Reassessment invalid on failure of AO to take note of information furnished during assessment

IN THE ITAT CHENNAI BENCH ‘C’

Deputy Commissioner of Income-tax (LTU)

Versus

Hyundai Motor India Ltd.

IT Appeal Nos. 1987 & 1988 (Mds.) of 2011
C.O. No. 43 (Mds.) of 2012
[ASSESSMENT YEARS 2004-05 & 2005-06]

SEPTEMBER  25, 2012

ORDER

Vikas Awasthy, Judicial Member

The present appeals, i.e., I. T. A. No. 1987/Mds/2011 relevant to the assessment year 2004-05 and I. T. A. No. 1988/Mds/2011 relevant to the assessment year 2005-06 have been filed by the Department impugning two separate orders of the Commissioner of Income-tax (Appeals), LTU, dated September 23, 2011 for the respective assessment years. The assessee has also filed cross-objection impugning the order of the Commissioner of Income-tax (Appeals) relevant to the assessment year 2005-06.

I. T. A. No. 1987/Mds/2011 :

2. The brief facts of the case are that the assessee-company is engaged in the manufacture and trading of passenger cars and vehicle components. For the assessment year 2004-05 the assessee filed its return of income on October 30, 2004 declaring total income of Rs. 5,08,72,14,630. The case of the assessee was selected for scrutiny and assessment under section 143(3) was completed on December 29, 2006 determining the total income at Rs.5,48,34,61,386.

3. Aggrieved against the assessment order, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals), LTU impugning the assessment order dated December 29, 2006. During the pendency of the said appeal, the Assessing Officer issued notice under section 148 on March 17, 2009. The Assessing Officer vide letter dated June 5, 2009 gave reasons for reopening the assessment which are reproduced hereunder :

“In the Schedule 4 (fixed asset) of the balance-sheet additions made during the year is Rs. 14,33,133 thousands. This is the net of Rs.1,44,897 thousands pertaining to gains from foreign exchange rate fluctuation on loans taken to acquire the fixed asset. The assessee has claimed a deduction of Rs. 2,42,957 thousands from the profit as per the profit and loss account in the computation statement towards research and development capital expenses under section 35.

Actual cost of addition during the year as per income-tax depreciation statement is Rs. 13,35,053 thousands and the assessee has deducted a sum of Rs. 1,46,04,383 from the actual cost of the asset while computing depreciation under section 32 whereas the assessee has made a profit of Rs. 1,44,897 thousands from foreign exchange rate fluctuation on loans taken to acquire the fixed assets. Hence, the assessee has not reduced the entire gain on fluctuation gain for the purpose of computation of depreciation as per the Income-tax Act. Further, if the profit on foreign exchange rate fluctuation on loans pertains to the fixed assets which is used for research and development purpose on which deduction under section 35 was claimed, as per section 43A of the Act, the assessee can claim deduction only to the extent of Rs. 11,26,65,180 (Rs. 24,29,57,797 – Rs. 13,02,92,617) under section 35 of the Income-tax Act, whereas the assessee has claimed entire research and development capital expenses as deduction including the gain on foreign exchange rate fluctuation.

2. It is seen from the profit and loss account that the assessee-company debited on account of Rs. 2,04,81,35,000 towards royalty and technology transfer fee. Out of the total amount, the royalty paid was to the tune of Rs. 1,93,97,95,716 as detailed below :

Thus, the balance of Rs. 10,83,39,284 (i.e. Rs. 2,04,81,35,000 – Rs.1,93,97,95,716) represents amount paid towards technology transfer fee. It is seen from the agreement contract between M/s. Hyundai Motor Co. and the assessee that the Hyundai Motor Co. had granted the assessee, the right to manufacture, assemble, sell and service the licensed products and supply of technical know-how on the terms and conditions stipulated in the agreement.

According to article 6 of the agreement in consideration of the rights granted and technical know-how supplied by M/s. Hyundai Motor Co. to the assessee-company. The assessee-company shall make the following payments to M/s. Hyundai Motor Co.

The royalty and lump sum fee as mentioned above should be paid by the assessee-company to M/s. Hyundai Motor Co. in foreign currency decided by the parties. The assessee shall pay the royalty to M/s. Hyundai Motor Co. commencing from April 1, 2002. The parties shall through a letter of concurrence specify the percentage of royalty payable by the assessee-company to M/s. Hyundai Motor Co. The agreement shall be effective for the period of 10 years commencing from April 1, 2002 and ending on March 31, 2012 unless terminated under any other provisions of the agreement.

In this connection, the lump sum payment of Rs. 10,83,39,284 made by the assessee towards supply of technical know how requires to be capitalised after allowing depreciation under section 32(1)(ii) in view of the decision in the case of Scientific Engineering House P. Ltd. v. CIT [1986] 157 ITR 86 (SC) wherein it was held that where under an agreement the assessee made payment to its foreign collaborator for documents such as manufacture, drawings, processing documents, designs charts, plan, etc., the expenditure has to be treated as capital expenditure.

3. As per Taxation Laws (Amendment) Act, 2005, if the export turnover exceeds Rs. 10 crores, the benefit of deduction on the DEPB under section 80HHC shall be given subject to the fulfilment of conditions laid down as per the above amendment to section 80HHC(3) of the Act. Hence, the assessee has to prove that it had opted to choose either duty drawback or the DEPB/DFRC being the duty remission scheme and the rate of the duty drawback was higher than the DEPB/DFRC during that period. The corresponding proviso is reproduced as under :

‘Provided also that in the case of an assessee having export turnover exceeding rupees ten crores during the previous year, the profits computed under clause (a) or clause (b) or clause (c) of this sub-section or after giving effect to the first proviso as the case may be, shall be further increased by the amount which hears to ninety per cent. of any sum referred to in clause (iiid) of section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee, if the assessee has necessary and sufficient evidence to prove that,-

(a)          he had an option to choose either the duty drawback or the Duty Entitlement Pass Book Scheme being the Duty Remission Scheme ; and

(b)          the rate of drawback credit attributable to the customs duty was higher than the rate of credit allowable under the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme.’

It has been observed that during the current year the assessee has export turnover of Rs. 9,41,08,31,440 and income by way of DEPB/ DFRC credit to the tune of Rs. 1,28,86,38,853 but the assessee has not proved that it had opted to choose either duty drawback or the DEPB being the duty remission scheme and the rate of duty drawback was higher than the DEPB during that period.

Hence, the above DEPB/DFRC receipt should be excluded for the purpose of computation of section 80HHC deduction being the export incentives as per the proviso to section 80HHC(3) otherwise means that the deduction under section 80HHC cannot be further increased on the above receipt by way of DEPB/DFRC credit.

Based on the above facts, it is clear that assessee has not produced the material facts fully and truly before the tax authorities.

Therefore, I have the reason to believe that the income has escaped the assessment within the meaning of section 147 of the Income-tax Act.”

4. The assessee filed objections to the reopening proceedings. The Assessing Officer rejected the objections of the assessee and completed the assessment under section 143(3) read with section 147 of the Act on December 23, 2009 determining the total income of the assessee at Rs. 5,70,17,10,121. Aggrieved against the assessment order dated December 23, 2009, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals), LTU primarily on the following grounds :

(i)           Reopening of the assessment is beyond the period of four years ;

(ii)          The Assessing Officer reopened the assessment for the reasons that the appellant did not reduce the entire foreign exchange gain from the actual cost of asset for claiming depreciation under section 32 and deduction under section 35 of the Act ;

(iii)         The lump sum consideration paid towards technical know-how needs to be capitalised after allowing depreciation at 25 per cent. ;

(iv)         The assessee did not prove that it had opted to choose either duty draw back or DEPB/DFRC for the purpose of deduction under section 80HHC.

5. The Commissioner of Income-tax (Appeals), vide order dated September 23, 2011, allowed the appeal of the assessee on the ground that the Assessing Officer had called for the details regarding these issues during the original assessment proceedings. The assessee vide letters dated September 13, 2006 and October 16, 2006 had furnished details in respect of queries raised by the Assessing Officer. The Assessing Officer after considering the contentions of the assessee and the documents on record had completed the original assessment. Since, the information sought in the reassessment proceedings was already submitted by the assessee in original assessment proceedings under section 143(3) the reassessment proceedings have been initiated merely on change of opinion which is not permissible in law. The Commissioner of Income-tax (Appeals) relying on the judgment of the hon’ble Supreme Court of India in the case of CIT v. Kelvinator of India Ltd. [2010] 320 ITR 561  allowed the appeal of the assessee for the assessment year 2004-05.

6. The Revenue aggrieved by the order of the Commissioner of Income-tax (Appeals) preferred second appeal before the Tribunal. Smt. Anupama Shukla representing the Department submitted that notice under section 148 was issued to the assessee on March 17, 2009 which is very much within the time limit prescribed under the provisions of section 149 of the Act. The Departmental representative submitted that the reasons for reopening were duly conveyed to the assessee. The Commissioner of Income-tax (Appeals) has erred in holding that the assessment was reopened on the change of opinion only. The Departmental representative further contended that production of books of account or any other evidence before the Assessing Officer from which material evidence could have been discovered with due diligence by the Assessing Officer will not necessarily amount to disclosure within the meaning of proviso to section 147. To support her contentions, the Departmental representative relied on the decision of the hon’ble Delhi High Court in the case of Consolidated Photo & Finvest Ltd. v. Asstt. CIT [2006] 281 ITR 394 and the order of the Visakhapatnam Bench of the Tribunal in the case of Coastal Corpn. Ltd. v. Jt. CIT [2008] 118 TTJ 563 .

7. On the other hand, Shri S. Hariharan, authorised representative for the assessee submitted that the order passed by the Commissioner of Income-tax (Appeals) is a well-reasoned and detailed order. No interference in the order of the Commissioner of Income-tax (Appeals) is called for. He submitted that the case of the assessee is squarely covered by the judgment of the hon’ble Supreme Court in the case of Kelvinator of India Ltd. (supra) and the Division Bench judgment of the hon’ble Madras High Court in the case of CIT v. Cholamandalam Investment & Finance Co. Ltd. [2009] 309 ITR 110. He contended that in the present case the entire documents were submitted by the assessee to the Assessing Officer and whatever queries raised were duly answered along with the evidence at the time of original assessment. He submitted that notice under section 148 of the Act was issued merely on the basis of change of opinion and no new issue or ground was raised in the reopening proceedings.

8. We have heard the submissions made by both the parties and have gone through the orders of the authorities below. The judgment/orders referred to by the respective parties have also been examined by us. It is an admitted fact that in original assessment proceedings under section 143(3) of the Act, the Assessing Officer had completed the assessment, vide order dated December 29, 2006 making certain additions. A perusal of the original assessment order dated December 29, 2006 which is at pages 32 to 37 of the paper book shows that the Assessing Officer had made detailed study of books of account of the assessee and thereafter had reworked the deduction under section 80HHC of the Act. The Assessing Officer had also taken into consideration the orders of the Transfer Pricing Officer dated December 18, 2006 passed under section 92CA(3). During the pendency of the appeal before the Commissioner of Income-tax (Appeals), the Assessing Officer issued notice under section 148 for reopening the assessment for the reasons mentioned hereinabove. A perusal of the reasons for reopening provided by the Assessing Officer shows that the Assessing Officer had already asked for the details pertaining to the issues during the course of original assessment proceedings. The assessee vide letter dated September 13, 2006 and October 16, 2006, which are at pages 38 to 51 of the paper book, had furnished all the details in response to the questionnaire issued by the Assessing Officer.

9. In our considered opinion, the notice issued under section 148 of the Act is nothing but mere change of opinion. The issues which have already been considered in the original assessment cannot be reappreciated in reassessment proceedings under the garb of income escaping assessment. If the Assessing Officer has not given any finding after considering the evidence on record, it cannot be said that the income had escaped assessment on account of concealment of income of the assessee. The hon’ble Supreme Court of India in the case of Kelvinator of India Ltd. (supra) has held that the Assessing Officer has power to reopen the assessment provided there is “tangible material” to come to the conclusion that there was escapement of income from assessment. However, in the present case the Assessing Officer has miserably failed to show that there was any tangible material to hold that there was escapement of income from assessment. The Departmental representative in support of her contentions has relied on the judgment of the hon’ble Delhi High Court in the case of Consolidated Photo & Finvest Ltd. (supra) and the order of the Visakhapatnam Bench of the Tribunal in the case of Coastal Corpn. Ltd. (supra). In both the aforementioned cases it has been held that the in view of Explanation 1 to section 147 action under section 147 is permissible, even if the Assessing Officer gathered his reasons to believe from the very same record as had been the subject matter of the completed assessment proceedings. In our opinion, the law laid down in the said judgment/order is not applicable in the facts and circumstances of the present case. In the instant case, the Assessing Officer not only examined the documents/evidence originally submitted by the assessee but has asked for further documents. Admittedly, the information was supplied by the assessee, if the Assessing Officer fails to take note of the same or does not appreciate the evidence from all dimensions in the first instance, he cannot be permitted to reopen the assessment under section 147 of the Act to cover up his own folies. Once the entire evidence as required by the Assessing Officer is submitted by the assessee, duty is cast upon the Assessing Officer to take cognisance of the evidence and pass assessment order under section 143(3) of the Act. The Assessing Officer cannot review his own order under the guise of section 148 and reappreciate the evidence which was already before him at the time of original assessment. Therefore, we uphold the order of the Commissioner of Income-tax (Appeals) and dismiss the appeal of the Revenue.

I. T. A. No. 1988/Mds/2011 and C. O. No. 43/Mds/2012 :

10. The Revenue in I. T. A. No. 1988/Mds/2011 has impugned the order of the Commissioner of Income-tax (Appeals), dated September 23, 2011, relevant to the assessment year 2005-06. The assessee had filed return of income on October 29, 2005 declaring the total income of Rs. 4,08,60,91,779. The assessment under section 143(3) was completed by the Assessing Officer on December 26, 2008. The Assessing Officer made certain additions/disallowances in the income returned by the assessee and determined the total income of the assessee as Rs. 5,36,70,48,238. Aggrieved against the assessment order the assessee preferred an appeal before the Commissioner of Income-tax (Appeals) impugning the assessment order dated December 26, 2008. During the pendency of the appeal before the Commissioner of Income-tax (Appeals), the Assessing Officer issued notice under section 148 to the assessee on March 24, 2010. The Assessing Officer vide letter dated May 25, 2010 communicated the reasons for reopening of assessment to the assessee. The reasons for reopening of assessment are reproduced hereunder :

“It has been observed from the manufacturing account that an amount of Rs. 15,57,94,737 has been debited as excise duty paid on finished goods, whereas it is observed that the sale of the current year has been valued at net off excise duty. If the closing stock of this year sold in the next assessment year, the sale figure would be exclusive of the excise duty which would amount to double deduction. Hence the above amount of Rs. 15,57,94,737 has to be disallowed and brought to tax. Hence, it is clear that the assessee has not provided all the necessary particulars for the purpose of assessment in this regard.

2. Also as per Circular No. 7 of 2009 the circular which has been issued with reference to the provisions of section 195, viz., Circular No. 23 dated July 23, 1969, Circular No. 163, dated May 29, 1975 ([1975] 99 ITR (St.) 87) and Circular No. 786 dated February 7, 2000 ([2000] 241 ITR (St.) 132) has been withdrawn by the Central Board of Direct Taxes. Further it has been observed from the Finance Bill 2010-11 that the provisions of section 9 of the Income-tax Act has been amended retrospectively from June 1, 1976 in relation to the assessment year 1977-78 and subsequent years that the expenditure incurred outside India also deemed to accrue or arise in India in respect of the services rendered.

Based on the above circular of the Central Board of Direct Taxes No. 7 of 2009 and also from Finance Bill 2010-11 that whatever the expenditure incurred by the assessee in foreign currency for the purpose of utilisation of services even though the services rendered outside India is taxable. Since the assessee has incurred expenditure in foreign currency to the tune of Rs. 3,88,92,59,000 the same has to be allowed only subject to the provisions of section 195 of the Act. Hence, the assessee has not disclosed all the necessary facts for the purpose of allowability of the same in the return of income on the above issue. Thus, the above claim of expenditure in foreign currency shall be disallowed as per the provisions of section 40(a)(i) of the Income-tax Act.

Therefore, it is clear that the assessee has not disclosed all the material facts for the assessment year 2005-06 for the purpose of assessment. Hence, I have reasons to believe that the income has escaped the assessment within the purview of section 147 of the Income-tax Act.”

11. The Assessing Officer after rejecting the objection of the assessee vide assessment order dated December 27, 2010 passed under section 143(3) read with section 147 determined the total income of the assessee as Rs.4,27,41,97,180 after making additions on account of disallowance of excise duty on closing stock. Aggrieved against the assessment order, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals). The assessee impugned the assessment order on two counts :

(i)           Validity of reopening of assessment under section 147 ; and

(ii)          Disallowance of excise duty on closing stock.

12. The Commissioner of Income-tax (Appeals) vide order dated September 23, 2011 partly allowed the appeal of the assessee. The Commissioner of Income-tax (Appeals) held that the assessee had provided for excise duty on closing stock in accordance with the Accounting Standard 2 issued by the Institute of Chartered Accountants of India. The same does not have any effect on the profits since the amount of excise duty provided is also added to the value of closing stock. The Commissioner of Income-tax (Appeals) discarded the view of the Assessing Officer that since the sale is net of excise duty, the debit towards excise duty in the profit and loss account cannot be allowed. To fortify his decision the Commissioner of Income-tax (Appeals) relied on the judgment of the hon’ble Bombay High Court in the case of CIT v. Loknete Balasaheb Desai S. S. K. Ltd. [2011] 339 ITR 288.

13. Aggrieved against the order of the Commissioner of Income-tax (Appeals) dated September 23, 2011 the Revenue has preferred the second appeal before the Tribunal. Smt. Anupama Shukla appearing on behalf of the Revenue submitted that the assessee has not incorporated the value of excise duty in the value of closing stock which is in violation of the provisions of section 145A of the Act. The Departmental representative contended that the assessee while showing inventory as net of excise duty debits excise duty payable on the difference of stock only to offset the increase in the value of stock under section 145A. She further contended that closing stock of the current year is sold in the next assessment year. The sale figure would be exclusive of excise duty which would amount to double deduction.

14. On the other hand, Shri S. Hariharan, authorised representative for the assessee submitted that the assessee is impugning the order of the Commissioner of Income-tax (Appeals) in cross-objection (C. O. No. 43/Mds/ 2012) on the ground that the Assessing Officer had no jurisdiction to reopen the assessment on the basis of change of opinion. He further contended that notice under section 148 was served on the assessee after expiry of time limit mentioned in the Act. The assessee had filed the return of income under section 139 within due date and had produced all the relevant documents with regard to notice served by the Department under section 143(2). Therefore, the reopening of assessment by the Assessing Officer is without jurisdiction. In order to support his contentions, he relied on the judgment of the hon’ble Supreme Court of India in the case of Kelvinator of India Ltd. (supra).

15. On the issues raised by the Departmental representative, the authorised representative submitted that there would be no double deduction as mentioned by the Departmental representative and there is no question of further addition in the inventory. The authorised representative submitted that there was substantial increase in the cost of finished goods as on March 31, 2005 as compared to March 31, 2004. On closing stock the excise duty has been provided as per Accounting Standard 2 issued by the Institute of Chartered Accountants of India. Due to substantial increase in closing stock, additional excise duty has been provided. In the tax audit report for the assessment year 2005-06 it has been certified that the provision for excise duty for the financial year ending on March 31, 2005 has been made before the filing of income-tax return. This complies the requirement of section 43B of the Act. In order to support his contentions, the authorised representative relied on the judgement of the hon’ble Bombay High Court in the case of Loknete Balasaheb Desai S. S. K. Ltd. (supra), wherein it has been held that excise duty on closing stock once provided should be allowed. The authorised representative has referred to letter dated August 8, 2008 addressed to Assistant Commissioner of Income-tax which is at page 48 of the paper book. The said letter was sent by the assessee in reply to the queries during the course of original assessment, wherein the details of domestic as well as export sales in number of units, and also in values was mentioned as explanation to query raised by the Assessing Officer in regard to the closing stock.

16. We have heard the submissions made by the respective parties and have also examined the orders passed by the authorities below. We are in consonance with the view taken by the Commissioner of Income-tax (Appeals) on the issue of excise duty and the closing stock. As has been rightly pointed out, the assessee had provided for excise duty on closing stock in accordance with Accounting Standard 2 issued by the Institute of Chartered Accountants of India. The assessee in its letter dated August 18, 2008 has categorically stated that the amount of Rs. 23,02,99,484 appearing in annexure 10B of tax audit report represents excise duty provision on the closing stock of finished goods as on March 31, 2005. This amount was paid before the clearance of goods from the factory prior to the date of tax audit report as certified by the tax auditors. An amount of Rs. 15,57,94,737 was debited in the profit and loss account under the head “manufacturing and other expenses”. This amount represents difference between opening provision of excise duty on stock as on April 1, 2004 and the excise duty on closing stock as on March 31, 2005. The Assessing Officer has erred in coming to the conclusion that since the sale is net off excise duty, the debit towards excise duty in the profit and loss account cannot be allowed. With regard to compliance with the provisions of section 43B is concerned, the assessee had stated that the amount of excise duty debited in the profit and loss account has been paid in the next year before the due date of filing of return and therefore, disallowance on this ground is not warranted. The case of the assessee is squarely covered by the decision of the hon’ble Bombay High Court in the case of Loknete Balasaheb Desai S. S. K. Ltd. (supra). Therefore, the appeal of the Revenue is dismissed being devoid of merits.

17. The cross-objections have been filed by the assessee impugning the order of the Commissioner of Income-tax (Appeals) relevant to the assessment year 2005-06 on the issue of jurisdiction. The cross-objections have been filed by the assessee with the delay of 57 days. The assessee has not filed any application for condonation of delay. Since, no reasons whatsoever have been furnished by the assessee for filing the cross-objections beyond the period of limitation, the cross-objections of the assessee are dismissed being barred by limitation.

18. In the result, both the appeals of the Revenue and the cross-objections of the assessee are dismissed for the reasons mentioned above.