M.S. Sanklecha, J@mdashThis Petition under Article 226 of the Constitution of India challenges the notice dated 14th March, 2007 issued under Section 148 of the Income Tax Act, 1961 (the Act) by the Assessing Officer, seeking to reopen the assessment for the Assessment Year 2002-03.
2. The Petition was admitted on 18th December, 2007. At the time of admission, the impugned notice dated 14th March, 2007 was stayed.
3. The brief undisputed facts leading to this Petition are as under:--
"(a) The Petitioner has three manufacturing units - one located at Pimpri and two at Ahmednagar. At all times relevant to this Petition, two manufacturing units of the Petitioner were located at Ahmednagar were entitled to the benefit of tax under Section 80IA/80IB of the Act as they were situated in a backward region;
(b) On 30th October, 2002, the Petitioner filed its Return of Income for the Assessment Year 2002-03, declaring total income of Rs. 6.89 Crores. In its Return of Income, the Petitioner claimed deduction under Section 80IA/80IB of the Act in respect of two manufacturing units situated at Ahmednagar aggregating to Rs. 2.86 Crores;
(c) Along with its Return of Income, the Petitioner had filed two Auditor Certificates both dated 26th October, 2002 in respect of its two manufacturing units situated at Ahmednagar, claiming the benefit of Section 80IA/IB of the Act. The Auditor''s certificate was given in terms of Section 80IA(8) of Act as then existing for claiming the deduction. Along with the Auditor''s report, the Petitioner had also filed a note indicating the manner in which it had worked out its claim for deduction under Section 80IA of the Act. The note indicated that the expenses were allocated between the three manufacturing units on its turnover, actual basis and time spent depending upon the nature of expenses;
(d) During the regular assessment proceedings, the Assessing Officer by a communication dated 27th December, 2004 inter alia sought the following information/ clarification in respect of the working of its claim for deduction under Section 80IA/IB of the Act:
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"13. From the working of deduction u/s. 80IA in respect of Ahmednagar unit, it is soon the profit of this unit includes interest of Rs. 17.14 lakhs. As interest not derived from such business of the undertaking, please explain why same should not be excluded for the profit of Industrial Undertaking.
14. File the Profit and Loss Account of each unit giving the details of expenditure actually incurred and also the common expenditure allocated against and also give the basis for allocating the expenditure.
15. Details of Power and Fuel unit wise.
16. Please submit depreciation chart as per unit wise.
17. Details of inventories unit wise.
18. Details of stores consume unit wise.
19. Details of consumption of tools/materials etc. unit wise."
(e) The Petitioner by its letter dated 25th January, 2005 responded to the queries raised by the communication dated 27th December, 2004. In its response dated 25th January, 2005 the Petitioner in particular gave details of the manner in which the expenses had been allocated amongst the three manufacturing units i.e. two in the backward region and one at Pimpri;
(f) On 9th March, 2005, the Assessing Officer passed an order for Assessment Year 2002-03 in regular assessment proceedings under Section 143(3) of the Act. The income was determined at Rs. 7.13 Crores while accepting the Petitioner''s claim for deduction under Section 80IA/IB of the Act of Rs. 2.08 Crores in the order dated 9th March, 2005;
(g) On 14th March, 2007, the impugned notice under Section 148 of the Act was issued by the Assessing Officer, seeking to re-open the assessment for the Assessment Year 2002-03. The relevant portion of the letter dated 6th August, 2007 containing the reasons recorded in support of the impugned notice dated 14th March, 2007 reads as under:
"2. Assessment in your case for A. Y. 2002-03 was originally completed u/s. 143(3) on 09.03.2005 at an income of Rs. 7,13,08,960/-. In the said assessment, the Assessing Officer had asked you to furnish details in support of your claim of exemption u/s. 80IA. You had furnished expenses as per which it has been observed that there is a dis-appropriate allocation of expenses between the various units eligible and those not eligible for deduction u/s. 80IA in view of the above, the Assessing Officer has re-opened your proceedings u/s. 148, the reasons for which are being provided to you as under:
"The assessee in this case filed Return of Income on 30/10/2002 declaring income of Rs. 6,89,93,550/. The assessment was completed u/s. 143(3) on 09/03/2005, assessing the income at Rs. 7,13,08,960/-.
The assessee company is engaged in the business of manufacturing and sale of sintered automotive parts, sintered bearings and parts, fittings and mental powders.
The assessee is claiming deduction u/s. 80IA for its unit located at Ahmednagar for manufacturing (i) Bearing and Parts (year of commencement 1994-95) & (ii) Metal Powder (year of commencement 1992-93).
The comparative figures for the turnover and profit in respect of the assessee''s 80 IA units and non 80IA units is as per Annexure ''A'' enclosed herewith.
Prima facie it appears that while preparing the accounts, the assessee has claimed most of its expenditure in the units which are not eligible for 80IA deduction, thereby inflating the profits of the units which are eligible for deduction. To highlight this fact, the following expenses are compared:
If the above expenses are re-allotted correctly in ratio of the respective turnover, then the assessee''s claim of deduction u/s. 80IA will decrease and correspondingly the profits of non 80IA units would be increased as under:
The profits of 80IA unit needs to be reduced by Rs. 52,59,040/- and accordingly corresponding 80IA deduction @ 30% i.e. Rs. 15,77,712/- needs to be reduced.
In view of the above facts, I have reason to believe that the assessee''s income has been escaped assessment and accordingly request for permission u/s. 151(1) to issue notice u/s. 148 in this this case."
(h) On 3rd September, 2007, Petitioner''s filed its objections to the reasons recorded by the Assessing Officer in support of the impugned notice dated 14th March, 2007. In its objections, the Petitioner contested the impugned notice essentially on the ground that the same is issued on change of opinion. It was pointed out that during the regular assessment proceedings under Section 143(3) of the Act, the Assessing Officer had formed an opinion that the allocation of expenses between the three units was proper. This on the basis of not only the complete disclosure of the allocation of expenses but also in view of specific enquiry into the same by the Assessing Officer during regular assessment proceedings before accepting the same. Thus, it was submitted that there is no reason to believe on the part of the Assessing Officer to acquire jurisdiction to issue the impugned notice dated 14th November, 2007; and
(i) The Assessing Officer by an order dated 14th November, 2007 rejected the Petitioner''s objections to the reasons recorded. This inter alia, on the ground that income had escaped the assessment and post the amendment to Section 147 of the Act w.e.f. 1st April, 1989, the power of Assessing Officer to issue notice under Section 148 of the Act is much wider then that existing under the earlier provisions.
SUBMISSIONS:--
4. Mr. Irani, learned Counsel in support of the Petition submits as under:--
"(a) The sine-qua-non for the issue of a notice to re-open the assessment even within the period of four years from the end of the relevant assessment year would be a reason to believe on the part of the Assessing Officer that income chargeable to tax has escaped assessment. However, in the present case as the Assessing Officer had occasion to form an opinion on the very issue of allocation of expenditure during the regular assessment proceedings, the issue of impugned notice on the same facts being a change of opinion would not satisfy the test of reasons to believe on the part of the Assessing Officer;
(b) The impugned order dated 14th November, 2007 not dealing with the Petitioner''s objection that the notice has been issued on account of mere change of opinion, is an implicit acceptance of the Petitioner''s objection;
(c) In any event, the letter dated 6th August, 2007 by which the reasons recorded were furnished to the Petitioner itself indicates that during the regular assessment proceedings, specific questions were raised by the Assessing Officer with regard to the Petitioner''s claim for deduction under Section 80IA/80IB of the Act and consequent to the explanation of the Petitioner, the same was accepted in regular assessment proceedings. It is on observations of those very facts that now an opinion is formed, that the allocation of expenditure among the three manufacturing units is disproportionate. Thus, the impugned notice is clearly based on change of opinion; and
(d) In any view of the matter, there is no universal method of allocation of expenditure between the distinct manufacturing units run by any assessee like the Petitioner. This allocation of expenditure could be done by adopting various methods and the Petitioner itself had adopted different methods of allocation depending upon the nature of expenditure incurred amongst the three manufacturing units. This basis was found acceptable in regular assessment proceedings under Section 143(3) of the Act."
In view of the above, it is submitted that the impugned notice is without jurisdiction.
5. Opposing the Petition, Mr. Chhotrary, learned Counsel appearing for the Revenue submits as under:--
"(a) The Petitioner in its objections to the reasons recorded in support of the impugned notice dated 14th March, 2007 have not disputed the dis-proportionate allocation of expenses to its Pimpri unit (non 80IA/80IB unit) resulting in escapement of income. Thus, the escapement of Income having been accepted by the Petitioner, re-opening notice cannot be found fault with;
(b) In the present case, the issue of the impugned notice is not on the basis of any change of opinion but on the basis of tangible material namely - communication dated 15th January, 2007 received by the Assessing Officer from an Additional Commissioner of Income Tax who assessed the Petitioner to tax for Assessment Year 2004-05 indicating that the allocation of expenditure amongst the three manufacturing units was dis-proportionate having regard to its turn over, resulting in excessive allocation of expenditure to non-80IA/IB unit. It is settled position of law that the material obtained during the subsequent assessment proceedings would be a tangible material for the purpose of invoking a provisions of Section 147/148 of the Act for re-opening the assessment;
(c) Without prejudice to the above, it is submitted that in any view the Assessing Officer had formed no opinion in respect of the allocation of expenditure amongst the three manufacturing units while passing the Assessment Order on 9th March, 2005 under Section 143(3) of the Act. This is evident from the fact that no reference to the same is found in the Assessment Order dated 9th March, 2005. Moreover, the queries raised by letter dated 27th December, 2004 by the Assessing Officer were of a general nature and the response being voluminous, it did not indicate any application of mind by the Assessing Officer for forming an opinion in regular Assessment Proceedings; and
(d) At this stage, when, only a notice for re-opening has been issued, this Court should not interfere. At this stage, it is only a prima facie view and the Petitioner would during the regular assessment proceedings have sufficient opportunity to satisfy the authorities about the appropriates/corrections of the allocation of expenditure amongst its three manufacturing units."
In view of the above, it is submitted that no interference with the impugned notice is warranted.
6. The law on re-opening of an assessment under the Act, is fairly settled. An assessment once made, is final. The Assessing Officer can re-open an assessment only in accordance with the express provisions provided in Section 147/148 of the Act. This is for the reason that there is a finality/sanctity attached to an assessment order. It is only on the Assessing Officer strictly satisfying the provisions of Section 147 of the Act, that it acquires jurisdiction to re-open an assessment. Section 147 of the Act, clothes the Assessing Officer with jurisdiction to re-open an assessment on satisfaction of the following:
"(a) The Assessing Officer must have reason to believe that
(b) Income chargeable to tax has escaped the assessment and
(c) In cases where the assessment sought to be re-opened is beyond the period of four years from the end of the relevant assessment year, then an additional condition is to be satisfied viz: there must be failure on the part of the Assessee to fully and truly disclose all material facts necessary for assessment."
7. Admittedly in this case, the impugned notice has been issued within a period of four years from the end of the relevant assessment year i.e. Assessment Year 2002-03. In such cases, the Assessing Officer would be clothed with jurisdiction to issue a notice for re-opening of an assessment if he has reason to believe that income chargeable to tax has escaped the assessment. The requirement of failure to make true and full disclosure as provided in the proviso to Section 147 of the Act is not to be satisfied for issuing of re-opening notice within the period of four years from the end of the relevant assessment year. Thus, in the absence of cumulative satisfaction of reason to believe and in the absence of any income chargeable to tax escaping assessment, the Assessing Officer is not empowered with jurisdiction to re-open an assessment.
8. So far as true and correct meaning of the word ''reason to believe'' is concerned, the Supreme Court in
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However, one needs to give a schematic interpretation to the words "reason to believe" failing which, we are afraid, Section 147 would give arbitrary powers to the Assessing Officer 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. Bur reassessment has to be based on fulfillment of certain pre-conditions 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 Assessing Officer. Hence, after 1st April, 1989, the Assessing Officer has power to reopen, provided 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."
From the aforesaid observations of the Supreme Court, it is clear that the powers to re-open an assessment is not a power to review an order of assessment. Further, a change of opinion on the part of the Assessing Officer in issuing the re-opening notice, from the opinion formed on the very issue during regular assessment proceedings would result in the same ceasing to be a reason to believe.
9. Besides, this Court in catena of decisions beginning with
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The reasons recorded by the Assessing Officer cannot be supplemented by filing an affidavit or making an oral submission, otherwise, the reasons which were lacking in the material particulars would get supplemented, by the time the matter reaches the Court, on the strength of the affidavit or oral submissions."
Thus, the validity of a notice for re-opening of an assessment is to be examined on the basis of the reasons recorded at the time of issuing the notice for re-opening an assessment. The impugned notice cannot be supported any additional material which does not find a place in the reasons recorded at the time while issuing the notice.
10. Keeping the above settled principles in mind, we shall now examine the rival contentions.
11. In this case, the impugned notice has been issued within a period of four years from the end of the relevant assessment year. In such a case, the Assessing Officer acquires jurisdiction to issue the impugned notice, if he has reason to believe that income chargeable to tax has escaped assessment. Mr. Irani submits that the objections taken by the Petitioner that the impugned notice has been issued on mere change of opinion, has not been dealt with in the order dated 14th November, 2007 which results in the Petitioner''s submission of change of opinion, being accepted. It must follow that there is no reason to believe on the part of the Assessing Officer that income chargeable to tax has escaped assessment. This submission is not factually correct. The order dated 14th November, 2007 has in fact, held that there is no change of opinion in issuing the impugned notice although not supported by reasons. Therefore, the contention of the Petitioner that the Petition be allowed only on the above basis cannot be accepted.
12. Similarly, the contention of Revenue that merely because Petitioner had not contested the fact of escapement of income in its objections to the reasons recorded, it must conclusively follow that the impugned notice is valid in law and this Court should not interfere is not acceptable. The Petitioner had in its objections questioned the jurisdiction of the Assessing Officer to issue the impugned notice on the ground that there was no reason to believe on the part of the Assessing Officer this on the basis of the impugned notice is a change of opinion. This is evident from the fact that the opinion on the issue of allocation of expenses for claiming deduction under Section 80IA/IB of the Act was formed during the regular assessment proceedings. As observed above, the jurisdiction to issue a notice is acquired on satisfaction of twin conditions i.e. reason to believe and escapement of income tax in case of assessment being sought be opened within a period of less then four years from the end of Assessment Year. Besides, the issue of escapement of income chargeable to tax is also an issue on merits and may not in particular facts establish ex-facie absence of jurisdiction.
13. In the present facts, the Petitioner had along with its Return of Income filed its Computation of Income wherein claim for deduction under Section 80IA/IB of the Act was made. Besides the Auditor''s certificate as required under Section 80IA(8) of the Act to claim to deduction was also filed along with a note indicating the basis of allocation of expenditure amongst its three manufacturing units was also filed. These were all primary documents which would not normally escape examination during the scrutiny proceedings. This is also evident from the fact that during assessment proceedings, the Assessing Officer had by letter dated 27th December, 2004 called upon the Petitioner to furnish details with regard to its claim for deduction under Section 80IA/IB of the Act including the method/manner of allocation of expenditure amongst its three manufacturing units. The Petitioner by its letter dated 25th January, 2005 submitted various details of allocation of expenses supporting its note filed along with the Return of Income that the expenditure had been allocated actual basis, turn over basis and time spent basis amongst the three manufacturing units. The aforesaid allocation of expenses on different basis was on the basis of the nature of expenditure. The Assessing Officer was satisfied with the Petitioner''s response and consequently in the assessment order dated 9th March, 2005 under Section 143(3) of the Act accepted the Petitioner''s claim for deduction under Section 80IA/IB of Rs. 2.08 Crores. This establishes that an opinion was formed in respect of allocation of expenses amongst the three manufacturing units for deduction under Section 80IA/IB of the Act while passing an order of assessment on 9th March, 2005.
14. However, Mr. Chhotrary, learned Counsel appearing for the Revenue submits that there has been no formation of opinion on allocation of expenditure amongst the three manufacturing units by the Assessing Officer as the Assessment Order dated 9th March, 2005 passed under Section 143(3) of the Act contains no discussion on the same. According to the Revenue, it could only be when the assessment order contains discussion with regard to particular claim can it be said that the Assessing Officer had formed an opinion with regard to the claim made by the assessee. This Court in
15. Therefore, as there is a change of opinion in issuing the impugned notice having regard to the opinion formed while passing the assessment order under Section 143(3) of the Act, the Assessing Officer would cease to have any reason to believe as held by the Supreme Court in Kelvinator of India Ltd. (supra). Moreover, the power to re-assess under Section 147/148 of the Act is not a power to review an order of assessment passed under Section 143(3) of the Act.
16. It is further submitted on behalf of the Revenue that so far as letter dated 27th December, 2004 issued by the Assessing Officer is concerned, same was of general nature and particulars furnished by the Petitioner in response to the same are voluminous and, therefore, not indicative of any application of mind on this issue by the Assessing Officer. Reliance was placed upon the decision of this Court in
17. Further, reliance is also placed by the Revenue upon the decision of the Bombay High Court in
18. In was next contended by Mr. Chhotrary, learned Counsel appearing for the Revenue that in the present case, the impugned notice does not emanate from any change of opinion but on account of communication dated 15th January, 2007 received by the Assessing Officer from Additional Commissioner of Income Tax who had assessed the Petitioner to tax for the Assessment Year 2004-05. The aforesaid communication dated 15th January, 2007 has been annexed to the affidavit in reply dated 11th January, 2008 filed by the Assistant Commissioner of Income Tax. The aforesaid communication dated 15th January, 2007 is not even referred to in the reasons recorded while issuing the impugned notice dated 14th March, 2007. On the contrary, the communication dated 6th August, 2007 which contains the reasons recorded at the time of issuing the impugned notice refers to the details furnished by the Petitioner during the regular assessment proceedings and it is now observed therefrom that the allocation of common expenses between the three manufacturing units belonging to the Petitioner is disproportionate.
19. As pointed out herein above, this Court in series of decision beginning with Hindustan Lever (supra) has taken a view that re-opening notice has to stand or fall on the basis of the reasons recorded at the time of issuing the notice for re-opening. It is not open to the Assessing Officer to improve upon the reasons recorded at the time of issuing the notice either by adding and/or substituting the reasons by affidavit or otherwise. The tangible material i.e. letter dated 15th January, 2007 on which the Revenue relies upon for issuing of the notice, could have undoubtedly been the basis for issuing the impugned notice even if the same has been obtained in assessment proceedings for a subsequent assessment year provided the same was the basis of the impugned notice and so recorded in the reasons in support of the impugned notice.
20. In these circumstances, the reliance by the Revenue upon the letter dated 15th January, 2007 from the Additional Commissioner of Income Tax cannot be read into the reasons recorded while issuing the impugned notice.
21. It was lastly contended by Mr. Chhotrary, learned Counsel appearing for the Revenue that the impugned notice is only for reassessment for Assessment Year 2002-03. At this stage, the Revenue is not required to establish the case to the hilt, but only required to make out a prima facie case in support of its stand. In support of the above submission, reliance was also placed upon the decision of the Supreme Court in
22. For the reasons indicated herein above, we set aside the impugned notice dated 14th March, 2007 issued under Section 148 of the Act. Petition allowed. No order as to costs.
