Reassessment on ground of treatment of cenvat credit in closing stock not valid if assessee furnishes full details

HIGH COURT OF GUJARAT

Asian Silk Mills

versus

Deputy Commissioner of Income-tax

SPECIAL CIVIL APPLICATION NO. 18224 OF 2011

OCTOBER 29, 2012

JUDGMENT

N.V. Anjaria, J.

The petitioner, by presenting this petition under Article 226 of the Constitution, challenged notice dated 30.03.2011 issued by the respondent herein under section 148 of the Income Tax Act, 1961, seeking to reopen the assessment in petitioner’s case. It was also prayed to quash the decision reflected in communication dated 24.11.11, whereby the Assessing Officer rejected petitioner’s objections to reopening of the assessment.

2. Summarizing the necessary facts at the outset, the petitioner, a partnership firm engaged in the business of manufacture and sale of art silk fabrics, filed its return of income for the Assessment Year 2004-2005 in which it declared total loss of Rs. 35,89,715/-. The return was accompanied by a statement of total income, an audited annual accounts, audit report in the prescribed form as well as the audited balance-sheet. The case was selected for scrutiny assessment, and notice under section 142 (2) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’ for sake of brevity) was issued on 19.06.2006 calling for various details. The details were supplied by the petitioner by letter dated 7.7.2006. Assessment order was passed under section 143(3) of the Act on 21.12.2006. After passage of five years, the respondent Assessing Officer exercised his powers under section 147 read with section 148 and issued the impugned notice. The petitioner filed its objections on 24.06.2011. The respondent rejected the same on 24.11.2011.

2.1 While issuing notice in the petition, this Court by an interim order directed the Assessing Officer not to pass final assessment order without permission of the Court, however, allowed the Assessing Officer to proceed with the assessment. It appeared that before the said interim order could be served, the respondent passed order of assessment under section 147 read with section 143(3) on 23.12.2011. By way of amendment, the petitioner incorporated those facts in the memorandum of petition.

3. The power to reopen the assessment may be exercised provided the conditions emanating from section 147 exist. As per that provision, if the Assessing Officer (i) has reason to believe (ii) that an income chargeable to tax has escaped assessment, and (iii) which comes to his notice subsequently in course of the proceedings, (iv) he may subject to provisions of section 148 to 153 assess or reassess such income. The First Proviso to section 147 puts limit on the power in respect of cases where assessment under section 143(3) has been made for the relevant assessment year and the action is sought to be taken after expiry of four years from the end of relevant assessment year. In other words, in a case where the power to reopen is exercised after four years, it is got to be established that the escapement of income was by reason of failure on part of the assessee to disclose fully and truly all material facts necessary for his assessment for that assessment year. In the instant case, the First Proviso to section 147 would come into operation as the reopening notice was issued after expiry of four years.

4. Learned advocate Mr. Deepak Shah holding the brief for learned advocate Mr. Tej Shah for the petitioner submitted that not only that the reopening was sought after expiry of four years, but the basic conditions contemplated under section 147(1) of the Act were also not satisfied. It was submitted that the Assessing Officer had no material, much less any tangible material and therefore, there was no reason to reopen the assessment. It was further submitted that the details regarding the opening stock, purchases, sales and closing stock were filed and disclosed during the original assessment proceedings. It was submitted that only ground on which the Income Tax Officer reopened the reassessment was that the unutilized CENVAT credit of Rs. 11,94,403/- was not credited to the profit & loss account. It was submitted that the assessee had produced a copy of account showing CENVAT receivable and its utilization, which was within the knowledge of the Assessing Officer. The learned advocate relied on the apex decision in CIT v. Kelvinator of India [2010] 320 ITR 561 for the proposition that the jurisdiction to reopen the assessment could not be assumed on a mere change of opinion or in order to review the original assessment.

Also, Check it out form 403.

4.1 It was submitted that in any view of the matter, the alleged omission did not result in under assessment of income, because even if the alternative method of accounting was followed, it would not have resulted into any change of the total income. In support of that learned advocate relied on decisions in CIT v. Mahavir Aluminum Ltd. [2008] 297 ITR 77 and in CIT v. Mahalaxmi Glass Works (P.) Ltd. [2009] 318 ITR 116 (Bom.) submitting further that Mahavir Aluminum Ltd. (supra) was confirmed by the Apex Court and the SLP was dismissed. Learned advocate submitted that when all the facts were made available and there was no failure on part of the assessee to disclose fully the material facts, the conditions of the First Proviso to section 147 were not satisfied and assumption of jurisdiction under section 148 by the officer was not permissible in law.

4.2 On behalf of the respondent, learned advocate Mr. Manav Mehta submitted that the Assessing Officer during verification of the records found that the assessee was following mercantile system of accounting. On examination of the break-up of loans and advances given in the balance sheet, it was noticed that the assessee at the end of previous year ended on 31.03.2004 had to his credit unutilized CENVAT credit. Since the said amount was not shown in the profit & loss account by way of credit, in view of section 5(1) of the Act, which provides for inclusion of all income, read with provisions of section 145A of the Act, there was an omission to disclose the correct facts. According to his submission, it resulted into under assessment of income of Rs. 11,94,403/- involving short levy of income-tax of Rs. 4,28,492/-. The learned advocate relied on the affidavit-in-reply filed on behalf of the respondent and referred to the contentions therein to submit that the notice under section 148 was validly issued and there was a proper exercise of jurisdiction by the respondent Assessing Officer.

5. At this stage, the reasons for reopening recorded by the Assessing Officer may be usefully noticed, which are reproduced herein below.

“In this case return was filed on 30.10.2001 declaring loss of Rs. 35,89,715/- and assessment was completed u/s. 143(3) on 2.12.2006 determining the loss at Rs. 25,80,342/-.

Assessee followed mercantile system of accounting. On perusal of the break up of loans and advances in the balance sheet of the assessee, it was observed that the assessee had at the end of the P.Y. ending on 31.3.2004 unutilized Cenvat Credit of R. 11,94,403/-. However, as the assessee followed the exclusive method of accounting in respect of excise duty, the unutilized Cenvat Credit was not credited to the profit & loss accounting. In view of the provisions of section 5(1) of the Act which provide for inclusion of all income from whatever source in the total income and the inclusive provisions of section 145A of the Act, the unutilized Cenvat credit was required to be added to the total income even the assessee followed exclusive method of accounting. Omission resulted in under-assessment of income of Rs. 11,94,404/- involving short levy of potential IT as under :

5.1 Now, in the context of above reasons recorder for reopening and the conditions for exercise of powers for reopening, the details regarding the original assessment for the year 2004-2005 may be looked into. It would be seen that the petitioner submitted the accounts for the corresponding previous year with an audit report in the prescribed from. They were certified by the Chartered Accountant.

5.2 Secondly, in the statement of particulars furnished under section 44AB of the Act in Form No. 3CD, it was inter-alia mentioned in Part-B as under.

5.3 In the next, the memorandum of adjustment to be made under section 145A, which was also a part of the audit report, reflected the details of the CENVAT credit availed and utilized on raw material consumed, as under.

CENVAT Credit Availed end Utilized on Raw Material consumed

5.4 Furthermore, before passing the assessment order, the Assessing Officer, by his communication dated 19.06.2006, raised various queries with reference to the notice under section 143(2) of the Act seeking from the assessee necessary information. One of the items at Sr. No. 17 in the said communication required the assessee to provide a brief note on the method of maintenance of stock and whether day-to-day stock register/record was maintained. Further, the details about the opening stock and closing stock in the format comprising particulars about the nature, description of item, quantity, rate, value and basis of valuation of each item separately were asked for. The assessee by his reply dated 07.07.2006 provided the requisite information stating that “Day-to-day stock registers are maintained. Details of opening and closing stock are filed herewith. Stock is valued at cost. Month-wise details of raw material purchase and consumed are filed herewith-page no. 96 & 97.”

6. From the preceding paragraphs No. 5.1 to 5.4, it is clear that all the relevant facts which had the context on the ground mentioned in the reasons recorded by the Assessing Officer were duly disclosed. Those facts were before the Assessing Officer when he undertook the original assessment proceedings. No new fact or any tangible material was relied on by the Officer while issuing the impugned notice.

6.1 In the above set of facts, it is to be appreciated whether the Assessment Officer acted within the parameters of his powers for reopening the assessment. At least two conditions are necessary to justify the exercise of powers under Section 147 of the Act. The first is that the Assessing Officer must have formed a belief that there is an escapement of income chargeable to tax. This formation of the belief has to be based on tangible material. Secondly, the escapement of income is by itself, a requirement. It is sine qua non. An inquiry under section 147 would be inconsequential if the element of escapement does not exist. In the present case, the reopening being after expiry of four years, an additional limitation was that the escapement was required to be on account of failure on part of the assessee to disclose the material facts. It is evident from a bare reading of the reasons recorded by the respondent- Assessing Officer that nowhere he stated that the assessee failed to disclose fully and truly the facts which were necessary for his assessment. Therefore, on this count alone the action would fail to sustain. The ultimate yardstick to judge whether the reopening of assessment is on germane grounds permissible in law, is the reasons recorded by the Assessing Officer.

6.2 As already seen, only aspect mentioned in the reasons recorded is about the requirement of inclusion or non-inclusion of cenvat/modvat credit in closing stock. The Assessing Officer stated in his reasons inter alia that on perusal of break up the loans and advances in the balance-sheet, it was found that the assessee had at the end of previous year a particular amount of cenvat credit not utilised and that the assessee had not credited the said amount to the profit & loss account. In this regard, the issue could be judged and the inferences could be drawn by the Assessing Officer from the details of the closing stock valuation. As noted above, such details about the closing stock, purchase and sales were disclosed by the assessee not only in the audited accounts, but also in response to a specific query subsequently raised by the assessing officer in his letter dated 19.06.2006 seeking details on the methods of accounts, the details of opening and closing stock etc.. The assessee supplied all those details. It was thereafter that the assessment order dated 21.12.2006 was passed. The contents thereof revealed that the details relevant to the issue were dealt with by the Assessing Officer. It is trite principle that the duty of the assessee does not extent beyond placing the primary facts before the Assessing Officer and it is for the Assessing Officer to draw necessary inferences and his conclusions from such primary facts or deduce further facts.

6.3 Looking at the issue differently, when the Assessing Officer issued notice under section 148 of the Act, he had no material other than what was considered by him in course of the original assessment. The proposition is well-settled in light of decision of the Supreme Court in Kelvinator of India’s case (supra) and several other decisions that a mere change of opinion is no ground to reopen the assessment. The Assessing Officer does not derive power to issue notice under sec. 148 on same set of facts which were before him and which were considered by him while finalising the original assessment.

6.4 In the facts of the present case noted above, it is difficult to hold that the Assessing Officer had any ‘reason to believe’ for the purpose of Section 147. In Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191 (SC) the Apex Court lucidly explained what the expression “reason to believe” means.

“The expression “reason to believe” in section 34 of the Income-tax Act [Act of 1922] postulates belief and the existence of reasons for that belief. The belief must be held in good faith : it cannot be merely a pretence. The expression does not mean of purely subjective satisfaction of the Income-tax Officer : the forum of decision as to the existence of reasons and the belief is not in the mind of the Income-tax Officer. If it be asserted that the Income-tax Officer had reason to believe that income had been under-assessed by reason of failure to disclose fully and truly the facts material for assessment, the existence of the belief and the reasons for the belief, but not the sufficiency of the reasons, will be justiciable. The expression predicates that the Income-tax Officer holds the belief induced by the existence of reasons for holding such belief. It contemplates existence of reasons on which the belief is founded, and not merely a belief in the existence of reasons inducing the belief; in other words, the Income-tax Officer must on information at his disposal believe that income has been under-assessed by reason of failure fully and truly to disclose all material facts necessary for assessment. Such a belief may not be based on mere suspicion : it must be founded upon information.”

7. The above reasons render the impugned action on part of the respondent to be bad in law. However, the crux of the matter may now be seen. What is reasoned by the Assessing Officer is that since the assessee followed the exclusive method of accounting, the amount of unutilised cenvat credit ought to have been credited in the profit & loss account and the non crediting thereof resulted into under assessment of income. He referred to sec. 5(1) and sec. 145A of the Act. It could be successfully demonstrated by learned advocate for the petitioner that even if the petitioner had followed alternative method of accounting, namely the mercantile system, it would not have entailed any change in the profit amount. The assessee explained the same in his objections to the reopening thus

“Now, as the assessee is following exclusive method of accounting as rightly observed in the reasons recorded for reopening assessment, assessee has shown less expenses amounting to Rs. 62,59,770 by reducing the Cenvat Receivable amount from the opening stock and purchases. Assessee has to pay Rs. 50,57,947/- as excise on the sales in the year under consideration. So, the net excise receivable i.e. unutilised CENVAT credit comes to Rs. 11,94,403/- which is appearing on the asset side of balance-sheet. Thus, the assessee has claimed less expenses and shown more income to that extent. So, if the same is transferred to Profit and Loss a/c in that case, the profit will get reduced to that extent. Hence, the observation that omission resulted in the understatement of income for the year under consideration is totally incorrect and without any basis.”

“It is common accounting principle that if any entry appearing on the Asset Side of Balance Sheet is transferred to P & L A/c, the same will go on to reduce profit of the firm and never increase the profit of the firm. So, the observation made in reasons recorded for reopening assessment is without application of mind & without properly understanding the basic principles of accounting.”

8. The whole raison ‘de ‘tre for reopening assessment is the escapement of income. From the above facts, it was established that in either method of accounting, the total income would not have changed and the final figure would have remained the same. There was, therefore, no question of any under assessment and consequently there was no escapement of income. The Assessing Officer did not apply his mind and overlooked the simple accounting principle. The centripetal condition that there has to be an escapement of income is not fulfilled. The justification for reopening therefore falls to the ground.

9. As a result of foregoing discussion and reasons, the impugned notice dated 30.03.2011 issued under section 148 of the Act by the respondent is held to be illegal and the same is hereby quashed and set aside. As the impugned notice is set aside, the consequences would follow to all subsequent actions/orders.

10. The petition is allowed without any order as to costs.