Gujarat High Court
Kaira District Co Op Milk Producers ... vs Deputy Commissioner Of Income Tax on 19 January, 2016
Author: Akil Kureshi
Bench: Akil Kureshi, Mohinder Pal
C/SCA/15143/2015 ORDER
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
SPECIAL CIVIL APPLICATION NO. 15143 of 2015
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KAIRA DISTRICT CO OP MILK PRODUCERS UNION LIMITED....Petitioner(s)
Versus
DEPUTY COMMISSIONER OF INCOME TAX....Respondent(s)
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Appearance:
MR MANISH J SHAH, ADVOCATE for the Petitioner(s) No. 1
MR KM PARIKH, ADVOCATE for the Respondent(s) No. 1
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CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI
and
HONOURABLE MR.JUSTICE MOHINDER PAL
Date : 19/01/2016
ORAL ORDER
(PER : HONOURABLE MR.JUSTICE AKIL KURESHI)
1. The petitioner Kaira District Coop Milk Producers (herein after referred to as "assessee") has challenged a notice dated 26.3.2015 as at AnnexureG to the petition issued by the Assessing Officer seeking to reopen the assessment of the petitioner for the assessment year 20102011 which was previously framed after scrutiny.
2. Brief facts are as under. The petitioner is a cooperative society of milk producers which purchases milk from primary cooperative societies which are members of the petitioner society and is also engaged in supplying such milk and milk products to the federal cooperative society namely, Gujarat Cooperative Marketing Federation Page 1 of 14 HC-NIC Page 1 of 14 Created On Fri Jan 22 01:33:01 IST 2016 C/SCA/15143/2015 ORDER Limited ("GCMMFL" for short). For the assessment year 20102011, the petitioner filed its return of income which was scrutinised by the Assessing Officer who passed the assessment order under section 143(3) of the Income Tax Act, 1961 ("the Act" for short) on 31.1.2013.
3. To reopen such assessment, the Assessing Officer issued impugned noticed. Upon the request of the petitioner, he also supplied the reasons recorded by him for issuing notice for reopening. Such reasons read as under :
"3.1 As per clause 11(a) of the 3CD Report, the assessee is following mercantile system of accounting. On perusal of notes on account of assessee in the audit report for financial year 200910 (Asst. Year 201011) read as "provision of Rs.76 crore for milk purchase/ sale account for milk pool price receivable from Gujarat Cooperative Milk Marketing Federation Ltd has been made by union and the same has been credited to respective primary co operative societies. To this extent, trading, profit and loss account and balance sheet show provisional figures." It was noticed, that no such provision existed in the Balance Sheet. As assessee was following mercantile system of accounting, milk pool price receivable from Gujarat Co operative Milk Marketing Federation Ltd should be passed through P&L account and it should be shown as income of assessee if such amount is not included in any other item of income. The remark of the auditor indicated that this income was not included in P & L items.
3.2 Section 5 of the Act provides that the total income of a person for any previous year shall include all incomes from whatever sources derived, actually received or accrued or deemed to be received or accrued.Page 2 of 14
HC-NIC Page 2 of 14 Created On Fri Jan 22 01:33:01 IST 2016 C/SCA/15143/2015 ORDER 3.3 As this involves income to the extent of Rs.76 crore which falls within the ambit of section 5 of the Act.
4.1 On further perusal of P&L account, computation of income as well as Tax Audit Report in Form No. 3CD, it has been also noticed that the assessee has claimed deduction of Rs.2,29,17,577/ u/s. 80P(2)(d) of the Act being interest received from co--operative banks & co operative societies. The Chartered Accountant also in 3CD report under Clause26 with statement showed the same. It was allowed.
4.2 It was, however, noticed from the P&L a/c that assessee has received total interest of Rs.3,52,26,000/ out of which Rs.2,29,17,577 was interest received from co operativebanks & cooperative societies. It was further noticed from the P&L a/c that assessee has paid interest of Rs.12,52,58,000/. As such, net interest income of assessee is ()Rs.9,00,32,000/ (Rs.12,52,58,000 Rs.3,52,26,000). As net interest income was in the negative, the assessee was not eligible for deduction of any amount u/s.80P(2)(d).
4.3 As per section 80P(2)(d) of the Act, where, in the case of an assessee being a cooperative society, the gross total income includes any income by way of interest or dividends derived by the cooperative society from its investments with any other cooperative society, the whole of such income shall be deducted in computing the total income of the assessee. The quantum of deduction on account of interest income should be the net amount of interest earned. If the assessee had earned interest from its investment with cooperative banks/societies, and had paid interest on loans taken by it from various bodies and the interest paid exceeded the interest earned, no deduction on that account is allowable. Reliance is placed Page 3 of 14 HC-NIC Page 3 of 14 Created On Fri Jan 22 01:33:01 IST 2016 C/SCA/15143/2015 ORDER on decision of the Allahabad High Court in the case of CIT V/s. Dugdh Uptpadak Sehkari Sangh Ltd. 202 CTR 343 in which the above mentioned ratio was decided by the Hon'ble High Court.
4.4 In view of the above facts. the assessee was not eligible for deduction of any amount u/s.80P(2)(d) of the Act of Rs.2,29,17,577/ 5.1 On further perusal of Tax Audit Report in Form No.3CD, note forming part of income furnished by assessee and computation of income, it was noticed that though the assessee in the note forming part of income tax return has stated that an amount of Rs.14,68,985/ (net) expenditure under the head "Prior period income/expenses is debited to Profit & Loss a/c". It was however noticed from the 3CD report that Chartered Accountant has reported prior period income (net) of Rs.21,34,590/ against clause 22(b) of the Tax Audit Report. It was further noticed that while computing total taxable income, prior period expenditure of Rs.14,68,985/-- as reported by assessee itself.
5.2 As per section 37(1) of the act, any expenditure not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". As per clause 22(b) of the 3cd report, the ca has to furnish particulars of income or expenditure of prior period credited to profit and loss account. Prior period expenditure (expenditure incurred prior to the current ay) is not allowed as deduction from the profit current year.
6. In view of the above facts and circumstances of the case, Page 4 of 14 HC-NIC Page 4 of 14 Created On Fri Jan 22 01:33:01 IST 2016 C/SCA/15143/2015 ORDER I have reason to believe that income chargeable to tax to the extent of Rs. 78,43,86,562/ (Rs.76 crore + Rs.2,29,17,577 + Rs.14,68,985) has escaped the assessment within the meaning of section 147 of the Act read with Explanation 2(c)(i) therto for, the Asstt. Year 201011."
4. The petitioner objected to such notice of reopening. However, such objections were rejected by an order dated 25.8.2015. Hence this petition.
5. Upon perusal of the reasons, we notice that the Assessing Officer had recorded three separate reasons for issuing the notice for reopening. In short, these reasons are as under :
1) Regarding a sum of Rs.76 crores, receivable from GCMMFL for which a provision was made by the assessee which according to the Assessing Officer was not shown as income of the assessee in the Profit and Loss account.
According to the Assessing Officer thus the said sum of Rs. 76 crores which was chargeable to tax had escaped assessment.
2) The assessee had claimed deduction of Rs.2.29 crores (rounded off) for interest under section 80P(2)(d) of the Act which was not allowable since the assessee had paid a total interest of 12.52 crores (rounded off). According to the Assessing Officer, since the net interest income was in the negative, no deduction under section 80P(2)(d) could have been granted.
3) According to the Assessing Officer, the sum of Page 5 of 14 HC-NIC Page 5 of 14 Created On Fri Jan 22 01:33:01 IST 2016 C/SCA/15143/2015 ORDER Rs.14.68. lacs (rounded off) which was a prior period expenditure was claimed by the assessee which was not allowable.
6. Inviting our attention to such reasons and other material on record, counsel for the petitioner challenged the notice for reopening on the following grounds :
1) That there has been no escapement of income regarding sum of Rs.76 crores since it had already been included in Profit and Loss account. The auditor's remarks only clarified that such sum represented a provisional figure. This however, does not mean the sum did not form part of total sales and purchases of the milk during the period under consideration. The belief of the Assessing Officer that the income chargeable to tax had escaped assessment was invalid.
2) Regarding second ground it was contended that the entire issue of deduction of interest income under section 80P(2)(d) of the Act was examined by the Assessing Officer during the original assessment for which written queries were raised and replies were given by the assessee. Any reexamination of such issue would only be on the basis of change of opinion not permissible even within period of four years from the end of relevant assessment year.
3) Regarding the ground no.3, counsel contended that sum of Rs.14.68 lacs did not represent the assessee's prior period expenditure. It was in fact, income which was offered to tax by reducing the expenditure for the period Page 6 of 14 HC-NIC Page 6 of 14 Created On Fri Jan 22 01:33:01 IST 2016 C/SCA/15143/2015 ORDER under consideration and thereby increasing the income chargeable to tax. The Assessing Officer thus proceeded on entirely erroneous footing on this count.
7. On the other hand, learned counsel Shri K.M. Parikh for the Revenue opposed the petition contending that the impugned notice has been issued within a period of four years from the end of relevant assessment year. The additional requirement under proviso to section 147 that income chargeable to tax had escaped assessment due to failure on part of the assessee to disclose truly and fully all material facts, therefore, cannot be applied. Admittedly so far as reasons no. 1 and 3 are concerned, there was no scrutiny during the original assessment. The Assessing Officer therefore, must be allowed to examine these questions. He further submitted that a sum of Rs. 76 crores had not been reflected in Profit and Loss account and, therefore, escaped assessment. Regarding 14.68 lacks, he submitted that being a prior period expenditure, it was not allowable as an expenditure during the current assessment year. With respect to claim of deduction of interest under section 80P(2)(d), counsel submitted that the issue of the assessee having negative interest income was not examined by the Assessing Officer nor full disclosures were made by the assessee on this count.
8. Having thus heard learned counsel for the parties and having perused the materials on record, we would segregate our observations on the basis of three separate reasons recorded by the Assessing Officer.
Page 7 of 14HC-NIC Page 7 of 14 Created On Fri Jan 22 01:33:01 IST 2016 C/SCA/15143/2015 ORDER
9. With respect to the first reason of sum of Rs.76 crores previously receivable from GCMMFL not being offered to tax, we notice that the assessee had in the Profit and Loss account indicated sum of Rs.736.68 crores by way of milk sales. As against that the assessee had shown a sum of Rs.111.4 crores towards milk purchases during the previous year relevant to the assessment year 20092010. Thus the total milk sales and purchase figures were reflected in the Profit and Loss account. Auditor in his report in connection with a sum of Rs.76 crores receivable from GCMMFL, had placed the following note :
"6. Provision of Rs.76 crore for Milk purchase/sale account for Milk pool price receivable from Gujarat Cooperative Milk Marketing Federation Ltd has been made by Union and the same has been credited to respective primary co operative societies. To this extent, Trading, Profit and Loss account and Balance Sheet show provisional figures."
10. Thus, this note merely clarifies that provision of Rs.76 crores was made for milk purchases and sales account for milk pool price receivable from GCMMFL. It was clarified that same has been credited to respective primary cooperative societies. It was further clarified that to this extent trading, profit and loss account and balance sheet show provisional figures. This note, in fact, clarified that said sum of Rs.76 crores was a provisional figure for milk purchases and sales account receivable from GCMMFL. In fact, it clarifies that such sum has been reflected in the trading, profit and loss account and balance sheet on the basis of provisional figures. The Assessing Officer's assertion therefore, that the said sum Page 8 of 14 HC-NIC Page 8 of 14 Created On Fri Jan 22 01:33:01 IST 2016 C/SCA/15143/2015 ORDER was not reflected under the profit and loss account is not correct. This ground for reopening therefore, must fail.
11. Coming to the ground no.2 for reopening, we may recall that it pertained to the claim of deduction of interest of Rs.2.29 crores under section 80P(2)(d) of the Act. In this context, the Assessing Officer during the assessment proceedings had raised the following queries in writing :
"9. Please furnish detailed interest account(s) for all sorts of interest paid/payable and received/receivable.
29. Justify your claim of deduction u/s.80G, 80P(2)(d) and 80(P)(2)(e) with cogent and sufficient evidences."
12. To these queries, the petitioner had replied as under :
"5. Point No.9: Details of interest paid or payable and details of interest received or receivable are enclosed herewith as per Annexure C and Annexure D respectively.
9(b) Deduction u/s 80P(2)(d):
Interest income of Rs.2,29,17,577/ has been claimed as deduction u/s.80P(2)(d) on the basis of chart showing interest income earned. You will please find from the chart that the interest has been earned out of the investment of amount received on sale of milk, milk products etc from GCMMF Ltd.
Similarly the dividend of Rs.1,06,54,490/ has been claimed as deduction u/s.80P(2)(d) of the I.T Act as the amount was invested in earlier years from our own funds. Please note that we have not borrowed any funds for purchase of shares on which we earned dividend income and claimed as deduction u/s.80P(2)(d). As the interest and dividend has been received from the Cooperative Page 9 of 14 HC-NIC Page 9 of 14 Created On Fri Jan 22 01:33:01 IST 2016 C/SCA/15143/2015 ORDER Societies and earned out of investment made from our own funds, we are entitled to full deduction u/s 80P(2)(d) of the Incometax Act.
We have earned interest on short term deposit with Coop Bank or from Coop Societies. We submit that no expenditure whatsoever in the form of interest has been incurred by us for earning such dividend and interest from CoOpSocieties. We submit that expenditure of interest has no nexus whatsoever with the income of the interest and dividend earned during the year.
Relied on :
a) In the case of Banas Dist. Coop Milk Producers Union Ltd., Hon'ble Appellate Tribunal has dismissed the appeal filed by the department in A.Ys.199091, 199192, 1992
93.
b) Hon'ble Appellate Tribunal has dismissed on similar grounds the appeal filed by the department in the case of (1) Kaira Dist. Coop Milk Producer's union Ltd. In A.Y. 198687 and (2) Sabarkantha Dist. Coop Milk Producer's Union Ltd in A.Ys. 199293 and 199394.
c) CIT Vs. Haryana Coop Sugar Mills Ltd., 180 ITR 631 (P&H)"
13. It can thus be seen that the entire issue of the petitioner's claim of deduction of interest of Rs.2.29 crores under section 80P(2)(d) of the Act was examined by the Assessing Officer threadbare during the original assessment proceedings. It was in response to the queries raised by the Assessing Officer that the petitioner made a detailed representation and pointed out that the petitioner had earned interest income of Rs.2.29 crores which was Page 10 of 14 HC-NIC Page 10 of 14 Created On Fri Jan 22 01:33:01 IST 2016 C/SCA/15143/2015 ORDER earned out of investment of amount received on sale of milk, milk products from GCMMFL. It was pointed out that since the interest was received from the cooperative society and earned out of investment made from its own fund, the assessee was entitled to full deduction under section 80P(2)(d) of the Act. It was further clarified that such interest was earned on short term deposits with the cooperative banks or from Cooperative societies. It was stated that no expenditure in the form of interest was incurred for earning such interest. The assessee also submitted that the expenditure of interest has no nexus with the income of the interest earned during the year. The assessee relied on decisions in its own case for earlier years pointing out that on this very ground, the assessee has succeeded before the appellate Tribunal.
14. It can thus be safely concluded that the Assessing Officer had examined this issue during the original assessment proceedings. Being satisfied that the claim of the assessee was justified, no disallowance was made. If the Assessing Officer had any doubt, it was always open to raise further queries or to squeeze the assessee further on this issue. However, having accepted the detail explanation of the assessee on the question of deduction of interest, the Assessing Officer cannot be allowed to reopen the issue on a mere rethinking. Though in the context of notice for reopening, the issue withing a period of four years from the end of relevant assessment year, the element of failure on part of the assessee to disclose truly and fully all material facts, cannot be brought into, it is well settled by the decision of Supreme Court in case of Commissioner of Page 11 of 14 HC-NIC Page 11 of 14 Created On Fri Jan 22 01:33:01 IST 2016 C/SCA/15143/2015 ORDER Incometax v. Kelvinator of India Ltd. reported in (2010) 320 ITR 561(SC), even after amendment in section 147, the concept of Assessing Officer having tangible materials to form a belief that income chargeable to tax has escaped assessment,is not done away with and in this context the principle of change of opinion would squarely apply.
15. Coming to the third ground, we may recall that according to the Assessing Officer, sum of Rs.14,68 lakhs which was prior period expenditure was erroneously claimed by the assessee and thus income to that extent escaped assessment. We may however, notice the objections raised by the petitioner to this ground under communication dated 30.7.2015 which reads as under :
" 3. Prior period expenses of Rs.14,68,985/ 3.1 The AO has proposed to disallow the prior period expenses of Rs.14,68,985/. In this regard it is submitted that this net amount is not expenses but it is income. Rs.14,68,985/ is mentioned in Profit and Loss account as negative balance on expenses side. It means it is income. Even in the Tax Audit report auditor has certified the prior period amount as income of Rs.21,34,590 in Statement No. 13 attached thereto. Hence when prior period income has been offered to tax and net result is not. expenditure, question of escapement of income does not arise at all. 3.2 Please note that in the profit and loss account on the debit side amount of Rs.14.69 Lacs has been shown as negative amount of Prior period and on credit side Rs. 7.14 Lacs credited as prior period income which is tallied with the amount mentioned in the tax audit report of Rs.21.34 lacs. Thus on this ground also there is no escapement of income and notice issued u/s. 148 for this ground is also Page 12 of 14 HC-NIC Page 12 of 14 Created On Fri Jan 22 01:33:01 IST 2016 C/SCA/15143/2015 ORDER liable to be withdrawn."
16. Elaborating this ground further, the counsel Shri J.P. Shah pointed out that said sum of Rs.14.68 lacs did not represent the prior period expenses of the assessee but formed part of total of Rs.21.34 lacs prior period income. It was therefore, that the assessee in addition to crediting a sum of Rs.7.14 lacs, by way of prior period income further added a sum of Rs.14.69 lacs by giving negative effect to the expenditure. In other words, the income of the assessee was increased by said sum of Rs. 14.68 lacs.
17. We find that at pages 24 and 25 of the compilation of this petition which forms part of the trading, profit and loss account, the assessee had deducted a sum of Rs.14.69 lacs from the expense side and further showed a sum of Rs.7.14 lacs towards the income of prior period. Thus a total sum of Rs.21.34 lacs was reflected in the income side. Though somewhat curiously and rather awkwardly, the assessee reduced the expenditure by Rs.14.69 lacs and thereby indirectly increasing the income. The Assessing Officer was therefore, wrong in recording that said sum of Rs.14.68 lacs represented prior period expenditure of the assessee. There was no material to support this assertion and consequently his conclusion that such expenditure though not allowable was claimed benefit of and income to that extent escaped assessment. This ground therefore, lacks validity.
18. In the result, impugned notice dated 26.3.2015 is quashed. Petition is allowed and disposed of accordingly.
(AKIL KURESHI, J.) Page 13 of 14 HC-NIC Page 13 of 14 Created On Fri Jan 22 01:33:01 IST 2016 C/SCA/15143/2015 ORDER (MOHINDER PAL, J.) raghu Page 14 of 14 HC-NIC Page 14 of 14 Created On Fri Jan 22 01:33:01 IST 2016