Gujarat High Court
Deep Recycling Industries vs Deputy Commissioner Ofincome Tax - ... on 2 August, 2016
Author: Akil Kureshi
Bench: Akil Kureshi, A.J. Shastri
C/SCA/3611/2013 ORDER
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
SPECIAL CIVIL APPLICATION NO. 3611 of 2013
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DEEP RECYCLING INDUSTRIES....Petitioner(s)
Versus
DEPUTY COMMISSIONER OFINCOME TAX - CIRCLE 2....Respondent(s)
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Appearance:
MR TUSHAR P HEMANI, ADVOCATE for the Petitioner(s) No. 1
MS VAIBHAVI K PARIKH, ADVOCATE for the Petitioner(s) No. 1
MR PRANAV G DESAI, ADVOCATE for the Respondent(s) No. 1
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CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI
and
HONOURABLE MR.JUSTICE A.J. SHASTRI
Date : 02/08/2016
ORAL ORDER
(PER : HONOURABLE MR.JUSTICE AKIL KURESHI)
1. The petitioner has challenged a notice dated 8.8.2011 issued by the respondent - Assessing Officer for reopening the assessment for the Assessment Year 2006-07.
2. Brief facts stated are as under;
2.1 The petitioner is a partnership firm. For the Assessment Year 2006-07, petitioner had filed a return of income on 18.8.2006 declaring total income of Rs.56.98 lacs (rounded off). Such return was taken in scrutiny by the Assessing Officer, who passed an order of assessment under Section 143(3) of the Income-Tax Act,1961 (for short 'the Act') on Page 1 of 14 HC-NIC Page 1 of 14 Created On Tue Aug 09 00:00:14 IST 2016 C/SCA/3611/2013 ORDER 23.12.2008 determining total income of the assessee at Rs.65.14 lacs (rounded off). To reopen such assessment, the impugned notice came to be issued. The Assessing Officer had recorded following reasons for issuing the notice :
"1. In this case, the return of income for the year under consideration was filed on 18.8.2006 and the same was processed u/s. 143(1) on 22.3.2007 accepting total income at Rs.56,98,020/-. The case was scrutinized u/s. 143(3) on 23.12.2008 assessing the total income at Rs.65,14,32/-.
2. On perusal of the records of the assessee firm it is noticed that the assessee firm had not paid any interest to its partner on their capital. Though there was a clear provision in partnership deed (clause 12) Partner's capital as on 1/4/2005 ....Rs.1,31,46,154/- Interest @ 12 % per annum ....Rs. 15,77,538/-
Underassessment ....Rs. 15,77,538/-
3. Similarly, no any remuneration was paid by the assessee firm to its partners. The deduction was allowed without paying the remuneration to partners (all were active partners) though it was duly authorized in partnership deed (clause 13) with only intention to get more deduction u/s 10B and to avoid tax in the hands of partners which was contrary to decision ibid.
No profit / total income before allowing interest & remuneration to the partners as computed by the assessee in the statement of income .. Rs.1,66,33,082/-
Add: Remuneration allowed ....Nil
Less:Interest allowable to partners ....Rs.15,77,538/-
Book profit for the purpose of
remuneration ....Rs.1,50,55,544/-
u/s.49(b)(v)
Allowable remuneration ....Rs.60,74,717/-
Computation of profit of the business :
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HC-NIC Page 2 of 14 Created On Tue Aug 09 00:00:14 IST 2016
C/SCA/3611/2013 ORDER
Profit computed as per statement of income Before interest & remuneration to partners =Rs.1,66,33,082/-(A) Less :
Remuneration allowable =Rs.60,74,717/-(a) Interest payable to partners =Rs.15,77,538/-(b) Profit of the business {A-(a+b) =Rs.89,80,827/-
Computation of deduction allowable =E.T. X Net Profit
T.T.
40,704/- =Rs.89,80,827 x 10, 05
15,28,73,141
=Rs.59,06,457/-
Deduction allowed =Rs.1,01,22,844/-
4. As per provision of section 10B a deduction of such profit and gains as are derived by 100% EOU from exports of article or things or computer software for a period of 10 consecutive assessment year beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee.
5. The Hon'ble Supreme Court in the case of Mc-
dowell & Company Vs. CIT (154 ITR 148) held that tax planning should be legitimate and within the framework of law. Colourable device cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious method.
6. The assessee firm had not paid interest to its Page 3 of 14 HC-NIC Page 3 of 14 Created On Tue Aug 09 00:00:14 IST 2016 C/SCA/3611/2013 ORDER partners on their capital. The deduction was allowed without debiting the interest to partners though there was a clear provision in partnership deed (clause 12 of the partnership deed) dated 24th Oct 2002, there was no change in partnership deed from the year of inception), with only intention to get more deduction u/s 10B and to the avoid in the hands of partners deduction was allowed which was contrary to the decision ibid. This resulted in not only allowance of deduction but also avoidance of tax on the said interest income in the hands of partners.
7. Also the assessee firm had accepted the loan of Rs.18,42,907/- (from M/s.Ratilal Patel - HUF) annexure 10 to the 3CD report) in respect of which the mode of acceptance of loan was mentioned as NA. The auditor had written in footnote that necessary evidence was not in possession of the "A" hence the mode of taking or accepting loan could not be verified. Moreover, no bank statement was available on records from which this transaction could be verified.
8. The loan may have been accepted in cash or otherwise than by a/c payee cheque or bank draft which may result in non-levy of penalty of rs.18,42,907/- u/s. 271D. On perusal of the annexure 10 to the 3CD report and on verifying the account details of the assessee it is perceived that there is no acceptance of loan from above parties. In fact there is repayment of loan of Rs.9,00,000/- Chq No.291243 SBS dt.30.8.2005, Rs.40,00/- Chq No.392269 HDFC dt. __/09/2005, Rs.30,000/- Chq No. 444460 HDFC Dt.3.2.2006, Rs.872,907/- Chq No.444478 HDFC Dt.10.2.2006 during the year.
9. On verifying the account details it is crystal clear that the assessee had repaid the above loan as discussed above. However, looking to the revenue point there is repayment of loan for which there is no reflection of entries in bank account details as furnished by the assessee (on perusal of SBS ban A/c.), which needs to be scrutinizes further.
10. In view of the above, the income of the assessee to the extent of Rs.37,30,489/- (Rs.18,87,582/- plus Page 4 of 14 HC-NIC Page 4 of 14 Created On Tue Aug 09 00:00:14 IST 2016 C/SCA/3611/2013 ORDER Rs.18,42,907/-) has escaped assessment.
Therefore, in view of the above, I have reasons to believe that the income chargeable to income tax has escaped the assessment atleast to the above extent for the above assessment year. The above income chargeable to tax has escaped assessment for the A.Y.2006-07 by reason of the failure on part of the above assessee who has failed to disclose truly fully material facts for his assessment for the above assessment year. Hence, the assessment has been reopened by issue of notice u/s.148 of the Act,1961."
3. The petitioner raised objections to the notice for reopening under a communication dated 7.3.2013. These objections were, however, rejected by the Assessing Officer by an order dated 19.3.2013, upon which the petitioner filed the present petition.
4. Taking us to the material on record, learned counsel for the petitioner submitted that the impugned notice was issued beyond the 4 years from the date of relevant assessment year. There was no failure on the part of assessee to disclose truly and fully all material facts. Even the Assessing Officer in the reasons recorded has stated that on perusal of the records, he had noticed certain facts on the basis of which he was of the opinion that the claim of exemption under Section 10B of the Act was not justified. Learned counsel further submitted that the entire issue of exemption under Section 10B of the Act was examined by the Assessing Officer during the original assessment proceedings. Regarding the question of acceptance of loan of Rs.18.42 lacs and return thereof, learned counsel submitted that this ground was not germane for reopening the assessment. Mere possibility of institution of penalty proceedings would not mean income chargeable to tax Page 5 of 14 HC-NIC Page 5 of 14 Created On Tue Aug 09 00:00:14 IST 2016 C/SCA/3611/2013 ORDER had escaped the assessment. Further, the Assessing Officer cannot resort to reopening of assessment for scrutinizing the issue further, as was suggested in the present case.
5. This petition was called out and kept back several times yesterday for non-availability of counsel for the Revenue. We had ultimately heard Mr.Hemani for the petitioner and kept the matter today. Today also, learned counsel for the Revenue was absent when the petition was taken up for hearing. We, therefore, proceed to decide the petition without the benefit of arguments of the learned counsel for the Revenue.
6. In the present case, notice for reopening of the assessment has been issued beyond the 4 years from the end of relevant assessment. In view of Section 147 of the Act therefore, in order to judge the validity of the notice, the additional requirement to be examined is whether income chargeable to tax had escaped assessment due to the failure on the part of assessee to disclose truly and fully all material facts. The reasons recorded by the Assessing Officer cited two grounds for issuing the notice for reopening. First is with respect to assessee's claim of deduction under Section 10B of the Act. It is not in dispute that the petitioner - firm was eligible to claim such deduction. The Assessing Officer in the reasons recorded points out that as per the partnership deed, there was a provision for payment of interest to the partners' capital contribution to the fund of the firm. Similarly, the deed also envisaged remuneration being paid to the partners. In the present case, the firm had not paid interest on a capital of Rs.1.31 crores invested by the partners and had also not remunerated the partners as provided in the partnership Page 6 of 14 HC-NIC Page 6 of 14 Created On Tue Aug 09 00:00:14 IST 2016 C/SCA/3611/2013 ORDER deed. According to the Assessing Officer, such interest worked out at Rs.15.77 lacs and total remuneration payable to the partners came to Rs.60.74 lacs and thus, the assessee firm inflated the profit of the eligible business to the extent of Rs.89.80 lacs being a total of unpaid remuneration and interest to the partners. The deduction proportionate to this amount for the purpose of Section 10B of the Act came to Rs.59.06 lacs. According to the Assessing Officer, this deduction was not allowable. Had the interest and the remuneration paid to the partners, said sum would have been exibigle to tax in their hands. By inflating the profit of the eligible business, the assessee claimed deduction under Section 10B of the Act which was not allowable.
7. The second ground cited by the Assessing Officer in the reasons recorded pertained to a loan of Rs.18.42 lacs accepted by assessee from one M/s.Ratilal Patel-HUF. The mode of acceptance of the loan was not mentioned. The auditor had put a footnote that in business all necessary evidence the mode of taking or accepting the loan could not be verified and no bank statement was available from which this transaction could be verified. According to Assessing Officer therefore, the assessee was liable to penalty under Section 271D of the Act, which as is well known is penalty for failure to comply with the provisions of Section 269SS of the Act i.e. acceptance of loan or deposit otherwise than by account payee cheque or bank draft. In this context, the Assessing Officer further recorded that the assessee while repaying the said loan, there was no reflection of the entries in the bank account as per the details furnished by the assessee which needs to be scrutinized further.
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8. Coming to the question of inflated deduction under Section 10B of the Act by the assessee, in the reasons recorded themselves the Assessing Officer recorded that on perusal of the records of the assessee firm, it is noticed that the assessee firm has not paid the interest and remuneration to the partners though there was a clear provisions in the partnership deed in this respect. Thus, even the Assessing Officer begins with the starting point that the information leading to his formation of belief that income chargeable to tax had escaped the assessment was available on the record. It is not the case of the Assessing Officer that the partnership deed was not available on the record. It may be that this not being the initial year of assessment of the partnership firm, such document may have been produced during the earlier assessments. Nevertheless, Section 184 of the Act raises requirement of production of such a documents at the initial point of time. Sub-section (1) of Section 184 provides that a firm shall be assessed as a firm for the purposes of this Act if it is a partnership evidenced by an instrument and the individual shares of the partners were specified in that instrument. Under sub-section (2) of Section 184, a partnership would produce a certified copy of the instrument of partnership along with return of income of the firm during previous year relevant to the assessment year in respect of which the assessment as a firm is first sought. Sub-section (3) of Section 184 provides that where a firm is assessed as such for any assessment year, it shall be assessed in the same capacity for every subsequent year if there is no change under the constitution of the firm or the shares of the partners as evidenced by the instrument of partnership on the basis of Page 8 of 14 HC-NIC Page 8 of 14 Created On Tue Aug 09 00:00:14 IST 2016 C/SCA/3611/2013 ORDER which the assessment as a firm was first sought. Sub-section (4) of Section 184 of the Act provides that the firm would notify by producing certified copy of the revised instrument of the partnership firm along with return of income for the assessment year relevant to such previous year when the change might have taken place.
9. In terms of Section 184 of the Act, thus, the petitioner - firm was required to produce a certified copy of the partnership deed along with return of the initial year of assessment and produce the certified copy of the revised instrument to partnership where any change takes place in said instrument. In the present case, it is not the case of the Revenue that said partnership deed was not produced as required under sub-section (2) of Section 184 of the Act. If it is so, the Assessing Officer had full access to the terms of the partnership which included the provisions for payment of interest to the capital invested by the partners and for remuneration to the partners.
10. The fact that neither any interest nor any remuneration was paid to the partners was also very much part of the record of the assessment proceedings. The audit report accompanying the record contains several annexures. Annexure-6 thereof contains particulars of interest and remuneration inadmissible under Section 40(b) / 40(ba) to the partners. In this annexure, it was stated as under :
"During the year under review the firm has not paid interest and remuneration to partners so these clause is not applicable."
11. This annexure though had reference to Section 40(b) Page 9 of 14 HC-NIC Page 9 of 14 Created On Tue Aug 09 00:00:14 IST 2016 C/SCA/3611/2013 ORDER and 40(ba) of the Act pertaining to the limits of remuneration to the partners and payment of interest to the partners, the declaration thereof clearly provided that the firm had not paid either interest or remuneration to the partners. Thus, the fact that as per the partnership deed though interest and remuneration was to be paid to the partners, no such payments were made, was very much part of the assessment records when the Assessing Officer took up the proceedings for scrutiny assessment.
12. Quite apart from this, the Assessing Officer had examined the petitioner's claim for deduction under Section 10B of the Act during the original assessment proceedings. In response to the letter dated 29.9.2008 written by the Assessing Officer, the petitioner had provided various details which included the following :
"2. In respect of secured loan, we have C.C.A/c. with HDFC Bank Ltd. which is fully secured against hypothecation of stock. Xerox copy of loan sanction letter was furnished with our letter dated 20.12.2007. As regards the addition in partners' capital viz.(1) Ratilal B. Dobaria, (2) Babulal B. Dobaria and (3) Mahesh B. DObaria detailed copies of capital accounts and sources thereof were furnished with our letter dated 20.12.2007."
13. The partners' capital account was also produced with the return. It was after such scrutiny that the Assessing Officer in the order of assessment dated 23.12.2008 allowed the claim of deduction under Section 10B of the Act only partially. He observed as under :
"9. In view of the discussion made in the foregoing paragraphs it is thus proved in this case that the Page 10 of 14 HC-NIC Page 10 of 14 Created On Tue Aug 09 00:00:14 IST 2016 C/SCA/3611/2013 ORDER assessee has not manufactured or produced a new article or thing in segregating the aluminum and stainless steel scrap for mixed scrap. The assessee is therefore can not be allowed deduction u/s. 10B of the Act on the export of these scrap items. The deduction u/s10B of the Act is recalculated as follows after excluding the value of the aluminum and stainless steel scrap from the export sales:
Total turnover as per audited account filed with return 152873141 Total profit of the business audited account filed with return 16633082 Total export turnover as per assessee 100540704 Less :Stainless Steel Scrap as discussed above 3905082 Total export turnover 93038140 Profit of business x Export turnover 16633082 x 93038140 = 10122844 Total turnover 152873141 The assessee is allowed deduction of Rs.1,01,22,844/- u/s10B of the Act in place of the same claimed at Rs.1,09,39,147/-. Penalty proceedings u/s.271(1)(c) of the IT Act is being initiated separately for furnishing inaccurate particulars of income."
13.1 In this order also, there was no dis-allowance of deduction under Section 10B of the Act to the extent of unpaid interest and remunerations to the partners.
14. It is by now well settled that duty of the assessee is to disclose primary facts and on the basis of such facts, what legal conclusions should be arrived at would be within the purview of the Assessing Officer. It is not the duty of the assessee to advise the Assessing Officer on what legal conclusions should be arrived at on the basis of necessary Page 11 of 14 HC-NIC Page 11 of 14 Created On Tue Aug 09 00:00:14 IST 2016 C/SCA/3611/2013 ORDER facts. In case of Calcutta Discount Co. Ltd. V/s. Income- Tax Officer, Companies District I. Calcutta & Anr., reported in 41 ITR 191, the Supreme Court observed as under :
"The only nondisclosure mentioned in the report is that the company had failed to disclose "the true intention behind the sale of the shares ". Mr.Choudhury contends that this is not an omission to disclose a material fact within the meaning of Section 34 . The question whether sales of certain shares were by way of changing the investments or by way of trading in shares has to be decided on a consideration of different circumstances, including the frequency of the sales, the nature of the shares sold, the price received as compared with the cost price, and several other relevant facts. It is the duty of the assessee to disclose all the facts which have a bearing on the question; but whether the assessee had the intention to make a business profit as distinguished from the intention to change the form of the investments is really an inference to be drawn by the assessing authority from the material facts taken in conjunction with the surrounding circumstances. The law does not require the assessee to state the conclusion that could reasonable drawn from the primary facts. The question of the assessee's intention is an inferential fact and so the assessee's omission to state his " true intentions behind the sale of shares " cannot by itself be considered to be a failure or omission to disclose any material fact within the meaning of Section 34. Indeed, an assessee whose contention is that the shares were sold to change the form of investment and not with the intention of making a business profit cannot be expected to say that his true intention was other than what he contended it to be."
15. To summarize, the partnership deed was available on record, from which itself the Assessing Officer has recorded that there were provisions for payment of interest on capital and remuneration to the partners. The fact that no such payments were made during the year under consideration was Page 12 of 14 HC-NIC Page 12 of 14 Created On Tue Aug 09 00:00:14 IST 2016 C/SCA/3611/2013 ORDER also part of the record so disclosed by the assessee. The partners' capital account was also part of the assessment proceedings. There was no failure on the part of assessee to disclose truly and fully all material facts. Even if the assessee's claim of deduction under Section 10B of the Act was artificially inflated, it was well within the powers of the Assessing Officer to deny such claim while framing the assessment. The reopening of the assessment beyond the 4 years would not be permissible.
16. Coming to the second ground recorded by the Assessing Officer in the reasons, it has two elements. First is acceptance of loan without disclosing the mode of acceptance and second, the repayment of the said loan. Regarding acceptance of loan, the Assessing Officer refers to penalty under Section 271D of the Act which would be imposable for violation of provisions of Section 269SS of the Act. In this context, the Assessing Officer does not record that any income chargeable to tax had escaped assessment, the prime requirement for reopening the assessment but refers to possible penalty being imposed on the assessee. Regarding repayment of such loan though we recall that reference to the details of the cheque under which the repayment so made have been recorded, he desires to scrutinize the same further. It is held by series of judgments of this Court and other Courts that for mere scrutiny, reopening of the assessment would not be permissible. The reopening of assessment could be made if the Assessing Officer had formed a belief that income chargeable to tax had escaped assessment. In order to do so, the Assessing Officer must have some tangible material having live link with the escapement of the income on the basis of which he can form a Page 13 of 14 HC-NIC Page 13 of 14 Created On Tue Aug 09 00:00:14 IST 2016 C/SCA/3611/2013 ORDER bonafide belief of escapement of income chargeable to tax. Reopening cannot be resorted to for fishing or rowing inquiry on mere suspicion that income chargeable to tax may have escaped assessment.
17. In the result, both grounds cited by the Assessing Officer in the reasons recorded fail. The impugned notice dated 8.8.2011 is quashed and set aside. The petition is allowed and disposed of.
AKIL KURESHI, J.) (A.J. SHASTRI, J.) vipul Page 14 of 14 HC-NIC Page 14 of 14 Created On Tue Aug 09 00:00:14 IST 2016