Castrol India Ltd. Vs DCIT (Bombay High Court)
Summary: The Bombay High Court, in Castrol India Ltd. v. Deputy Commissioner of Income-tax, Circle-1(2)(1), Mumbai & Ors., held that reassessment proceedings initiated under Section 148 of the Income-tax Act, 1961, cannot be sustained merely on the basis of an audit objection and a change of opinion when the Assessing Officer had already examined the relevant material during the original scrutiny assessment. The dispute concerned Assessment Year 2017-18, for which Castrol India Ltd., engaged in the manufacture and distribution of lubricants and related products, filed its return declaring income of Rs. 1043,79,64,000. The company had disallowed Corporate Social Responsibility (CSR) expenditure of Rs. 15,27,42,467 under Explanation 2 to Section 37(1) while separately claiming a deduction of Rs. 6,18,60,803 under Section 80G in respect of donations made to approved trusts and institutions. During the original scrutiny proceedings, the Assessing Officer issued notices under Section 142(1), sought supporting documents and explanations concerning the deduction, and received the relevant computation statements and donation receipts. The assessment was completed under Section 143(3) on 17 December 2019, determining total income at Rs. 1044,50,66,250. Subsequently, following objections raised by the Department’s Audit Wing, the Assessing Officer issued a reassessment notice dated 27 March 2021 alleging escapement of income on account of the Section 80G deduction. The assessee challenged the reopening, contending that all material facts had already been disclosed, the deduction had been specifically examined, and the reassessment was based on the same records without any fresh tangible material.
Read SC Judgment in this case: CSR Donations Eligible for Section 80G Deduction: Bombay HC Ruling Left Undisturbed by SC
The Revenue argued that CSR expenditure expressly disallowed under Section 37(1) could not subsequently qualify for deduction under Section 80G and maintained that the audit objection constituted fresh tangible information justifying reassessment. It also alleged that the assessee had not separately disclosed the donation component of Rs. 12,37,21,606 included within its CSR expenditure. Examining the assessment records, the High Court found that the assessee had furnished the relevant financial statements, computation of income, donation receipts and explanations during the original proceedings. The Court agreed that donations made to eligible trusts could qualify for deduction under Section 80G even when funded from CSR expenditure. It further observed that the Assessing Officer had previously justified the original assessment before the Audit Wing without accepting the suggested adjustment. Relying on Commissioner of Income Tax v. Kelvinator of India Ltd., (2010) 2 SCC 723, and Aroni Commercials Ltd. v. Deputy Commissioner of Income Tax, (2014) 44 taxmann.com 304 (Bombay), the Court reiterated that reassessment cannot operate as a review of an earlier decision merely because the Assessing Officer subsequently adopts a different opinion. The Court also considered Assistant Commissioner of Income Tax v. Rajesh Jhaveri Stock Brokers Pvt. Ltd., (2008) 14 SCC 208, and clarified that the requirement of a reasonable belief regarding escapement of income does not permit reopening on the basis of previously examined material without fresh tangible information. Since the original assessment had been completed after examining the relevant deduction and there was no failure to disclose material facts, the reopening amounted to an impermissible change of opinion. Accordingly, the High Court allowed the writ petition, quashed the reassessment notice dated 27 March 2021 and the order dated 21 December 2021 rejecting the assessee’s objections, and made the rule absolute without any order as to costs.
Cases Discussed
- Commissioner of Income Tax, Delhi v. Kelvinator of India Ltd., (2010) 2 SCC 723 (Supreme Court) — Followed on the distinction between reassessment and review, and the requirement of tangible material rather than a mere change of opinion.
- Assistant Commissioner of Income Tax v. Rajesh Jhaveri Stock Brokers Pvt. Ltd., (2008) 14 SCC 208 (Supreme Court) — Considered; the Court cautioned that its observations on the stage of forming a belief do not authorise a review of a completed scrutiny assessment on the same material.
- Aroni Commercials Limited v. Deputy Commissioner of Income Tax–2(1), (2014) 44 taxmann.com 304 (Bombay High Court) — Followed for the principle that an issue raised in assessment queries and answered by the assessee is considered even if the assessment order does not expressly discuss it.
FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT
1. Rule. Rule returnable forthwith. By consent of parties, taken up for final hearing.
2. Petitioner seeks to question the legality of notice dated 27th March 2021 issued by the Assessing Officer (“AO”) under Section 148 of the Income Tax Act, 1961 (“the Act”) seeking to reopen assessment for the Assessment Year 2017-18. There is also an incidental challenge to the order of the AO dated 21st December 2021 rejecting the objections raised by Petitioner to the reopening of assessment. The reopening of assessment has taken place within a period of four years from the end of the relevant AY.
3. Petitioner is a company incorporated under the Companies Act, 1956 engaged in the business of manufacture and distribution of lubricating oils, greases, brake fluids and specialty products.
4. Petitioner filed its return of income for the AY 2017-18 on 30th November 2017 declaring total income of Rs.1043,79,64,000/- and made a disallowance of an amount of Rs.15,27,42,467/- being the CSR amount in consonance with Explanation 2 to Section 37 of the Act. An amount of Rs.6,18,60,803/- (being 50% of the aggregate donation) was deducted and claimed under Section 80G of the Act. This amount was donation in respect of approved trusts/institutions, for the purposes of Section 80G of the Act. The details of the donations were given in the computation of income, which formed part of the return of income.
5. Petitioner’s return of income was selected for scrutiny. Pursuant to initiation of assessment proceedings, notices dated 5 th April 2019 and 12th September 2019 were issued under Section 142(1) of the Act seeking details along with supporting evidence including copy of the audit report in respect of the claim of deduction. Petitioner replied by letter dated 15th April 2019 explaining that no deduction was claimed by it. Another notice dated 12th September 2019 under Section 142(1) of the Act was issued asking Petitioner to file a detailed note, supporting documents and explanation on each of the points raised in the notice. Petitioner responded by letter dated 18th November 2019 once again explaining that deduction under Chapter VIA of Rs.6,18,60,803/- was on account of donation given to approved trusts and institutions under Section 80G of the Act. Once again computation of income was annexed along with copies of receipts.
6. Assessment order was passed on 17th December, 2019 under Section 143(3) of the Act determining total income of Petitioner at Rs.1044,50,66,250/-. In the computation part of the assessment order and the computation sheet annexed thereto, the deduction claimed towards CSR was fully allowed. It is the contention of Petitioner that the Audit Wing of the Department had raised objections with respect to original assessment order including in respect of the grant of deductions under Section 80G of the Act and the AO took a view that no adjustment was required as the pre- conditions for grant of deduction was fulfilled.
7. Petitioner received notice dated 27 th March 2021 under Section 148 of the Act conveying reasons to believe that income chargeable to tax for the relevant assessment year has escaped assessment and required Petitioner to deliver return for the said assessment year. Petitioner complied by filing its return on 27 th April 2021. Petitioner also requested the AO for a copy of the reasons recorded for reopening assessment. The reasons to believe escapement of income were provided by a letter dated 30 th July 2021 to which Petitioner filed its objections on 28th August 2021. The AO rejected the objections by the impugned order dated 21 st December 2021. It is this order along with notice dated 27th March 2021 alleging that income has escaped assessment which is the subject matter of challenge herein.
8. Mr. Pardiwalla, learned Senior Advocate appearing for Petitioner, challenged the reopening of assessment contending that the jurisdictional preconditions have not been fulfilled in the present case as the belief formed by the AO is based on an audit objection without fulfilling an objective criteria. He also submitted that the assessment cannot be reopened on the basis of a change of opinion and the belief so formed must be based on fresh and tangible material having a rational and a live nexus with the belief. Mr. Pardiwalla aligned the legal objections with the facts in the matter by pointing out the following:
(i) Petitioner has not claimed the deduction of CSR expenses as business expenditure.
(ii) Section 80G of the Act has no condition that such deduction shall not be allowed in respect of amounts spent out of CSR.
(iii) The AO has formed his belief regarding escapement of income based on an audit objection without an independent application of mind and had earlier refused to accept the audit objection.
(iv) Petitioner had made adequate disclosure regarding expenditure by way of CSR and deduction under Section 80G of the Act is made in the annual accounts, the tax audit report, the computation of income which was already considered by the AO while passing the original assessment order. Deduction under Section 80G of the Act was specifically mentioned in the computation sheet which formed the part of the assessment order. Therefore, it was a clear case of ‘change of opinion’. On this issue, queries were raised during the assessment proceedings and Petitioner replied thereto. Therefore, this issue was subject of consideration during the assessment proceedings.
(v) The satisfaction of the Sanctioning Authority has not been provided to Petitioner which indicates that there is no such approval. Mr. Pardiwalla thus, contends that the impugned notice and order is unreasonable and discloses an arbitrary exercise of power. He urges the Court to set aside and quash the same.
9. Mr. Suresh Kumar, learned counsel appears for the Revenue and justifies the impugned order by contending that since the deduction of CSR expenses are specifically disallowed under Section 37(1) read with Explanation 2 of the Act, the same cannot be allowed under Section 80G of the Act. While candidly admitting the audit objection, he however, asserts that the same itself is a source of information and constitutes ‘fresh tangible material’. Mr. Suresh Kumar further points out that although an amount of Rs.15,27,42,467/- appears in the profit and loss account showing debit on account of CSR expenses under the head ‘other expenses’, this includes donation expenses of Rs.12,37,21,606/-. This amount has not been separately debited in the profit and loss account which was never disclosed by Petitioner directly or indirectly. Mr. Suresh Kumar relies on the affidavit in reply filed by the Department to buttress the objectives of providing for CSR which is to share the burden of the government in providing social services by companies having a net worth.
10. Mr. Suresh Kumar has tried to unveil an alleged strategy by which Petitioner firstly incurs CSR expenses, without claiming any deduction since the same are disallowed as business expenditure, but thereafter adding back the expenditure in the computation of income. Thus, the CSR expenses are treated by Petitioner under two different heads, defeating the very public welfare purpose by converting the same as a tax saving tool. Mr. Suresh Kumar, thus, urges us to dismiss the petition.
11. We have heard both the parties and perused the records of the proceeding with the assistance of counsel.
12. It is seen that prior to the passing of the original assessment order, AO has raised queries vide notices dated 5th April 2019 and 12th September 2019, each of which were duly responded by Petitioner. Petitioner has explained that no deduction was claimed by it except that under Section 80G of the Act. Copies of receipts of donations were also provided as proof of donation. All these details were also included in the computation of income. Petitioner has, thus, submitted detailed explanation along with supporting documents. It is also seen that Petitioner has claimed deduction for eligible donation as detailed in Schedule. We agree with Mr. Pardiwalla’s submission that as far as donations given to eligible trust is concerned, it would still qualify as deduction under Section 80G of the Act even if the contribution is out of the CSR funds. The AO has examined all these aspects while passing the original assessment order.
13. The documents on record also indicate that the Audit Wing of the Department raised certain objections to the original assessment order including the issue of deduction under Section 80G of the Act. It is seen that the AO justified the original assessment order to the audit party without accepting any adjustment to the same.
14. The notice providing the reasons to believe itself is based on verification of the profit and loss account and computation of income showing the amount of CSR expenses debited under the head ‘other expenses’ and the said amount being added back and claimed as deduction under Chapter VA as donation. The notice further goes on to say that during the course of original assessment proceedings, neither the AO has asked for any details and information on this issue from Assessee nor has Assessee volunteered any details. The relevant portion of the notice providing the reasons to believe escapement of income reads thus:
“2. On verification of profit and loss account and computation of income, it is seen that an amount of Rs.15,27,42,467/- was debited on account of CSR expense in Other expenses head. Further, the aforesaid amount was added back by the assessee in its computation of income as CSR Expenses and again claimed as deduction as donation of Rs. 6,18,60,803/- under chapter VA as donation. In this connection, it is submitted that as per the amendment made vide Finance Act, 2014, CSR expenses is not allowable as business expenditure. Hence, the same is required to be disallowed and added to the total income of the assessee.
3. From the above, it is clear that the assessee has claimed expenses, which is not allowable as business expenditure and has escaped assessment by reasons of failure on the part of the assessee to disclose fully and truly all material facts and accordingly the same was required to be added to the total income shown by the assessee. It is also seen that during the course of assessment proceedings in this case, the A.O. has not asked any details and information on this issue from the assessee nor the assessee has submitted any details in respect of the same……….”
15. From the perusal of the documents, two glaring facts emerge. One is that all material/documents necessary for computing the income were disclosed and submitted by Petitioner during the course of assessment proceedings leading to an irrefutable conclusion that there was no failure on the part of Petitioner to disclose fully and truly all material facts. Secondly, there is a notable absence of any fresh tangible material coming to the knowledge of the AO and the reopening of assessment is purely on a re-examination of the very same material on the basis of which the original assessment order was passed.
16. It is a well settled principle of law that an AO has no power to review and this power is not to be confused with the power to re- assess. The Apex Court in Commissioner of Income Tax, Delhi v. Kelvinator of India Ltd. (2010) 2 SCC 723, has reiterated that mere change of opinion cannot be a ground for reopening concluded assessment. The observations made in paragraphs 6 and 7 read as below: “
6. We must also keep in mind the conceptual difference between power to review and power to reassess. The assessing officer has no power to review; he has the power to reassess. But reassessment has to be based on fulfilment of certain precondition 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.
7. 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 1-4-1989, 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………….”
17. Similarly, as held by this Court in Aroni Commercials Limited v. Deputy Commissioner of Income Tax–2(1)1 once a query is raised during the assessment proceedings and Assessee has replied to it, it follows that the query raised was a subject of consideration of the AO while completing the assessment. It is also not necessary that an assessment order should contain reference and/or discussion to disclose its satisfaction in respect of the query raised. Therefore, the reopening of the assessment, in our view, is merely on the basis of change of opinion of the AO from that held earlier during the course of assessment proceedings and this change of opinion does not constitute justification and/or reason to believe that income chargeable to tax has escaped assessment. Paragraph 14 of Aroni Commercials Limited (supra) reads as under: “
14. We find that during the assessment proceedings the petitioner had by a letter dated 9 July 2010 pointed out that they were engaged in the business of financing trading and investment in shares and securities. Further, by a letter dated 8 September 2010 during the course of assessment proceedings on a specific query made by the Assessing Officer, the petitioner has disclosed in detail as to why its profit on sale of investments should not be taxed as business profits but charged to tax under the head capital gain. In support of its contention the petitioner had also relied upon CBDT Circular No.4/2007 dated 15 June 2007. (The reasons for reopening furnished by the Assessing Officer also places reliance upon CBDT Circular dated 15 June 2007). It would therefore, be noticed that the very ground on which the notice dated 28 March 2013 seeks to reopen the assessment for assessment year 2008-09 was considered by the Assessing Officer while originally passing assessment order dated 12 October 2010. This by itself demonstrates the fact that notice dated 28 March 2013 under Section 148 of the Act seeking to reopen assessment for A.Y. 2008-09 is based on mere change of opinion. However, according to Mr. Chhotaray, learned Counsel for the revenue the aforesaid issue now raised has not been considered earlier as the same is not referred to in the assessment order dated 12 October 2010 passed for A.Y. 2008- 09. We are of the view that once a query is raised during the assessment proceedings and the assessee has replied to it, it follows that the query raised was a subject of consideration of the Assessing Officer while completing the assessment. It is not necessary that an assessment order should contain reference and/or discussion to disclose its satisfaction in respect of the query raised. If an Assessing Officer has to record the consideration bestowed by him on all issues raised by him during the assessment proceeding even where he is satisfied then it would be impossible for the Assessing Officer to complete all the assessments which are required to be scrutinized by him under Section 143(3) of the Act. Moreover, one must not forget that the manner in which an assessment order is to be drafted is the sole domain of the Assessing Officer and it is not open to an assessee to insist that the assessment order must record all the questions raised and the satisfaction in respect thereof of the Assessing Officer. The only requirement is that the Assessing Officer ought to have considered the objection now raised in the grounds for issuing notice under Section 148 of the Act, during the original assessment proceedings. There can be no doubt in the present facts as evidenced by a letter dated 8 September 2012 the very issue of taxability of sale of shares under the head capital gain or the head profits and gains from business was a subject matter of consideration by the Assessing Officer during the original assessment proceedings leading to an order dated 12 October 2010. It would therefore, follow that the reopening of the assessment by impugned notice dated 28 March 2013 is merely on the basis of change of opinion of the Assessing Officer from that held earlier during the course of assessment proceeding leading to the order dated 12 October 2010. This change of opinion does not constitute justification and/or reasons to believe that income chargeable to tax has escaped assessment.”
18. We have also noted the contents of the impugned order rejecting the objections of Petitioner. An identical and common place assertion is seen in various such orders rejecting the objections of Assessees. The Department routinely relies upon an observation of the Supreme Court in the case of Assistant Commissioner of Income Tax v. Rajesh Jhaveri Stock Brokers Pvt. Ltd.,2 which reads as follows:
“At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief. Whether the materials would conclusively prove the escapement is not the concern at that stage. This is so because the formation of belief by the Assessing Officer is within the realm of subjective satisfaction.”
19. However, Assessing Officers without appreciating the true import of the aforesaid decision of the Supreme Court, continue to reopen assessments on the ground of income having escaped assessment despite the fact that all the material and information was already available with him while passing the original assessment order. Furthermore, while conclusive proof of escapement of income may not be necessary to reopen an assessment, the least that is required is a requisite belief based on tangible material which was not accessible to the AO or that which was deliberately withheld by Assessee, which then would amount to non-disclosure of relevant information. When an assessment is sought to be reopened within a period of four years of the end of the relevant assessment year, the test to be applied is whether there is tangible material to do so. What is tangible is something which is not illusory, hypothetical or a matter of conjecture. An AO, who has plainly ignored relevant materials in arriving at an assessment acts contrary to law. The facts in the present case clearly show that the AO was infact in the knowledge of and in possession of all the relevant details regarding the deductions on account of CSR. The computation sheets, the tax audit report, the receipts from the donees and the other relevant documents were all provided and disclosed by Petitioner. It is thus a clear case of ‘change of opinion’ by the AO. The notice of reopening assessment does not by any measure disclose any material leave aside any information leading to formation of cogent and requisite belief. The finding of the Apex Court in Rajesh Jhaveri (supra) must not be used by AO to reopen assessments to review the original assessment order on the basis of a change of opinion of the AO, as done in the present case. Further, the reasons to believe notice itself indicates that the AO was already seized with information prior to passing of the original assessment order and as such, there is no tangible information on the basis of which he has allegedly formed the requisite belief.
20. In these circumstances, we have no hesitation in holding that the notice dated 27th March 2021 under Section 148 of the Act in respect of income having escaped assessment and the order dated 21st December 2021 passed by the AO rejecting the objections of Petitioner impugned herein, are untenable and cannot be sustained in law. The Petition is allowed.
21. Rule is made absolute in terms of prayer clause (A) which reads as under:
“A. that this Hon’ble Court may be pleased to issue a Writ of Certiorari or a Writ in the nature of Certiorari or any other appropriate writ, order or direction under Article 226 of the Constitution of India calling for the records of the Petitioner’s case and, after examining the legality and validity of the Impugned Notice dated 27.03.2021 issued under Section 148 of the Act (being EXHIBIT “I” hereto) and the Impugned Order dated 21.12.2021 (being EXHIBIT “M” hereto) quash and set aside the same;”
22. There is no order as to costs.
Notes:-
1 (2014) 44 taxmann.com 304 (Bombay).
2 (2008) 14 SCC 208.
