V.M. Sahai, J.@mdashThe petitioner (assessee) company was incorporated on 15th April, 1994 and since April, 2000, it is a wholly-owned subsidiary of the General Motors Corporation Group. Its equity is held by G.M. Asia Pacific Holding LIC, USA and Holden Ltd., Australia, a nominated subsidiary of General Motors Corporation, USA. The assessee company is a private limited company Incorporated under the Companies Act, 1956 and is engaged in manufacturing and trading of automobiles and its parts under the brand name ''Chevrolet''. The assessee filed his return of income for the assessment year (for short the asst. yr.) 2006-07 on 29th Dec, 2006 declaring total turnover at Rs. 1,884.51 crores (net of excise) during the year on which net profit was shown at Rs. 55.02 crores. The total taxable income was declared at Rs. NIL under e-filing. The case of the assessee was taken up for scrutiny by issuing notice on 17th Dec, 2007 under s. 143(2) of the IT Act, 1961 (in short the Act). Thereafter, a notice under s. 143(2) along with notice under s. 142(1) was issued with detailed questionnaire. In response chartered accountants of the assessee attended from time to time and filed details as called for. Since there were large number of transactions of import, royalty payment, management fee etc., the AO after considering the volume of such transactions referred the return to TPO under s. 92CA(1) of the Act after obtaining approval of CIT-3, Baroda. The TPO, namely, the Addl. CIT (TPO-1). Ahmedabad passed an order under s. 92CA(3) of the Act on 29th Oct., 2009 and directed the AO to make an addition of Rs. 53.15 crores to the total income of the assessee.
2. The additions of Rs. 53.15 crores proposed in the income returned by the assessee was prejudicial to his interest, therefore, a draft assessment order was passed on 20th Nov., 2009 under s. 144C of the Act and it was forwarded and served on the assessee on the same day. The assessee filed his objections on 17th Dec., 2009 to the draft assessment order with the Dispute Resolution Panel, Ahmedabad. A copy of the objections was also filed on 18th Dec., 2009 in the office of the Dy. CIT. Panchmahal Circle, Godhra (for short the AO).
3. The Dispute Resolution Panel. Ahmedabad issued direction to the AO on 27th Aug., 2010 to make additions under the provisions of s. 144C(6) of the Act and thereafter, the AO following the directions of the DRP as per the provisions of s. 144C(10) of the Act passed assessment order under s. 143(3) r/w s. 144C of the Act on 20th Sept., 2010 wherein the AO made additions under various heads to the income of the assessee, and allowed unabsorbed depreciation of asst. yr. 1997-98 Rs. 43,60,22,158 and accepted the total income at Rs. Nil. The relevant additions were made to the income of the assessee but the same was set off against various unabsorbed losses and unabsorbed depreciation of the previous year.
4. Paragraphs 12 and 13 of the assessment order dt. 20th Sept., 2010 are extracted below:
12. In view of the discussion in the forgoing paras, total income of the assessee is worked out as under:
13. Assessed under s. 143(3) r/w s. 144C of the IT Act, Calculate tax. Give credit of prepaid taxes. Issue demand notice accordingly. Issue show-cause notice under s. 274 r/w s. 271(1)(c) of the IT Act for the reasons discussed above in para 5.4.
5. The AO on 29th March, 2011 issued notice under s. 148 of the Act wherein it was stated that he had reason to believe that income chargeable to tax for the asst. yr. 2006-07 had escaped assessment within the meaning of s. 147 of the Act and, therefore, he had proposed to reassess income/recompute loss/depreciation allowance for the aforesaid assessment year. In compliance of the notice dt. 29th March, 2011, the assessee wrote a letter dt. 4th April, 2011 to the AO requesting him to supply the reasons recorded before issuing notice under s. 148 of the Act. The reasons for reopening the assessment recorded under s. 147 of the Act dt. 29th March, 2011 were supplied to the assessee on 29th Nov., 2011. According to the assessee, the only ground for reopening the assessment was that the AO had season to believe that the unabsorbed depreciation pertaining to asst, yr. 1997-98 of Rs. 43,60,22,158 was wrongly allowed to be set off against the income of asst. yr. 2006-07 though s. 32(2) of the Act as amended by the Finance Act No. 2, 1996, the unabsorbed depreciation for the asst. yr. 1997-98 could be carried forward upto a maximum period of 8 years from the year in which it was first computed, therefore, brought forward depreciation was eligible for carry forward and set off against the income for asst. yr. 2005-06 only.
6. It is pleaded by the petitioner that he raised various objections to notice under s. 148 by his objection dt. 7th Dec., 2011 before the AO that there was no failure on his part to disclose fully and truly all material facts necessary for assessment and requested the AO to drop the reassessment proceedings. The AO did not pass any order disposing of the objections dt. 7th Dec, 2011 filed by the petitioner and he passed assessment order on 27th Dec, 2011 under s. 143(3) r/w s. 147 of the Act and objection dt. 7th Dec, 2011 was also rejected by him in the assessment order.
7. By means of this writ petition, the petitioner has challenged the impugned notice dt. 29th March, 2011 issued under s. 148 of the Act and the assessment order dt. 27th Dec, 2011 to this petition.
8. We have heard Mr. S.N. Soparkar, learned senior counsel assisted by Mr. Bandish Soparkar holding brief of Mrs. Swati Soparkar for the petitioner and Mr. K.M. Parikh, learned Central Government standing counsel appearing for the Revenue.
9. Mr. S.N. Soparkar, learned senior counsel for the petitioner has urged that the notice dt. 29th March, 2011 under s. 148 of the Act was issued by the AO to which objections was filed by the assessee on 7th Dec., 2011, Therefore, the AO was first required to dispose of the objection of the assessee by a reasoned and speaking order and thereafter, he could proceed to pass the assessment order under s. 143(3) r/w s. 147 of the Act. It is vehemently urged that it was not open to the AO to pass an assessment order under s. 143(3) r/w s. 147 of the Act on 27th Dec, 2011 and reject the objection filed by the assessee dt 7th Dec., 2011 in the same assessment order. According to the petitioner, the order passed by the AO is in violation of the decision of the apex Court in GKN Driveshafts (India) Ltd. (infra), therefore, it is urged that the composite assessment order dt. 27th Dec., 2011 is illegal, without jurisdiction and is liable to be quashed.
10. The other argument of learned senior counsel for the assessee is that the impugned notice issued under s. 148 of the Act is contrary to law and it amounts to change of opinion by the AO, thus, the notice is bad in law. When the earlier assessment order was passed on 20th Sept., 2010, all material facts were truly and fully disclosed. The AO even made additions to the income of the assessee and set off the same against the unabsorbed losses and unabsorbed depreciation of the previous years including the year under question i.e. asst. yr. 1997-98. The reopening of the assessment is now sought on the pretext that the unabsorbed depreciation for the asst, yr. 1997-98 was inadmissible as per the provisions of s. 32(2) of the Act as amended by Finance Act No. 2 of 1996 and not eligible for being carried forward and set off against the income for the asst. yr. 2006-07. Mr. Soparkar also contended that an issue which had already been dealt with by the AO during the assessment proceedings cannot be reopened on the basis of mere change of opinion of the AO and it would amount to providing power of review to him in absence of any tangible material on record. Therefore, the notice issued under s. 148 based on mere change of opinion is liable to be quashed. He further urged that since the notice issued under s. 148 of the Act is illegal, therefore, the notice as well as the assessment order both were liable to be quashed by this Court under the writ jurisdiction.
11. Learned senior counsel Mr. Soparkar forcefully urged that s. 32(2) of the Act (as substituted by the Finance Act, 2001) would be applicable and unabsorbed depreciation for asst. yrs. 1997-98 to 2001-02 could be carried forward indefinitely. The depreciation could be claimed in any subsequent year irrespective of time-limit. The 8 years limit on the ground on which the AO has formed his opinion to reopen the assessment was no more applicable due to change in law from the asst. yr. 2002-03. It was submitted that this aspect was relevant and raised in the objection dt. 7th Dec., 2011 which was required to be considered by the AO.
12. Mr. Soparkar, lastly urged that there was no tangible material available with the AO on the basis of which he could have formed an opinion that any income chargeable to tax had escaped assessment.
13. On the other hand. Mr. K.M. Parikh, learned Central Government standing counsel appearing for the Revenue has urged that fresh assessment order had been passed by the AO on 27th Dec., 2011. Therefore, the writ petition under Art. 226 of the Constitution of India would not be maintainable. The remedy of the assessee lies in filing a statutory appeal which is available to the assessee and is required to be exhausted by the assessee. In the alternative, he has urged that if this writ petition is entertained, provisions of appeal would be rendered redundant as every assessee would prefer to'' approach this Court bye-passing the statutory remedy of appeal. In support of his argument, he placed reliance on the decisions in Arvind Mills Ltd. (infra) and GKN Driveshafts (India) Ltd. (Infra).
14. Mr. Parikh has further urged that the unabsorbed depreciation for the asst. yr. 1997-98 can be carried forward upto maximum period of 8 years from the year in which it was first computed. Thus, brought forward depreciation for the asst. yr. 1997-98 was eligible for being carried forward and set off against the income for asst. yr. 2005-06 only and unabsorbed depreciation of Rs. 43,60,22,158 for the asst. yr. 1997-98 was not eligible for being carried forward and set off against income of asst. yr. 2006-07. Therefore, the unabsorbed depreciation for the asst. yr. 1997-98 was wrongly carried forward and set off against the income for the asst. yr. 2006-07. Therefore, income to the extent has escaped assessment and the AO rightly issued notice to the assessee under s. 148 after complying with s. 147 of the Act.
15. The learned counsel for the Revenue has urged that while passing the assessment order dt. 27th Dec., 2011, the AO has considered the objections of the assessee dt. 7th Dec., 2011 and, therefore, it cannot be urged by the assessee that the assessment order has been passed without disposing of the objections filed to the notice under s. 148 of the Act, He further urged that even if the objections dt. 7th Dec., 2011 of the assessee were decided by the AO in the assessment order, that will not make the assessment order illegal and without jurisdiction.
16. Mr. Parikh further urged that reopening of assessment was on tangible material. He urged that if there was an error in applying the provisions of law, it can be treated to be tangible material and the AO was justified in reopening of assessment by issuing notice under s. 148 of the Act, From a bare perusal of s. 32(2) as amended by Finance Act No. 2 of 1996, it is established that income chargeable to tax has escaped assessment and set off for unabsorbed depreciation could not have been allowed for the asst. yr. 2006-07 as the period of 8 years expired in asst. yr. 2005-06. There was a clear link between the material facts and the opinion formed by the AO for reassessment. Therefore, the writ petition is liable to be dismissed.
17. Before we advert to the rival contentions raised by learned counsel for the parties, it is necessary to extract the reasons given by the AO dt. 29th March, 2011 for reopening of assessment under s. 147 of the Act, which is reproduced below:
Reasons for reopening of assessment
In this case, the assessee has filed return of income on 29th Dec., 2006 declaring total income at Rs. Nil under e-filing of return. In this case, an order was passed by the TPO, Addl. CIT (TOP-I), Ahmedabad under s. 92CA(3) of the IT Act on 29th Oct., 2009 and the case was referred to Dispute Resolution Panel. Assessment order was passed under s. 143(3) r/w s. 144C of the IT Act on 20th Sept., 2010 on total income at Rs. Nil. In the assessment order dt. 20th Sept., 2010, the unabsorbed depreciation pertaining to asst. yr. 1997-98 of Rs. 43,60,22,158 was allowed to be set off against the income of the asst. yr. 2006-07. As per provision of s. 32(2) of the IT Act as amended by the Finance Act No. 2, 1996 w.e.f. asst. yr. 1997-98, the unabsorbed depreciation for asst. yr. 1997-98 can be carried forward upto maximum period of 8 years from the year in which it was first computed. Thus brought forward depreciation for asst. yr. 1997-98 was eligible for carried forward and set off against the income for asst, yr. 2005-06 only. Therefore, the unabsorbed depreciation of Rs. 43,60,22,158 for asst. yr. 1997-98 was not eligible for carried forward and set off against the income for asst, yr. 2006-07 and therefore, the unabsorbed depreciation for asst. yr, 1997-98 was wrongly carried forward and set off against the income for asst. yr. 2006-07. Therefore, the income to the extent has escaped assessment.
I have therefore reason to believe that income of Rs. 43,60.22,158 being wrongly set off of unabsorbed depreciation for asst. yr. 1997-98 has escaped assessment within the meaning of s. 147 of the Act.
Issue notice under s. 148 of the IT Act.
Date: 29th March, 2011
Place: Godhra
Sd/-
Dy. CIT
Panchmahals Circle, Godhra.
18. The first question which arises for consideration is whether the writ petition filed by the petitioner challenging the notice under s. 148 and the reassessment order is maintainable or it is liable to be dismissed as adequate alternative remedy of filing an appeal was available or remedy of appeal had been availed by the petitioner while the writ petition was pending ? Recently, a Division Bench of this Court in
19. In another decision the Division Bench of this Court in Vishwanath Engineers vs. Asstt. CIT (2012) 207 Taxman 121 (Guj)(Mag) had considered the decisions of other High Courts in
From the above observation it is clear that the Supreme Court in the case of Mafatlal Industries Ltd. (supra), has specifically recognized the power of this Court to entertain a writ application by pointing out that such power cannot be circumscribed by the provisions of any enactment but while exercising such power, the writ-Court will certainly have due regard to the legislative intent evidenced by the provisions of the concerned statute and would exercise their jurisdiction consistent with the provisions of the Act. Thus, in a given case, if the statutory authority exercises its power even in the absence of the conditions recognized by the statutory provisions, a writ Court can definitely interfere to avoid prolonged alternative remedy.
The Division Bench has further held in Vishwanath Engineers (supra) that if during pendency of the writ petition challenging the reassessment order on the ground that objection filed by the assessee to the notice under s. 148 had not been decided, the petitioner files a regular appeal, even then the writ petition would be maintainable. It held in para 11 that "It is now settled law that if a litigant has concurrent remedies against the selfsame order, it can avail of the both without prejudice to his rights and contentions made therein unless there is a specific bar created by statute in the matter of availing both the remedies." The Division Bench quashed the notice issued under s. 148 of the Act, on the ground of nonexistence of valid ground as disclosed in the reasons and since the initiation of proceedings itself was bad, the subsequent order of reassessment was also quashed.
20. The procedure for filing and deciding objection to the notice under s. 148 of the Act had been crystallized by the apex Court in
However, we clarify that when a notice under s. 148 of the IT Act is issued, the proper course of action for the noticee is to file a return and if he so desires, to seek reasons for issuing notices. The AO is bound to furnish reasons within a reasonable time. On receipt of reasons, the noticee is entitled to file objections to issuance of notice and the AO is bound to dispose of the same by passing a speaking order. In the instant case, as the reasons have been disclosed in these proceedings, the AO has to dispose of the objections, if filed, by passing a speaking order, before proceeding with the assessment in respect of the abovesaid five assessment years.
21. A Division Bench of this Court in
...What the Supreme Court has now done in the
Viewed in this light, it appears to me that the rigour of availing of the alternative remedy before the AO for objecting to the reassessment notice under s. 148 has been considerably softened by the apex Court in GKN case (supra) in the year 2003. In my view, therefore, the GKN case (supra) does not run counter to the Calcutta Discount Co. Ltd., case (supra) but it merely provides for challenge to the reassessment notice in two stages, that is,--
(i) raising preliminary objections before the AO and in case of failure before the AO.
(ii) challenging the speaking order of the AO under s. 148 of the Act.
9. The position in law is thus well-settled. After a notice for reassessment has been issued an assessee is required to file the return and seek reasons for issuance of such notice. The AO is then bound to supply the reasons within a reasonable time. On receipt of reasons, the assessee is entitled to file preliminary objections to issuance of notice and the AO is under a mandate to dispose of such preliminary objections by passing a speaking order, before proceeding with the assessment in respect of the assessment year for which such notice has been issued.
22. From the aforesaid discussion, we are of the considered opinion that writ petition under Art. 226 of the Constitution of India is maintainable where no order has been passed by the AO deciding the objection filed by the assessee under s. 148 of the Act and assessment order has been passed or the order deciding an objection under s. 148 of the Act has not been communicated to the assessee and assessment order has been passed or the objection filed under s. 148 has been decided along with the assessment order. If the objection under s. 148 has been rejected without there being any tangible material available with the AO to form an opinion that there is escapement of Income from assessment and in absence of reasons having direct link with the formation of the belief, the writ Court under Art. 226 can quash the notice issued under s. 148 of the Act. The writ petition filed by the petitioner is maintainable. The AO is mandated to decide the objection to the notice under s. 148 and supply or communicate it to the assessee. The assessee gets an opportunity to challenge the order in a writ petition. Thereafter, the AO may pass the reassessment order. We hold that it was not open to the AO to decide the objection to notice under s. 148 by a composite assessment order. The AO was required to, first decide the objection of the assessee filed under s. 148 and serve a copy of the order on assessee. And after giving some reasonable time to the assessee for challenging his order, it was open to him to pass an assessment order. This was not done by the AO, therefore, the order on the objection to the notice under s. 148 and the assessment order passed under the Act deserve to be quashed.
23. The second question which arises for consideration in this petition is whether an assessment order can be reopened on the ground that in the original assessment order, the AO had not correctly applied the provisions of s. 32(2) of the Act ? The assessee filed his return of income for the asst. yr. 2006-07 on 29th Dec., 2006 declaring his total taxable income at Rs. Nil under e-filing. In his return the assessee had claimed unabsorbed losses for asst. yr. 2000-01, asst. yr. 2001-02 and unabsorbed depreciation for asst. yr. 1997-98. asst. yr. 1999-2000, asst. yr. 2000-01, asst. yr. 2001-02. The case of the assessee was taken up for scrutiny and notice was issued on 17th Dec., 2007 under s. 143(2) of the Act. Thereafter, a notice under s. 143(2) along with notice under s. 142(1) was issued with detailed questionnaire. In response the chartered accountants of the assessee attended from time to time and filed details as called for. Since there were large number of transactions of import, royalty payment, management fee etc., the AO after considering the volume of such transactions referred the return to TPO under s. 92CA(1) of the Act after obtaining approval of CIT-3, Baroda. The TPO, namely, the Addl. CIT (TPO-1), Ahmedabad passed an order under s. 92CA(3) of the Act on 29th Oct., 2009 and directed the AO to make an addition of Rs. 53.15 crores to the total income of the assessee. The DRP, Ahmedabad issued direction to the AO on 27th Aug., 2010 to make additions as per the provisions of s. 144C(6) of the Act and thereafter, the AO following the directions of the DRP as per the provisions of s. 144C(10) of the Act passed assessment order under s. 143(3) r/w s. 144C of the Act on 20th Sept., 2010 wherein the AO made additions under various heads to the income of the assessee, and allowed unabsorbed depreciation of asst. yr. 1997-98 Rs. 43,60,22,158 as well as for other assessment years and accepted the total income of the assessee at Rs. nil. The relevant additions were made to the income of the assessee but the same was set off against various unabsorbed losses and unabsorbed depreciation of the previous years.
24. From the facts stated above, it is clear that there was no omission or failure on the part of the assessee to make a return under s. 139 of the Act. The assessee had disclosed fully and truly all material facts necessary for his assessment for the year. Nor subsequently, the AO had any tangible material on record, on the basis of which he could have formed his opinion or could have reason to believe that income chargeable to tax had escaped assessment.
25. The apex Court in
On going through the changes, quoted above, made to s. 147 of the Act, we find that, prior to the Direct Tax Laws (Amendment) Act, 1987, reopening could be done under the above two conditions and fulfillment of the said conditions alone conferred jurisdiction on the AO to make a back assessment, but in s. 147 of the Act (w.e.f. 1st April, 1989), they are given a go-by and only one condition has remained viz., that where the AO has reason to believe that income has escaped assessment, confers jurisdiction to reopen the assessment. Therefore, post--1st April, 1989, power to reopen is much wider. However, one needs to give a schematic interpretation to the words ''reason to believe'' failing which, we are afraid, s. 147 would give arbitrary powers to the AO to reopen assessments on the basis of ''mere change of opinion'', which cannot be per se reason to reopen. We must also keep in mind the conceptual difference between power to review and power to reassess. The AO has no power to review; he has the power to reassess. But reassessment has to be based on fulfillment of certain preconditions and if the concept of ''change of opinion'' is removed, as contended on behalf of the Department, then, in the garb of reopening the assessment, review would take place. One must treat the concept of ''change of opinion'' as an in-built test to check abuse of power by the AO. Hence, after 1st April, 1989, the AO has power to reopen, provided that there is ''tangible material'' to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief.
26. A Division Bench of this Court in its decision dt. 30th July, 2012 in Special Civil Application No. 29792 of 2007,
41. The powers under s. 147 of the Act are special powers and peculiar in nature where a quasi-judicial order previously passed after full hearing and which has otherwise become final is subject to reopening on certain grounds. Ordinarily, a judicial or quasi-judicial order is subject to appeal, revision or even review if statute so permits but not liable to be reopened by the same authority. Such powers are vested by the legislature presumably in view of the highly complex nature of assessment proceedings involving large number of assessees concerning multiple questions of claims, deductions and exemptions, which assessments have to be completed in a time-frame. To protect the interest of the Revenue, therefore, such special provisions are made under s. 147 of the Act. However, it must be appreciated that an assessment previously framed after scrutiny when reopened, results into considerable hardship to the assessee. The assessment gets reopened not only qua those grounds which are recorded in the reasons, but also with respect to entire original assessment, of course at the hands of the Revenue. This obviously would lead to considerable hardship and uncertainty. It is precisely for this reason that even while recognizing such powers, in special requirements of the statute, certain safeguards are provided by the statute which are zealously guarded by the Courts. Interpreting such statutory provisions Courts upon Courts have held that an assessment previously framed cannot be reopened on a mere change of opinion. It is stated that power to reopening cannot be equated with review.
42. Bearing in mind these conflicting interests, if we revert back to central issue in debate, it can hardly be disputed that once the AO notices a certain claim made by the assessee in the return filed, has some doubt about eligibility of such a claim and therefore, raises queries, extracts response from the assessee, thereafter in what manner such claim should be treated in the final order of assessment, is an issue on which the assessee would have no control whatsoever. Whether the AO allows such a claim, rejects such a claim or partially allows and partially rejects the claim, are all options available with the AO. over which the assessee beyond trying to persuade the AO, would have no control whatsoever. Therefore, while framing the assessment, allowing the claim fully or partially, in what manner the assessment order should be framed, is totally beyond the control of the assessee. If the AO, therefore, after scrutinizing the claim minutely during the assessment proceedings, does not reject such a claim, but chooses not to give any reasons for such a course of action that he adopts, it can hardly be stated that he did not form an opinion on such a claim. It is not unknown that assessments of larger corporations in the modern day, involve large number of complex claims, voluminous material, numerous exemptions and deductions. If the AO is burdened with the responsibility of giving reasons for several claims so made and accepted by him, it would even otherwise cast an unreasonable expectation which within the short frame of time available under law would be too much to expect him to carry. Irrespective of this, in a given case, if the AO on his own for reasons best known to him, chooses not to assign reasons for not rejecting the claim of an assessee after thorough scrutiny, it can hardly be stated by the Revenue that the AO cannot be seen to have formed any opinion on such a claim. Such a contention, in our opinion, would be devoid of merits. If a claim made by the assessee in the return is not rejected, it stands allowed. If such a claim is scrutinized by the AO during assessment, it means he was convinced about the validity of the claim. His formation of opinion is thus complete. Merely because he chooses not to assign his reasons in the assessment order would not alter this position. It may be a non-reasoned order but not of acceptance of a claim without formation of opinion. Any other view would give arbitrary powers to the AO.
43. We are, therefore, of the opinion that in a situation where the AO during scrutiny assessment, notices a claim of exemption, deduction or such like made by the assessee, having some prima facie doubt raises queries, asking the assessee to satisfy him with respect to such a claim and thereafter, does not make any addition in the final order of assessment, he can be stated to have formed an opinion whether or not in the final order he gives his reason for not making addition.
The AO has the power to reopen the assessment proceedings if some tangible material had come to his knowledge. However, he cannot reopen the assessment merely because on the same documents considered earlier by him, another inference was possible. The reassessment can only take place if the conditions laid down under s. 147 are fulfilled otherwise under the garb of change of opinion, the AO may review his earlier assessment order.
27. The apex Court in Kelvinator of India Ltd. (supra) has observed that the concept of change of opinion is an in-built test to check abuse of power by the AO. The AO has wide power to reopen the assessment proceedings w.e.f. 1st April, 1989 provided there was some tangible material to come to the conclusion that there was escapement of income from assessment and the reasons under s. 147 must have a link with the formation of the belief. The tangible material must have nexus to the escapement of income from being assessed to tax, but without there being any tangible material, it is not open to the AO to form a belief that income of the assessee has escaped assessment from tax. The AO while forming his opinion and recording reasons under s. 147 of the Act, in the instant case, was aware that at the time of original assessment, the AO had considered the material on record and took a conscious decision in scrutiny assessment and allowed the unabsorbed depreciation pertaining to asst. yr. 1997-98 of Rs. 43,60,21,158 to be set off against the income of asst. yr. 2006-07. No tangible material was available with the AO while forming opinion under s. 147 of the Act. Reopening of original assessment order on the ground that unabsorbed depreciation was allowed to be set off, wrongly, against the provisions of amended s. 32(2) would amount to reviewing the original assessment order which is not permissible. If on the facts disclosed by the assessee, a wrong legal inference is taken by the AO at the time of original assessment then it would not confer any power on him under s. 147 of the Act to commence reassessment proceedings. The AO cannot take benefit of his own wrong and reopen the assessment proceedings under s. 147 of the Act. It would be a case of second thought on the same material and the omission to draw the correct legal presumption during the original assessment proceedings did not warrant initiation of proceedings under s. 147 of the Act. Whether the legal inference has been rightly drawn or not is none of the concern of the subsequent AO and the assessee cannot be held responsible for the remissness on the part of AO in not applying the correct law. The mistake of law claimed to have been committed by the AO in allowing unabsorbed depreciation of asst. yr. 1997-98 to be set off against the income of asst. yr. 2006-07 was not due to assessee''s omission or failure to disclose fully and truly all material facts. The mistake, if any, committed by the AO at the time of assessment could not furnish a ground to the AO to reopen the original assessment order as it would amount to change of opinion.
28. For the aforesaid reasons, we are of the considered opinion that since the assessee had disclosed fully and truly all material facts necessary for his assessment for the year and in response to the queries of the AO, the assessee had placed entire material demanded by the AO, And on the material on record, the AO applied his mind and allowed unabsorbed depreciation for the year asst. yr. 1997-98 and other assessment years. to be carried forward and set off against the income of asst. yr. 2006-07. then merely because the AO did not give reasons for allowing the claim of unabsorbed depreciation in the original assessment order would not make the assessment order illegal. The AO, in law, must be deemed to have formed an opinion that the assessee''s claim deserves to be accepted. Thus, in such a situation, the original assessment order cannot be reopened as it would amount to change of opinion by the AO and the reassessment order is liable to be set aside.
29. The last question which arises for consideration is that whether the unabsorbed depreciation pertaining to asst. yr, 1997-98 could be allowed to be carried forward and set off after a period of eight years or it would be governed by s. 32 as amended by Finance Act, 2001 ? The reason given by the AO under s. 147 is that s. 32(2) of the Act was amended by Finance Act No. 2 of 1996 w.e.f. asst. yr. 1997-98 and the unabsorbed depreciation for the asst. yr. 1997-98 could be carried forward upto the maximum period of 8 years from the year in which it was first computed. According to the AO, 8 years expired in the asst. yr. 2005-06 and only till then, the assessee was eligible to claim unabsorbed depreciation of asst. yr. 1997-98 for being carried forward and set off against the income for the asst. yr. 2005-06. But the assessee was not entitled for unabsorbed depreciation of Rs. 43,60.22,158 for asst. yr. 1997-98, which was not eligible for being carried forward and set off against the income for the asst. yr. 2006-07.
30. Prior to the Finance Act No, 2 of 1996 the unabsorbed depreciation for any year was allowed to be carried forward indefinitely and by a deeming fiction became allowance of the immediately succeeding year. The Finance Act No. 2 of 1996 restricted the carry forward of unabsorbed depreciation and set off to a limit of 8 years, from the asst. yr. 1997-98. Circular No. 762, dt. 18th Feb., 1998 [(1998) 145 CTR (St) 5] issued by the CBDT in the form of Explanatory Notes categorically provided, that the unabsorbed depreciation allowance for any previous year to which full effect cannot be given in that previous year shall be carried forward and added to the depreciation allowance of the next year and be deemed to be part thereof.
31. So, the unabsorbed depreciation allowance of asst. yr, 1996-97 would be added to the allowance of asst. yr. 1997-98 and the limitation of 8 years for the carry forward and set off of such unabsorbed depreciation would start from asst. yr. 1997-98.
32. We may now examine the provisions of s. 32(2) of the Act before its amendment by Finance Act, 2001. The section prior to its amendment by Finance Act, 2001, read as under;
Where in the assessment of the assessee full effect cannot be given to any allowance under cl. (ii) of sub-s. (1) in any previous year owning to there being no profits or gains chargeable for that previous year or owing to the profits or gains being less than the allowance, then, the allowance or the part of allowance to which effect has not been given (hereinafter referred to as unabsorbed depreciation allowance), as the case may be,--
(i) shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year;
(ii) if the unabsorbed depreciation allowance cannot be wholly set off under cl. (i), the amount not so set off shall be set off from the income under any other head, if any, assessable for that assessment year;
(iii) if the unabsorbed depreciation allowance cannot be wholly set off under cl. (i) and cl. (ii), the amount of allowance not so set off shall be carried forward to the following assessment year and--
(a) it shall be set off against the profits and gains, if any of any business or profession carried on by him and assessable for that assessment year;
(b) if the unabsorbed depreciation allowance cannot be wholly so set off, the amount of unabsorbed depreciation allowance not so set off shall be carried forward to the following assessment year not being more than eight assessment years immediately succeeding the assessment year for which the aforesaid allowance was first computed:
Provided that the time-limit of eight assessment years specified in sub-cl. (b) shall not apply in case of a company for the assessment year beginning with the assessment year relevant to the previous year in which the said company has become a sick industrial company under sub-s. (1) of s. 17 of the Sick Industrial Company (Special Provisions) Act, 1985 (1 of 1986) and ending with the assessment year relevant to the previous year in which the entire net worth of such company becomes equal to or exceeds the accumulated losses.
Explanation: For the purposes of this clause, ''net worth'' shall have the meaning assigned to it in cl. (ga) of sub-s. (1) of s. 3 of the Sick Industrial Companies (Special Provisions) Act, 1985.
33. The aforesaid provision was introduced by Finance (No. 2) Act, 1996 and further amended by the Finance Act, 2000. The provision introduced by Finance (No. 2) Act was clarified by the Finance Minister to be applicable with prospective effect.
34. Sec. 32(2) of the Act was amended by Finance Act, 2001 and the provision so amended reads as under:
Where, in the assessment of the assessee, full effect cannot be given to any allowance under sub-s. (1) in any previous year, owing to there being no profits or gains chargeable for that previous year, or owing to the profits or gains chargeable being less than the allowance, then, subject to the provisions of sub-s. (2) of s. 72 and sub-s. (3) of s. 73, the allowance or the part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following previous year and deemed to be part of that allowance, or if there is no such allowance for that previous year, be deemed to be allowance of that previous year, and so on for the succeeding previous years.
35. The purpose of this amendment has been clarified by CBDT in the Circular No. 14 of 2001, dt. 22nd Nov., 2001 [(2002) 172 CTR (St) 13]. The relevant portion of the said circular reads as under:
Modification of provisions relating to depreciation
30.1 Under the existing provisions of s. 32 of the IT Act, carry forward and set off of unabsorbed depreciation is allowed for 8 assessment years.
30.2 With a view to enable the industry to conserve sufficient funds to replace plant and machinery, specially in an era where obsolescence takes place so often, the Act has dispensed with the restriction of 8 years for carry forward and set off of unabsorbed depreciation. The Act has also clarified that in computing the profits and gains of business or profession for any previous year, deduction of depreciation under s. 32 shall be mandatory.
30.3 Under the existing provisions, no deduction for depreciation is allowed on any motor car manufactured outside India unless it is used (i) in the business of running it on hire for tourists, or (ii) outside in the assessee''s business or profession in another country.
30.4 The Act has allowed depreciation allowance on all imported motor cars acquired on or after 1st April, 2001.
30.5 These amendments will take effect from the 1st April, 2002, and will, accordingly, apply in relation to the asst. yr. 2002-03 and subsequent years.
36. The CBDT circular clarifies the intent of the amendment that it is for enabling the Industry to conserve sufficient funds to replace plant and machinery and accordingly the amendment dispenses with the restriction of 8 years for carry forward and set off of unabsorbed depreciation. The amendment is applicable from asst, yr. 2002-03 and subsequent years. This means that any unabsorbed depreciation available to an assessee on 1st April. 2002 (asst. yr. 2002-03) will be dealt with in accordance with the provisions of s. 32(2) as amended by Finance Act, 2001 and not by the provisions of s. 32(2) as it stood before the said amendment. Had the intention of the legislature been to allow the unabsorbed depreciation allowance worked out in asst. yr. 1997-98 only for eight subsequent assessment years even after the amendment of s. 32(2) by Finance Act, 2001 it would have incorporated a provision to that effect. However, it does not contain any such provision. Hence keeping in view the purpose of amendment of s. 32(2) of the Act, a purposive and harmonious interpretation has to be taken. While construing taxing statutes, rule of strict interpretation has to be applied, giving fair and reasonable construction to the language of the section without leaning to the side of assessee or the Revenue. But if the legislature fails to express clearly and the assessee becomes entitled for a benefit within the ambit of the section by the clear words used in the section, the benefit accruing to the assessee cannot be denied. However, Circular No. 14 of 2001 had clarified that under s. 32(2), in computing the profits and gains of business or profession for any previous year, deduction of depreciation under s. 32 shall be mandatory. Therefore, the provisions of s. 32(2) as amended by Finance Act, 2001 would allow the unabsorbed depreciation allowance available in the asst. yrs. 1997-98. 1999-2000. 2000-01 and 2001-02 to be carried forward to the succeeding years, and if any unabsorbed depreciation or part thereof could not be set off till the asst. yr. 2002-03 then it would be carried forward till the time it is set off against the profits and gains of subsequent years.
37. Therefore, it can be said that, current depreciation is deductible in the first place from the income of the business to which it relates. If such depreciation amount is larger than the amount of the profits of that business, then such excess comes for absorption from the profits and gains from any other business or business, if any, carried on by the assessee. If a balance is left even thereafter, that becomes deductible from out of income from any source under any of the other heads of income during that year. In case there is a still balance left over, it is to be treated as unabsorbed depreciation and it is taken to the next succeeding year. Where there is current depreciation for such succeeding year the unabsorbed depreciation is added to the current depreciation for such succeeding year and is deemed as part thereof. If, however, there is no current depreciation for such succeeding year, the unabsorbed depreciation becomes the depreciation allowance for such succeeding year. We are of the considered opinion that any unabsorbed depreciation available to an assessee on 1st April, 2002 (asst. yr. 2002-03) will be dealt with in accordance with the provisions of s. 32(2) as amended by Finance Act, 2001. And once the Circular No. 14 of 2001 clarified that the restriction of 8 years for carry forward and set off of unabsorbed depreciation had been dispensed with, the unabsorbed depreciation from asst, yr. 1997-98 upto the asst. yr. 2001-02 got carried forward to the asst. yr. 2002-03 and became part thereof, it came to be governed by the provisions of s. 32(2) as amended by Finance Act, 2001 and were available for carry forward and set off against the profits and gains of subsequent years, without any limit whatsoever. For the aforesaid reasons, this writ petition succeeds and is allowed. The notice issued under s. 148 of the IT Act, 1961, dt. 29th March, 2011 Annex. A and the assessment order dt. 27th Dec., 2011 passed by the AO Annex. F respectively to the writ petition are quashed. Rule is made absolute. The parties shall bear their own costs.
