HIGH COURT OF GUJARAT
Arvind Polycot Ltd.
Versus
Chandra Ram
SPECIAL CIVIL APPLICATION NO. 2385 OF 2001
AUGUST 27, 2012
JUDGMENT
AkilKureshi J.
The petitioner has challenged a notice dated 15.3.2001 issued by the respondent-Assessing Officer under section 148 of the Income-tax Act, 1961 (hereinafter to be referred to as “the Act”) seeking to reopen the assessment in case of the petitioner for the assessment year 1997-98. The petition arises in the following factual background:
(1.1) The petitioner is a company registered under the Companies Act, 1956 and is regularly assessed to tax. For the assessment year 1997-98, the petitioner filed its return of income on 25.11.l997 declaring total income of Rs. 1,14,26,121/-. The return was taken in scrutiny by the Assessing Officer. He framed assessment under section 143(3) of the Act on 28.3.2000 at total income of Rs. 7,15,25,010.
(1.2) It is this assessment which the Assessing Officer desired to reopen, for which impugned notice dated 15.3.2001 came to be issued. At the request of the petitioner, the Assessing Officer supplied the reasons recorded by him for reopening the assessment. Such reasons read as under:
“In this case, assessment u/s. 143(3) was completed on 28.3.2000 determining total income of Rs. 7,15,25,008/-. During the appeal proceedings for A.Y. 1995-96, it has come to the notice that the assessee has made payment of Rs. 187.54 lacs towards Voluntary Retired Scheme in F.Y. 1996-97 relevant to A.Y. 1997-98 which was allowed as revenue expenditure. Now, the CBDT has issued a Circular dated 23.1.2001 in which it has stated that any ex gratia amount which results in an enduring benefit to assessee should be treated as capital expenditure. In view of this, the said VRS payment is required to be disallowed as capital expenditure. I have therefore, reason to believe that the amount of Rs. 187.54 lacs chargeable to tax has escaped assessment. Therefore, notice u/s. 148 is issued for A.Y. 1997-98.”
(1.3) At that stage, the petitioner approached this Court challenging the very notice for reopening the assessment.
2. Taking us through the documents on record, Mr. S.N. Soparkar, learned counsel for the petitioner contended that in the original assessment, the Assessing Officer had examined the question of deduction of the payment made by the assessee-Company by way of retrenchment compensation pursuant to Voluntary Retirement Scheme(hereinafter to be referred to as “V.R.S.”). The assessee had given detailed reply and supported such a claim placing reliance on several decisions of various Courts. Satisfied that such claim was valid, the Assessing Officer, in the original assessment, made no disallowance. The counsel submitted that the Assessing Officer, having formed an opinion that the claim was genuine and valid, cannot now reopen the assessment which would be based on mere change of opinion.
3. The counsel further submitted that even otherwise the reasons recorded by the Assessing Officer would not be sufficient for the Assessing Officer to assume jurisdiction to reopen the assessment. As per the Assessing Officer, in view of the circular of Central Board of Direct Taxes (hereinafter to be referred to as “C.B.D.T”) such expenditure had to be treated as capital in nature. He therefore, held a belief that income chargeable to tax had escaped assessment. Drawing our attention to the circular of C.B.D.T in question, counsel submitted that in the circular, no specific directions have been issued to treat a particular expenditure as a capital expenditure. In any case, such directions if at all read into circular of the C.B.D.T, would be outside the purview of C.B.D.T under section 119 of the Act. It was further contended that several courts have opined that such expenditure would be revenue expenditure, having been expended wholly and exclusively for the purpose of business. The C.B.D.T.’s circular is contrary to such settled legal position.
4. The counsel further submitted that in any case reopening of an assessment on the basis of opinion of the C.B.D.T would not be permissible. He submitted that the C.B.D.T cannot give any directives to the Assessing Officer to frame assessment in a particular manner. Further, the opinion of the C.B.D.T cannot be placed on the same footing as that of statutory provisions or the pronouncement by a Court of competent jurisdiction.
5. In support of his contentions, counsel relied on the following decisions:
(5.1) In the case of Indian & Eastern Newspaper Society v. CIT [1979] 119 ITR 996 , wherein the Apex Court held and observed that opinion of internal audit party on a point of law would not amount to information enabling the Assessing Officer to form a belief that income chargeable to tax had escaped assessment.
(5.2) In the case of Sassoon J. David & Co. (P.) Ltd. v. CIT [1979] 118 ITR 261, wherein the Apex Court upheld the assessee’s contention that the compensation paid by the assessee-Company to its directors and employees for termination of their services could be stated to have been expended wholly and exclusively for the purpose of the business. The fact that such expenditure was incurred voluntarily and without any necessity would be of no consequence.
(5.3) In the case of Asstt. CIT v.Dhariya Construction Co. [2010] 328 ITR 515wherein the Apex Court observed that the opinion of DVO per se is not an information for the purpose of reopening assessment under section 147 of the Act. The Assessing Officer has to apply his mind to the information, if any, collected and must form a belief thereon.
(5.4) Our attention was drawn to the decision of the Calcutta High Court in the case of Bhartia Industries Ltd. v. CIT [2011] 201 Taxman 180. In such a decision, the validity of the same C.B.D.T circular dated 23rd January 2001 came to be examined by the Calcutta High Court in which it was held that the circular would be opposed to the decisions of Calcutta High Court in the case of Grindlays Bank P.L.C. v. CIT [1993] 201 ITR 148, CIT v. Machinery Mfg. Corpn. Ltd. [1992] 198 ITR 559 and in the case of CIT v.Bhor Industries Ltd. [2003] 264 ITR 180and in the case of CIT v. OEN India Ltd. [2011] 196 Taxman 131. The Court held that the board could not have issued such a circular. In the said judgment the Court referred to and relied upon the decision of the Apex Court in the case of UCO Bank v. CIT [1999] 104 Taxman 547, in the case of Collector of Central Excise v. Dhiren Chemical Industries AIR 2002 SC 453 and Commissioner of Customs v. Indian Oil Corpn. Ltd. [2004] 3 SCC 488 on the question of binding effect of the circular of the board issued under section 119 of the Act.
6. On the other hand, learned counsel Mr. Bhatt for the Revenue opposed the petition contending that the Assessing Officer was within his rights to reopen the assessment. He submitted that the circular of the board would form the source of information, on the basis of which, the Assessing Officer could form a belief that income chargeable to tax had escaped assessment. He submitted that sufficiency of reasons cannot be gone into by this Court while examining the validity of the notice for reopening the assessment.
7. Heavy reliance was placed on the decision of the Apex Court in the case of A.L.A. Firm v. CIT [1991] 189 ITR 285, wherein the Apex Court had the occasion to examine the validity of the notice for reopening issued by the Assessing Officer on the basis of the decision of the jurisdictional Court, which though existed at the time when the Assessing Officer framed the original assessment, was not noticed by him. In this context, the Apex Court upheld the notice for reopening relying on proposition Nos. (2) and (4) laid down by the Apex Court in the case of KalyanjiMavji& Co. v. CIT [1976] 102 ITR 287 (SC) to the effect that where in the original assessment the income liable to tax has escaped assessment due to oversight, inadvertence or a mistake committed by the Assessing Officer and where the information may be obtained even from the record of the original assessment from the investigation of the material on the record, or the facts disclosed thereby or from other enquiry or research into facts or law.
8. Having thus heard learned counsel for the parties and having perused the documents on record, we may recall that in the present case notice for reopening has been issued within four years from the end of relevant assessment year. The additional requirement therefore, that income chargeable to tax had escaped assessment due to the failure on the part of the assessee to disclose fully all material facts, before the assessee the Assessing Officer could assume jurisdiction to reopen the assessment, need not be satisfied. However, the question is whether the Assessing Officer could be said to have some tangible material to hold a belief that income chargeable to tax had escaped assessment. In this context, the question may arise whether the present circular of C.B.D.T could be stated to be a tangible material, on the basis of which, the Assessing Officer could form a belief that income chargeable to tax had escaped assessment.
9. Before taking note of the contents of the C.B.D.T circular in question, let us first examine in some detail, the material before the Assessing Officer and his consideration thereof at the time of original assessment. The assessee claimed deduction of a sum of Rs. 187.54 lacs, having spent the same wholly and exclusively for the purpose of business. The Assessing Officer desired to examine such a claim for which he raised a query in his communication dated 8.2.200 as under:
“details of retrenchment compensation and why these should not be disallowed as per last year”
10. In response to such a query, the assessee gave a detailed explanation with respect to the nature of expenditure, why the same should be allowed as revenue expenditure and decisions in support of such a stand. The assessee stated as under:
“You have asked us to show cause why the expenditure incurred on retrenchment compensation should not be disallowed on the basis of assessment order for Asstt. Year 1996-97. In this regard we have to state as under:
Arvind Polycot Limited is in the business of mfg. & sale of textiles. As is already on record, the company is restructuring its business activities.
The Voluntary Retirement Scheme was introduced to streamline the business activities. In this process it has incurred an expenditure of Rs. 187.54 lakhs on account of Voluntary Retirement Scheme.
While stating that the amount spent on Voluntary Retirement Scheme is admissible revenue expenditure, we rely on the decision of Madras High Court in case of CIT v. George Oaks Ltd. (197 ITR 288) in which has held as under:
“Held, that the purpose of retrenching the nine workmen as found by the Tribunal was only to contain the loss, reorgainse the branch by reducing the staff and to bring about a reduction in the wage bill as well. These were the matters of management pertaining to business consideration and expediency and the expenditure incurred by the assessee in this regard was for purpose of business and also with a view to maintain good relationship with the labour and that expenditure had to be considered as having been laid out wholly and exclusively for business purpose of the assessee. It was therefore deductible.” (page 288-289)
We also rely on the following later cases:
CIT v. Ramvilas Services Ltd. (211 ITR 763) (Mds.)
CIT v. Simpson & Co. (No. 2) (230 ITR 794) (Mds.)
In case of the Assessee Company it is reorganisation of business of the company by rationalising the labour to reduce the wage bill and this was done for the purpose of carrying on business of manufacture and marketing of textile. It was business consideration and expediency that required reorganisation of existing business in order to survive and make the business profitable in future.
From the Director’s Report you would note that the company has as a part of its long term business strategy purchased a textile unit, namely Ankur Textile from Arvind Mills Limited.
They have restructured the production facilities to upgrade its voile production by improving quality and established a marketing net work after acquiring the above unit. This has enabled it to get better quality product and introduce new products. On this account, the relalisation per meter has also gone up. This proves that due to retrenchment the business was never discontinued but on account of changed strategies the Assessee Company has been able to make more profits.
We therefore contend that out claim for deduction of payments made on retrenchment under Voluntary Retirement Scheme is revenue deductible as it is wholly incurred as textile manufacture for continuing in the business of textile. Our claim rightly falls under section 28/37 of the Act and is not a capital expenditure. It will not be out of place to invite your attention to turn over of textile business in this year and subsequent year which is as under:
A.Y. 1997-98
