Andhra HC (Pre-Telangana)
Mahalaxmi Motors Ltd. vs Deputy Commissioner Of Income-Tax And ... on 10 November, 2003
Equivalent citations: (2004)186CTR(AP)739, [2004]265ITR53(AP)
JUDGMENT Motilal B. Naik, J.
1. The petitioner-Mahalakshmi Motors Limited, represented by its managing director, seeks a writ of prohibition or any other appropriate writ or order or direction declaring the notice bearing No. P. A. No. M-001/DC-2(1), dated August 19, 2002, issued by the first respondent under Section 148 of the Income-tax Act, 1961, proposing to reopen the completed assessment for the assessment year 1996-97 as illegal and further seeks to restrain the respondents from proceeding further in pursuance of the said notice.
2. For the assessment year 1996-97, the petitioner-company filed its return of income under Section 139 of the Income-tax Act (for brevity "the Act"), on November 29, 1996. Along with the return, the petitioner also filed its profit and loss account for the year ended March 31, 1996, and its balance-sheet as on March 31,1996. Various schedules to the profit and loss account were also enclosed along with the return. The profit and loss account disclosed a net profit of Rs. 1,12,02,488. This profit was arrived at after inclusion of two items of income, namely, Rs. 72.50 lakhs and Rs. 45,32,852 in its income. These two items sum up to Rs. 1,17,82,852. This amount represented the premiums received by the company from the customers over and above the listed price of cars. In the computation statement in which the taxable income was arrived at in accordance with the provisions of the Act, the company arrived at a profit of Rs. 45,45,526. However, the company had a brought forward business loss of Rs. 2,21,64,479. Loss to the extent of Rs. 45,45,526 was set off against the above business profit under the provisions of Section 72(1) of the Act and thus the net taxable income was declared as nil.
3. While so, the first respondent issued notice under Section 143(2) of the Act and examined the case thoroughly on four different dates. Thereafter, a regular assessment was completed and an assessment order was passed under Section 143(3) of the Act on March 31,1999. However, a search was conducted at the business premises of the petitioner by the Income-tax Department on December 13,1995, on which basis, the Income-tax Department issued a notice under Section 158BC of the Act directing the petitioner to file its income for the "block period" of ten years and nine months, i.e., for the period from April 1,1985, to December 13, 1995. Accordingly, the petitioner filed the said return on November 13, 1996, for the block period of ten years and nine months, declaring its total "undisclosed income" as Rs. 38 lakhs. The Department, however, determined the undisclosed income for the block period as Rs. 6,85,28,373 under Section 158BC of the Act.
4. It is claimed that the petitioner filed an application before the Income-tax Settlement Commission, Additional Bench, Chennai, under Section 245C of the Act. The Settlement Commission admitted the said application and determined the total undisclosed income for the block period from April 1,1985, to December 13, 1995, as Rs. 1,36,52,700. The Settlement Commission passed an order under Section 245D(4) on February 11, 2002, determining the undisclosed income for the block period after giving ample opportunity to the Income-tax Department and the petitioner.
5. Subsequently, the Department seems to have filed miscellaneous petitions dated February 18, 2002, and May 20, 2002, before the Settlement Commission alleging that a mistake has crept in the computation of income made by the Settlement Commission and the petitioner obtained the settlement order by fraud and misrepresentation of facts and sought declaring the settlement order as void under Section 245D(6). The Settlement Commission, however, after hearing both the parties, found that the contentions of the Department were baseless and dismissed the petitions by order dated July 19, 2002, which became final.
6. It is alleged, in order to overcome the finality of the settlement order passed by the Settlement Commission under Section 245D(4) and its order passed under Section 245D(6) which dismissed the miscellaneous petitions filed by the Department, the respondents resorted to the device of reopening the regular assessment for the assessment year 1996-97 by issuing the impugned notice dated August 19, 2002, under Section 148 read with Section 147 of the Act, questioning the same, the present writ petition is filed seeking the reliefs as indicated above.
7. Meeting the allegations in the writ petition, counter and additional counters have been filed by the respondents justifying the reasons set out by the Assessing Officer for reopening the assessment. It is averred that the assessee had claimed speculative loss on account of falling share value and sought to set off the loss against the business income of the assessee. In the return filed by the assessee for the assessment year 1996-97, the assessee merely claimed loss on account of the fall of the value of share without giving the details or placing the material before the Assessing Officer in support of the said claim. It is averred by the respondents that the record disclosed that the assessee had in fact never sold the shares but arrived at the loss claimed by it. It was merely a speculative loss which cannot be set off against the business income as per Section 72 of the Act. The information available from the record disclosed that the shares on which the claim of speculative loss was made were in fact acquired by the managing director of the company and were never treated as assets of the assessee-company. The respondents alleged that the assessee had clearly failed to fully and truly disclose all the material facts necessary for completion of the assessment which has resulted in escapement of income to the extent of Rs. 9 lakhs. It is in this background, the respondents justified reopening of the assessment on the ground that true facts are not disclosed by the assessee.
8. On behalf of the writ petitioner, Sri N.R. Siva Swamy, learned counsel, mainly contended that issuance of the impugned notice to the petitioner under Section 148 of the Act on August 19, 2002, by the Department is time barred in terms of the proviso to Section 147 of the Act inasmuch as it is issued after a period of four years from the end of the relevant assessment year 1996-97 which ended on March 31, 2001. Counsel submitted, if in a given case there is any failure on the part of the assessee either to file a return or to disclose fully and truly all material facts necessary for completion of original assessment, then the respondents are justified in invoking the provisions under Section 148 of the Act. However, in this case, counsel submitted, the petitioner had furnished the entire material and has disclosed fully and truly all material facts before the assessing authority for computation of total income which was known to the Assessing Officer when he passed the original assessment order on March 31, 1999, under Section 143(3) of the Act, Counsel contended, when there is no escapement or non-disclosure of material facts truly and fully, issuance of the impugned notice is illegal. It is submitted, the completed assessment can be reopened by the Assessing Officer only by recording reasons before issuing a notice under Section 148 of the Act and while recording reasons, no fresh reasons can be added. Counsel further submitted that the material facts such as the company investing in quoted and unquoted shares amounting to Rs. 1,29,33,500 also in the personal name of the managing director as decided by the board which transaction is classified as short-term investment under the current assets, has also been disclosed by the assessee and this information was available before the assessing authority as the assessee had given all details along with the return. It is stated by learned counsel that the Assessing Officer himself allowed the loss on revaluation of Rs. 20,76,153 observing that the fall in the market value of shares being stocks of the company, disclosed under the current assets value at the lower of cost and market value. Counsel, therefore, contended when nothing is detected, the respondents could not have proceeded in reopening the matter beyond the stipulated period of four years. It is also stated, where a full and true disclosure of material facts was made by the assessee, the Department cannot reopen an assessment even if there is loss of revenue or even if the inference drawn by the Assessing Officer was erroneous in the first instance. Counsel also took us to the provisions under Section 209(3) of the Companies Act to convince the court about the mechanism to be followed in transactions of this nature. In support of his contentions, counsel also placed reliance on the decisions of the Supreme Court in Gemini Leather Stores v. ITO ; CIT v. Hemchandra Kar ; CIT v. Bhanji Lavji and in ITO v. Lakhmani Mewal Das . Counsel stated that the fact of loss arising on revaluation of shares is a non-speculative loss and it is only an ordinary business loss. This arises even when there is no actual sale of shares. It arises because of the well-recognised principle of accountancy, according to which any closing stock should be valued either at the cost of acquisition of that stock or at the prevailing market rate whichever is less. To support this contention, counsel placed reliance on a decision of the Supreme Court in Chainrup Sampatram v. CIT . Counsel, therefore, submitted that the respondents are not justified in reopening the matter beyond the stipulated period of four years from the end of the relevant assessment year and seeks to set aside the impugned notice.
9. On the contrary, Sri J.V. Prasad, learned standing counsel for the respondent, refuting the allegations made on behalf of the assessee, stated that failure to disclose all material facts also includes the deduction claimed by the assessee on account of loss in share value to the tune of Rs. 20,76,153. When this deduction is claimed, the assessing authority allowed the claim without any details and, as such, it would amount to non-disclosure of all material facts. Secondly, it is contended that there should be actual sale and the assessee shall actually suffer loss. However, the shares have been held by the managing director of the company but not by the assessee and as such the loss could not have been claimed under Section 37 of the Act. According to learned standing counsel, these factors which are vital, are not disclosed before the assessing authority truly and fully and, as such, the respondents are entitled to reopen the matter. In support of his contentions, learned standing counsel placed reliance on the decisions of the Supreme Court in Phool Chand Bajrang Lal v. ITO and in Sri Krishna Pvt. Ltd. v. ITO . Laying emphasis on these decisions, learned standing counsel stated that the respondents are justified in issuing the impugned notice and no interference is called for by this court.
10. Before we proceed to appreciate the rival contentions, it would be apposite to refer to the contents of the impugned notice. The respondents have issued the impugned notice dated August 19, 2002, to the petitioner under Section 148 of the Income-tax Act proposing to reassess the income of the petitioner under Section 147(a), of the Act, for the completed assessment year 1996-97, on the ground that the income chargeable to tax has escaped assessment within the meaning of Section 147 of the Act.
11. In this context, it is relevant to refer to the provisions of Sections 147 and 148 of the Income-tax Act, 1961. Section 147 deals with the income escaping assessment and it reads thus ;
"147. If the Assessing Officer, has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of Sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in Sections 148 to 153 referred to as the relevant assessment year) :
Provided that where an assessment under Sub-section (3) of Section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under Section 139 or in response to a notice issued under Sub-section (1) of Section 142 or Section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year.
Explanation 1.--Production before the Assessing Officer of account books or other evidence from which material evidence could, with due diligence have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of the foregoing proviso.
Explanation 2.--For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely : --
(a) where no return of income has been furnished by the assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax ;
(b) where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return ;
(c) where an assessment has been made, but--
(i) income chargeable to tax has been underassessed ; or
(ii) such income has been assessed at too low a rate ; or
(iii) such income has been made the subject of excessive relief under this Act; or
(iv) excessive loss or depreciation allowance or any other allowance under this Act has been computed."
Section 148 of the Act postulates issuance of notice to the assessee in cases where income has escaped assessment and it provides thus :
"148. (1) Before making the assessment, reassessment or recomputation under Section 147, the Assessing Officer shall serve on the assessee a notice requiring him to furnish within such period, as may be specified in the notice, a return of his income or the income of any other person in respect of which he is assessable under this Act during the previous year corresponding to the relevant assessment year, in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed; and the provisions of this Act shall, so far as may be, apply accordingly as if such return were a return required to be furnished under Section 139.
(2) The Assessing Officer shall, before issuing any notice under this section, record his reasons for doing so."
The provisions of Sections 147 and 148 of the Income-tax Act, 1961, fell for consideration before the Supreme Court in a catena of decisions including in Sri Krishna Pvt. Ltd. . The Supreme Court while interpreting the said provisions, set out the circumstances as to when the court may look into and examine the conclusion arrived at by the Income-tax Officer in proposing to initiate reassessment proceedings. The Supreme Court observed thus (headnote) ;
"The Income-tax Officer can issue notice under Section 148 of the Income-tax Act, 1961, proposing to reopen an assessment only where he has reason to believe that on account of either the omission or failure on the part of the assessee to file the return or on account of the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for that year, income has escaped assessment. The existence of the reason(s) to believe is intended to be a check, a limitation, upon his power to reopen the assessment. Section 148(2) imposes a further check upon the said power, viz., the requirement of recording of reasons for such reopening by the Income-tax Officer.,. The power conferred upon the Income-tax Officer by Sections 147 and 148 is thus not an unbridled one. It is hedged in with several safeguards conceived in the interest of eliminating room for abuse of this power by the Assessing Officers. The idea was to save the assessees from harassment resulting from mechanical reopening of assessments but this protection avails only to those assessees who disclose all material facts truly and fully. Every disclosure is not and cannot be treated to be a true and full disclosure. A disclosure may be a false one or a true one. It may be a full disclosure or it may not be. A partial disclosure may very often be a misleading one. What is required is a full and true disclosure of all material facts necessary for making assessment for that year. All the requirements stipulated by Section 147 must be given due and equal weight."
The Supreme Court further observed thus (headnote) :
"The enquiry at the stage of finding out whether the reassessment notice is valid is only to see whether there are reasonable grounds for the Income-tax Officer to believe and not whether the omission/failure and the escapement of income is established. It is necessary to keep this distinction in mind.
Since the belief is that of the Income-tax Officer, the sufficiency of reasons for forming the belief is not for the court to judge but it is open to an assessee to establish that, in fact there existed no belief or that the belief was not at all a bona fide one or was based on vague, irrelevant and non-specific information. To that limited extent, the court may look into the conclusion arrived at by the Income-tax Officer and examine whether there was any material available on the record from which the requisite belief could be formed by the Income-tax Officer and further whether that material had any rational connection or a live link for the formation of the requisite belief,"
In view of the parameters set out in the authoritative pronouncement of the Supreme Court extracted above, we now proceed to examine whether the petitioner-assessee has disclosed full and true material facts necessary for making assessment for the assessment year in question and whether the respondents are justified in issuing the impugned notice seeking to initiate reassessment proceedings against the petitioner.
Sri N. Siva Swamy, counsel for the petitioner, has drawn our attention to the material particulars which were furnished to the assessing authority by the petitioner during the relevant point of time, which are filed as material papers along with this writ petition, A glimpse at page 55 of the material papers discloses that at point No. 6 under the caption "Notes to accounts", the petitioner has furnished the following information to the assessing authority, viz., "The company has invested in quoted and unquoted shares amounting to Rs. 1,29,33,500. These are held in the personal name of the managing director as decided by the board. These are classified as 'short term investments' under the current assets. The company has not provided for reduction in the value of such investments as at the end of the year."
At page 57 of the material papers filed along with the writ petition, under schedule 10 categorised as "sales", the petitioner has disclosed all material facts falling under sales category. Under schedule 11 under the head of "Other incomes", the petitioner has furnished all the material particulars with regard to other income. It is evident from the material papers from pages 50 to 63, that the petitioner has furnished all necessary particulars and disclosed truly and fully all the material facts under schedules 1 to 23. Thus, a look at the particulars furnished by the petitioner to the Assessing Officer, it is clear that the petitioner has furnished all the material particulars for completion of the assessment.
The disclosure issue which is harped upon on behalf of the respondents is that though the assessee claimed deduction on account of loss in share value to the tune of Rs. 20,76,153, this deduction so claimed was allowed by the assessing authority without any details and that there should be actual sale and the assessee shall suffer loss and further the shares have been held by the managing director but not by the assessee and as such the assessee cannot make any claim under Section 37 of the Act. It is difficult for us to appreciate this contention of the Department. As has been noted by us above, from a perusal of the material papers filed before us, at pages 44, 49, 57 and 59 all these particulars are disclosed fully by the petitioner and these facts were available before the assessing authority while making the original assessment.
It would be apt to record the observations of the Supreme Court while approving the view of the Calcutta High Court, about the mechanism followed in commercial practice and accountancy. The Supreme Court (Chain-rup Sampatram v. CIT observed thus (page 485) :
"The true purpose of crediting the value of unsold stock is to balance the cost of those goods entered on the other side of the account at the time of their purchase, so that the cancelling out of the entries relating to the same stock from both sides of the account would leave only the transactions on which there have been actual sales in the course of the year showing the profit or loss actually realised on the year's trading."
The Supreme Court while referring to the report of the Committee on Financial Risks attaching to the holding of Trading Stocks, 1919, further observed thus (page 485 of [1953] 24 ITR) :
" 'As the entry for stock which appears in a trading account is merely intended to cancel the charge for the goods purchased which have not been sold, it should necessarily represent the cost of the goods. If it is more or less than the cost, then the effect is to state the profit on the goods which actually have been sold at the incorrect figure ...... From this rigid doctrine one exception is very generally recognised on prudential grounds and is now fully sanctioned by custom, viz., the adoption of market value at the date of making up accounts, if that value is less than cost. It is of course an anticipation of the loss that may be made on those goods in the following year, and may even have the effect, if prices rise again, of attributing to the following year's results a greater amount of profit than the difference between the actual sale price and the actual cost price of the goods in question' (extracted in paragraph 281 of the Report of the Committee on the Taxation of Trading Profits presented to British Parliament in April 1951). While anticipated loss is thus taken into account, anticipated profit in the shape of appreciated value of the closing stock is not brought into the account, as no prudent trader would care to show increased profit before its actual realisation. This is the theory underlying the rule that the closing stock is to be valued at cost or market price whichever is the lower, and it is now generally accepted as an established rule of commercial practice and accountancy. As profits for income-tax purposes are to be computed in conformity with the ordinary principles of commercial accounting, unless of course, such principles have been superseded or modified by legislative enactments, unrealised profits in the shape of appreciated value of goods remaining unsold at the end of an accounting year and carried over to the following year's account in a business that is continuing are not brought into the charge as a matter of practice, though, as already stated, loss due to a fall in price below cost is allowed even if such loss has not been actually realised."
The observations made by the Supreme Court extracted above in similar circumstances, indicating the accepted methods to be followed, prevent the respondents to contend that since the actual sale has not been effected and as such no loss is suffered by the petitioner and the recourse adopted by the assessee would amount to not disclosing the facts fully and truly.
As indicated above, in our considered view, the petitioner-assessee, had furnished all material facts truly and fully before the assessing authority at the relevant point of time. When once all the information is furnished to the assessing authority, it is for the assessing authority to decide what inference can reasonably be drawn and what legal inferences have to be drawn ultimately. It is to be noted, where full and true disclosure of facts was made by an assessee, the Department cannot reopen the assessment even if there is loss of revenue or even if legal inference drawn by the assessing authority was erroneous in the first place. Even mere change of opinion by the assessing authority is not enough for reopening the assessment. This view has been reiterated by the Supreme Court in the decisions in CIT v. Hemchandra Kar ; CIT v. Bhanji Lavji and ITO v. Lakhmani Mewal Das .
There is no dispute as regards the ratio laid down by the Supreme Court in the decisions in Phool Chand Bajrang Lal v. ITO and Sri Krishna Pvt. Ltd. v. ITO , relied upon by learned standing counsel appearing on behalf of the respondents. However, a distinction has to be drawn between cases where there is true and full disclosure of all material facts necessary for making assessment for a particular year and where there is non-disclosure of full and true material facts. In Sri Krishna Pvt. Ltd.'s case , the Supreme Court has sounded a note of caution by holding that the power conferred by Section 148 of the Act on the assessing authority is not an unbridled one and is hedged in with several safeguards conceived in the interest of eliminating room for abuse of this power. The Supreme Court further observed that these safeguards are provided to save the assessees from harassment resulting from mechanical reopening of assessments applicable to those assessees who disclose all material facts truly and fully.
In this case, as indicated by us, on an examination of the material papers filed along with the writ petition, all the material facts pertaining to the set off loss arising on revaluation of shares against its other income, and the shares on which the loss arose were standing in the name of the managing director of the company, were fully disclosed by the petitioner. Thus, there is no reason for us to hold that the petitioner has failed to disclose fully and truly all material facts relating to the claim of deduction on account of loss in share value to the tune of Rs. 20,76,153. When this deduction was claimed, the assessing authority allowed the claim as he had all the details before it.
Having regard to the facts and circumstances of the case, we are inclined to hold that the petitioner has disclosed fully and truly all the material facts necessary for making assessment and the respondents are not justified in issuing the impugned notice seeking reopening of assessment. The impugned notice dated August 19, 2002, is accordingly set aside. Consequently, the writ petition is allowed. No costs.