccounted production and estimated the value of such unaccounted production by adopting cost of Rs. 150/- per kg of the material. These figures he summarized as under:
Page 5 of 18HC-NIC Page 5 of 18 Created On Sun Jul 23 13:28:46 IST 2017 C/SCA/13218/2013 JUDGMENT Financial Actual Accounted Difference % of Value of year Production as Production As Unaccounted unacco unaccounted per B1-19 and per Excise Production unted production @ CSR (kg) (kg) (kg) producti Rs. 150 per kg (A) (A-B)=C on to (Rs) (B) account ed (E) producti on (C
-B)=D 2006-07 21,42,600 6,66,039 14,76,551 221.00 22,14,84,150 (May 2006- % May 2007) 2007-08 22,37,400 11,05,250 11,32,149 102.00 16,98,22,492.50 (Apr 2007- % Mar 2008) 2008-09 14,85233,370 8,62,432,900 6,22,800,470 72.00% 9,34,200070.50 (Apr 2008-
Nov 2008) Total 58,65,233,370 26,33,721,950 32,11,511,420 122.00 48,47,26713.00 %
9. As per this table, the Assessing Officer believed that for the entire period during the assessment year 2006-07 to assessment year 2008-09 (part) average unaccounted production was 122% of the accounted production. He proposed to project these figures for the earlier assessment years 2003-04 to 2006-07 also. He also undertook similar exercise for units other than Kim-1 and Kim-2 and proposed an addition of unaccounted production of Rs. 744 crores (rounded off).
10. The Settlement Commission knocked down much of the proposals of the department in this regard. The Commission trimmed down the additions to only one unit, Kim-1 with respect to which, material was available through registers collected during the search as well as during the assessment Page 6 of 18 HC-NIC Page 6 of 18 Created On Sun Jul 23 13:28:46 IST 2017 C/SCA/13218/2013 JUDGMENT proceedings. The Settlement Commission was also not prepared to accept the working out of the Assessing Officer of the unaccounted production being 122% on an average of the accounted production. The Settlement Commission was of the opinion that registers B1-13 to B1-16 were lab registers and therefore, would not accurately represent the data of production. The Settlement Commission accepted the assessee's contention that many batches of production would pass through multiple stages of testing and the total quantity of production cannot be arrived at by simple addition of volume of such entries. Even the cost of production adopted by the Assessing Officer was found to be wholly unreliable. The Settlement Commission, in the ultimate analysis, discarded all the data available in registers B1-13 to B1-16 and focused only on the register B1-19.
11. We may record that the assessee has not raised any objection regarding the cost of production put at Rs. 150/- per kg by the Assessing Officer. The Settlement Commission did not accept the unaccounted production reflected from B1-19 register at 72%, as worked out by the Assessing Officer or even 69.67% plainly flowing on comparison of the said register with the excise register for the precise matching periods but took a more conservative figure of 40% for the assessment years 2007-08 to 2009-10. The Settlement Commission projected these figures only for the assessee's manufacturing unit at Kim-1 on the ground that the said B1-19 register contained data only for the said unit. In other words, the Settlement Commission did not Page 7 of 18 HC-NIC Page 7 of 18 Created On Sun Jul 23 13:28:46 IST 2017 C/SCA/13218/2013 JUDGMENT make any additions for the assessee's Kim-2 unit on the basis of such data. We may further, for the sake of clarity, record that the Settlement Commission made small addition of Rs. 30 lacs in case of Kim-2 unit on other issues which are not before us.
12. With respect to the assessment years 2003-04 to 2006-07, the Settlement Commission did notice assessee's contention that for the said period, no incriminating material was found during the search and that therefore, no additions can be made for the said period by extrapolation. The Settlement Commission, however, referred to the decision of the Supreme Court in case of Commissioner of Sales Tax, Madhya Pradesh vs. H.M.Esufali H M. Abdulali, reported in 90 ITR 271 and considering the facts and circumstances of the case, adopted a ratio of 35%, 25% 25% and Nil of the unaccounted production over accounted production for the assessment years 2003-04 to 2006-07 respectively.
13. The Settlement Commission maintained the same value of unaccounted production at Rs. 150/- per kg as was proposed by the Assessing Officer and not opposed by the assessee and also the gross profit rate of 25%. The Settlement Commission added a sum of Rs. 1.67 crores (rounded off), 1.19 crores (rounded off) and 1.29 crores (rounded off) for the said assessment years 2003-04, 2004-05 and 2005-06 respectively. These additions are questioned before us by the petitioner.
14. Learned counsel Mr. Soparkar for the petitioner Page 8 of 18 HC-NIC Page 8 of 18 Created On Sun Jul 23 13:28:46 IST 2017 C/SCA/13218/2013 JUDGMENT contended that no incriminating material was found during the search concerning the said assessment years and it was, therefore, wholly impermissible for the Settlement Commission to make any addition on the basis of extrapolation of the figures concerning later assessment years. He submitted that the decision of Supreme Court in case of Commissioner of Sales Tax, Madhya Pradesh vs. H.M.Esufali H M. Abdulali was rendered in the background of normal assessment and not block assessment. He referred to the decision of Allahabad High Court in case of Commissioner of Income Tax vs. R.M.L. Mehrotra reported in 320 ITR 403 and in case of Commissioner of Income Tax vs. Dr. Ratan Kumar Singh reported in 357 ITR 35 to contend that the principles of extrapolation in best judgement assessment would not apply to block assessment proceedings.
15. On the other hand, learned counsel Mr. Bhatt for the department opposed the assessee's contention. He submitted that where the judicial review against the order of assessment is extremely narrow. As long as the order passed by the Settlement Commission is in accordance with the provisions of the Act, this Court would not interfere. He submitted that the Settlement Commission has given due consideration to the materials on record and made additions on the basis of estimates. The entire consideration, therefore, is based on facts. He relied on the decision of Bombay High Court in case of Harish Textile Engineers Ltd vs. Deputy Commissioner of Income Tax Page 9 of 18 HC-NIC Page 9 of 18 Created On Sun Jul 23 13:28:46 IST 2017 C/SCA/13218/2013 JUDGMENT reported in 379 ITR 160 to contend that even in block assessment, the ratio laid down by the Supreme Court in case of Commissioner of Sales Tax, Madhya Pradesh vs. H.M.Esufali H M. Abdulali would be applicable. For the same purpose, a reliance is also placed on the decision of Delhi High Court in case of Commissioner of Income Tax vs. Chetan Das Lachman Das reported in [2012] 25 Taxmann.com 227.
16. The entire controversy on this issue is limited to the additions made by the Settlement Commission under the head of 'unaccounted production' for the assessment years 2003-04 to 2005-06 [though technically assessment year 2006-07 would also fall in this category, the same is not referred since the addition is Nil] for the assessee's manufacturing unit at Kim-1. Upon perusal of the order of the Settlement Commission, we gather that against the actual data of unaccounted production recorded in B1-19 register as compared to the excise register for the relevant period, the unaccounted production came to 69.67% of the accounted production. The Settlement Commission also noted that number of employees found during the search is far in excess of those shown in the books of accounts of the company. Further, that the unaccounted production was admitted in the statements of the employees. Yet another significant aspect of the matter is that as per the statements of the employees, the registers for the earlier periods were destroyed under the instructions of the employer.
17. Based on these materials on record, the Settlement Commission Page 10 of 18 HC-NIC Page 10 of 18 Created On Sun Jul 23 13:28:46 IST 2017 C/SCA/13218/2013 JUDGMENT split the two periods for different treatment for estimate of the unaccounted production for the assessment years 2007-08 to 2009-10. The Settlment Commission adopted a more conservative figure of 40% of the accounted production as against the actual data of 69.67% flowing from B1 register. For the earlier period, the Settlement Commission further suppressed the figure and has adopted even more conservative estimate of the unaccounted production.
18. In case of Commissioner of Sales Tax, Madhya Pradesh vs. H.M.Esufali H M. Abdulali (supra) the Supreme Court permitted the department to project the figures of unaccounted production actually available for a short period of an assessment year for the entire year on the ground that in any case of best judgement assessment there is bound to be some guess work. As long as the same is done bona fide and on the basis of some material on record and not arbitrary, the same would be permissible in law.
19. Allahabad High Court in case of Commissioner of Income Tax vs. R.M.L. Mehrotra (supra) did observe that best judgement assessment made on the basis of search could not have been made in a block assessment in the case. It was observed that the principle laid down by the Supreme Court in case of Commissioner of Sales Tax, Madhya Pradesh vs. H.M.Esufali H M. Abdulali would not apply in such a case. On the other hand, Bombay High Court in case of Harish Textile Engineers Ltd vs. Page 11 of 18 HC-NIC Page 11 of 18 Created On Sun Jul 23 13:28:46 IST 2017 C/SCA/13218/2013 JUDGMENT Deputy Commissioner of Income Tax has expressed slightly different opinion. Prima facie we are not inclined to go to the extent of recording that in search cases principles analogous to best judgement assessment would not apply. However, in the present case, it is not necessary for us to thrash out an interesting issue whether in absence of incriminating material being found during the search for a particular period of the block assessment, any addition with the aid of best judgement can be made or not? This is so because if one looks at the overall evidence and material on record as well as examination by the Settlement Commission, this is not a case where no material whatsoever for the earlier periods was found. The factors taken into account by the Settlement Commission, which in our opinion were relevant, were that registers relating to the manufacturing unit of the company which were found, established unaccounted production, admission by the employees that the company was engaging in such unaccounted production, the number of employees at the time of search being found far in excess of what was recorded in the books of accounts and the statement of the employees that the registers for the earlier periods were destroyed under the instructions of the management. Based on such facts, if the Commission made a projection of the available figure of unaccounted production over the entire period by adopting what can, at best, be stated as a conservative figure and by recording proper reasons, it would not be possible for us to interfere with such ultimate conclusion of the Settlement Commission.
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C/SCA/13218/2013 JUDGMENT
20. In case of Fatechand Nursing Das vs. Settlement Commission (IT And WT) and anr reported in 176 ITR 169 the Supreme Court observed that in exercise of power of judicial review of the decision of the Settlement Commission, the Court is concerned with the legality of the procedure followed and not with the validity of the order. Judicial review is not concerned with the decision but with the decision-making process.
21. The limited scope of judicial review against the order of Settlement Commission is well settled proposition. In case of Jyotendrasinhji vs. S.I.Tripathi and ors reported in 201 ITR 611, the Supreme Court while holding that against the order of the Settlement Commission, writ jurisdiction of the High Court is not barred. The Supreme Court further observed that judicial review flowing from exercise of such powers would be restricted to considering whether the order of the Settlement Commission is contrary to the provision of Income Tax Act. It was observed as under:
"Be that as it may, the fact remains that it is open to the Commission to accept an amount of tax by way of settlement and to prescribe the manner in which the said amount shall be paid. It may condone the defaults and lapses on the part of the assessee and may waive interest, penalties or prosecution, where it thinks appropriate. Indeed, it would be difficult to predicate the reasons and considerations which induce the commission to make a particular order, unless of course the commission itself chooses to, give reasons for its order. Even if it gives reasons in a given case, the scope of enquiry in the Page 13 of 18 HC-NIC Page 13 of 18 Created On Sun Jul 23 13:28:46 IST 2017 C/SCA/13218/2013 JUDGMENT appeal remains the same as indicated above viz., whether it is,contrary 956 to any of the provisions of the Act. In this context, it is relevant to note that the principle of natural justice (and alteram partem) has been incorporated in Section 245-D itself. The sole overall limitation upon tire Commission thus appears, to be that it should act in accordance with the provisions of the Act. The scope of enquiry, whether by High Court under Article 226 or by this Court under Article 136 is also the same whether the order of the Commission is contrary to any of the provisions of the Act and if so, has it prejudiced the petitioner/appellant apart from ground of bias, fraud & malice which, of course, constitute a separate and independent category. Reference in this behalf may be had to the decision of this Court in Sri Ram Durga Prasad v. Settlement Commission 176 I.T.R. 169, which too was an appeal against the orders of the Settlement Commission. Sabyasachi Mukharji J., speaking for the Bench comprising himself and S.R. Pandian, J. observed that in such a case this Court is " concerned with the legality of procedure followed and not with the validity of the order.' The learned Judge added 'judicial review is concerned not with the decision but with the decision-making process." Reliance was placed upon the decision of the House of Lords in Chief Constable of the N.W. Police v. Evans, [1982] 1 W.L.R.1155. Thus, the appellate power under Article 136 was equated to power of judicial review, where the appeal is directed against the orders' of the Settlement Commission. For all the above reasons, we are of the opinion that the only ground upon which this Court can interfere in these appeals is that order of the Commission is contrary to the provisions of the Act and that such contravention has prejudiced the appellant The main controversy in these appeals relates to the interpretation of the settlement deeds though it is true, some contentions of law are also raised. The commission has interpreted the trust deeds in a particular manner, Even if the interpretation placed by the commission the said deeds is not correct, it would not be a ground for interference in these appeals, since a wrong interpretation of a deed of trust cannot be said to be a violation of the provisions of the Income Tax Act. it is equally clear that the interpretation placed upon the said deeds by the Commission does not bind the authorities under the Act in Page 14 of 18 HC-NIC Page 14 of 18 Created On Sun Jul 23 13:28:46 IST 2017 C/SCA/13218/2013 JUDGMENT proceedings relating to other assessment years."
22. Under the circumstances, the assessee's challenge on issue No.1 fails.
23. Issue No.2 pertains to disallowance of claim of deduction under section 80IB of the Act to the extent of Rs. 34.24 lacs. Brief facts are that the assessee manufactures jarikasab as a final product from jumbo rolls of metalized lacquered polyester films. Before the department as well as the Settlement Commission, the representative of the assessee pointed out that such rolls are converted into smaller sized rolls called 'pankets' using rough slitter machines. At the second stage, such 'pankets' are converted into 'metalic yarn' using the machines which is then wound on bobbins by using winding machine. At the third stage, the metallic yarn is twisted alongwith polyester thread to prepare jarikasab. This process involves twisting machine and autoclave to heat and set the yarn. The jarikasab is wound on cone by using coning machine.
24. The Settlement Commission noted that the department had been contesting the assessee's claim for the deduction in relation to the expenditure for the first stage of manufacturing on the ground that no manufacturing activity takes place in the process. In the earlier assessment years, Assessing Officer and CIT (Appeals) had held so. The Settlement Commission held that the first stage of process would not amount to Page 15 of 18 HC-NIC Page 15 of 18 Created On Sun Jul 23 13:28:46 IST 2017 C/SCA/13218/2013 JUDGMENT manufacturing since no distinct distinct mercantile product came into existence.
25. We are informed that for the earlier assessment years, the assessee had contested the issue before the Tribunal. The Tribunal refused to comment on the same since the entire issue was pending before the Settlement Commission. Neither side is therefore, bound by any earlier decision of any authority or the Tribunal. Having heard learned counsel for the parties on this issue, we find that the Settlement Commission has committed a serious error in law in disallowing this claim of the assessee. As noted, the process of manufacturing jarikasab commenced from acquisition of jumbo rolls of metalized lacquered polyester film. Such raw material undergo processes which can be broadly classified into three categories before the final product of jarikasab would come into existence. The entire process was one integrated manufacturing process. By no stretch of imagination a single integrated manufacturing process can be sub-divided or bifurcated into different parts for ascertaining whether at a particular stage a new article or thing had come into existence through manufacturing process. The approach of the Settlement Commission was wholly erroneous. When a single integrated manufacturing activity is shown to bring into existence entirely new and a distinct mercantile product through the human and mechanical intervention, it was simply not open for the Settlement Commission to segregate a portion of such manufacturing process to hold that since no new marketable Page 16 of 18 HC-NIC Page 16 of 18 Created On Sun Jul 23 13:28:46 IST 2017 C/SCA/13218/2013 JUDGMENT product came into existence, such process did not amount to manufacturing. Even within the narrow confines of our judicial review, in the order of Settlement Commission on this issue, we must intercept. This issue is therefore decided in favour of the assessee.
26. The third and last issue pertains to the expenditure of Rs. 39.30 lacs towards higher studies expenses of the Directors of the company. Section 37 grants deduction of any expenditure expended wholly and exclusively incurred for the purpose of business. The higher eduction of a partner of a firm or director of a company may have different parameters and ramification. In a case if it is aimed at improving the efficiency of the firm or the person concerned is expected to contribute better with the acquisition further knowledge, it may be open for the assessee to claim the deduction. However, simply because a director is sent abroad for further eduction by itself would not sufficient to establish such a claim without establishing other relevant facts and circumstances. The entire issue is factual in nature. Since no perversity is established we refuse to interfere.
27. In the result, the petition is allowed in part. The impugned order of the Settlement Commission is set aside to the limited extent of whether the Commission has disallowed the assessee's claim of deduction under section 80IB for a sum of Rs. 34.24 lacs. The order shall stand modified to this extent. The Revenue shall give effect to such modification. Petition is disposed of accordingly.
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