Mastek Limited Vs ACIT (Gujarat High Court)
Gujarat High Court held that Challenge to notice issued under section 154 of the Income Tax Act is maintainable under Article 226 of the Constitution of India.
Facts- The petitioner is a public limited company and a Global Information Technology Service Provider offering a wide range of software development and related services. A return of income was filed for A.Y. 2008-2009 after claiming a deduction u/s. 10A of the Income Tax Act, 1961. The case was selected for scrutiny and notices u/s. 142(1) and 143(2) were issued. During the assessment proceedings, the respondent specifically inquired into the computation of deduction u/s. 10A of the Act and called for evidence and justification in respect of the same which was duly submitted by the petitioner.
In March, 2018, the respondent issued the impugned notice u/s. 154 of the Act to rectify the OGE dated 30.01.2015. According to the respondent, a mistake of law and facts was committed while passing OGE allowing the loss (negative profit) of eligible 10A unit namely SDF VI and SDF VII amounting to Rs.4,46,67,531/- against income from House Property. According to the respondent, the loss (negative profit) will not be allowed to be set off against any other income. This according to respondent was a mistake, hence a notice.
Conclusion- Held that the notice under Section 154 of the Act is barred by limitation, that it was a debatable issue not therefore within the parameters of Section 154 of the Act, the notices under Section 154 of the Income Tax Act are bad. Even on the parameters of interpretation, notice under Section 263 in one of the petitions must also fail. Challenge to such a notice is maintainable under Article 226 of the Constitution of India.
FULL TEXT OF THE JUDGMENT/ORDER OF GUJARAT HIGH COURT
1. All these petitions raise a common issue and were heard together and are therefore decided by this common judgement.
2. Heard learned Senior Advocate Mr. S. N. Soparkar with Mr. B. S. Soparkar learned advocate for the petitioners and Mr.Varun Patel learned Senior Standing Counsel with Mr.Dev D. Patel learned advocate for the respondent.
3. With consent of the parties, the matters are taken up for final hearing.
4. RULE returnable forthwith. Mr.Varun Patel waives service of Rule on behalf of the respondent.
5. Challenge in all these petitions, except in Special Civil Application No.3981 of 2019, are to the notices issued by the respondent under Section 154 of the Income Tax Act, 1961. Special Civil Application No.3981 of 2019 is challenging a notice under Section 263 of Income Tax Act.
6. Special Civil Applications No.3971 of 2019, 3973 of 2019, 3972 of 2019, 3977 of 2019 and 3981 of 2019 pertain to Assessment Years 2008-2009, 2009-2010, 2011-2012, 2012-2013 and 20132014 respectively. The only other distinction in the other two petitions namely Special Civil Application Nos.3973 and 3977 of 2019 is that there were no orders giving effect.
7. FACTS OF SCA NO.3971 OF 2019
7.1 The petitioner is a public limited company and a Global Information Technology Service Provider offering a wide range of software development and related services. A return of income was filed for A.Y. 2008-2009 on 30.09.2008 declaring a total income of Rs.1,76,66,295/- after claiming a deduction under Section 10A of the Income Tax Act, 1961 (‘the Act for short). The case was selected for scrutiny and notices under Section 142(1) and 143(2) were issued. During the assessment proceedings, the respondent specifically inquired into the computation of deduction under Section 10A of the Act and called for evidence and justification in respect of the same which was duly submitted by the petitioner.
7.2 The respondent passed an order dated 02.02.2012 assessing total income at Rs.26,28,28,351/- making certain additions. Deductions under Section 10A was not disputed as the same was allowed in the assessment order. No appeal on the ground of Section 10A was filed. On other grounds raised in an appeal before the CIT(A), the CIT(A) by an order dated 27.08.2014 granted relief to the petitioner.
7.3 In November 2014, the respondent initiated reassessment proceedings for Assessment Year 2008-2009 by issuing a notice under Section 148 on 18.11.2014 to recompute deduction under Section 10A of the Act.
7.4 In January 2015, pursuant to the reliefs granted by CIT(A), Order Giving Effect (‘OGE’) dated 30.01.2015 was passed. The notice under Section 148 was quashed by the High Court vide order dated 11.01.2016.
7.5 In March 2018, the respondent issued the impugned notice dated 20.03.2018 and 24.04.2018 under Section 154 of the Act to rectify the OGE dated 30.01.2015. According to the respondent, a mistake of law and facts was committed while passing OGE allowing the loss (negative profit) of eligible 10A unit namely SDF VI and SDF VII amounting to Rs.4,46,67,531/-against income from House Property. Based on the interpretation of the decision of the Supreme Court in the case of CIT v. Yokogawa India Ltd. rendered in Civil Appeal No.8498 of 2013, the respondent was of the view that profits of eligible undertakings will be excluded from computation of total income. Thus, the loss (negative profit/will not be allowed to be set off against any other income. This according to respondent was a mistake, hence a notice.
8. Mr. S. N. Soparkar learned Senior Advocate for the petitioner would make the following submissions:
8.1 The ground for rectifying OGE under Section 154 is completely misconceived and baseless. The respondent sought to rectify the OGE on the following grounds:
a) The Respondent has stated in notice u/s 154 that in the assessment order dated 02.02.2012 passed for the said year, deduction u/s 10A has been allowed only after clubbing the business profits and losses of all the units.
b) However, CIT(A) has directed that benefit of 10A deduction should be given on the basis of individual eligible unit and not after clubbing the business profits and losses of all the units.
c) While passing the OGE, the Respondent has committed a mistake in allowing set-off of losses against the income from House Property and Other income.
d) The Respondent has referred the decision of Honorable Supreme Court in case of CIT v. Yokogawa India Ltd. (supra) as mentioned in para 2.10 and based on his interpretation of the decision, the profits of eligible undertaking shall be excluded from the computation of total income and thereby intended to rectify the mistake u/s 154 of the Act by not allowing set off of loss (negative profit) of the eligible unit amounting to Rs.4,46,67,531/- against any other income.
8.2 The issuance of notice under Section 154 is illegal and without jurisdiction.
8.3 That the issue of deduction under Section 10A was not a subject matter of appeal before the CIT(A) for the said year and therefore there was no question of making any mistake while passing the OGE.
8.4 Mr. Soparkar would submit that the jurisdiction and power of the Assessing Officer while giving effect to the Appellate Authority’s order are confined only to the issue and aspect involved in the appellate order. The Assessing Officer cannot go beyond the issue and aspect which he was directed to reconsider. The Assessing Officer cannot travel beyond the jurisdiction and limits of the directions of the Appellate Authority.
8.5 Mr. Soparkar would submit that the time for passing of the rectification order has expired. The assessment order for the said year was passed on 02.02.2012. The limitation prescribed is four years from the end of the financial year in which the order sought to be amended was passed. The time has expired in March 2016. Order therefore is barred by limitation.
8.6 The interpretation of the decision of the Supreme Court in case of CIT v. Yokogawa India Ltd. (supra) is incorrect. In the impugned notice u/s 154, the Respondent, based on his interpretation of the Honorable Supreme Court decision in the case of CIT v. Yokogawa India Ltd. (supra), in civil Appeal No 8498 of 2013, is of the view that profits of eligible undertaking will be excluded from the computation of total income. Thus, the loss (negative profit) determined for eligible unit amounting to Rs 4,46,67,531 will not be allowed to be set-off against any other income. Therefore, being a mistake apparent on record, the respondent has issued notice u/s 154 to rectify the OGE dated 30.01.2015. The aforesaid decision of Honorable Supreme Court is a landmark decision on deduction u/s 10A/10B/10AA of the Act, wherein the Honorable Supreme Court has actually settled the controversy on a long drawn litigation on whether the provisions of sections 10A/10B/10AA are deduction provisions or exemption provisions and the stage at which deduction is to be claimed. The Respondent has interpreted the said decision incorrectly and contrary to the principle laid down by Honorable Supreme Court that profit/loss (which is negative profit) incurred in 10A unit is to be excluded from the computation of total income and thereby loss (negative profit) shall not be allowed to be set off against any other income. The Petitioner respectfully submits that deduction u/s 10A has been correctly allowed by the Respondent in the assessment order as well as in the OGE passed for the A.Y 2008-09 i.e undertaking specific and allowed from “Total Business income”, which is as per the principle laid down by Honorable Supreme Court. Hence, notice issued by Respondent is bad in law.
8.7 Mr.Soparkar would further submit that the issues raised by the respondent due to incorrect interpretation of the decision of the Hon’ble Supreme Court is a legal and debatable issue and such issue cannot be considered as mistake apparent from the record to become a subject matter of rectification under Section 154 of the Act. The notice under Section 154 is therefore void ab initio.
8.8 That the petition is maintainable. Alternative remedy is not a bar when the notice is ex-facie without jurisdiction.
8.9 In support of his submissions, Shri Soparkar would rely on the following decisions:
I. Calcutta Discount Co. Ltd v. Income Tax Officer; [1961] 41 ITR 191 (SC)
II. Jeans Knit (P.) Ltd v. Deputy Commissioner of Income-tax, Banglore; [2017] 390 ITR 10 (SC))
III. JMC Projects (India) Ltd v. Principal Commissioner of Income-tax (Central); [2016] 67 com 258 (Gujarat)
IV. Engineering Professional Co. (P.) Ltd; [2020] 115 taxmann.com 288 (Gujarat)
V. Coates of India Ltd. v. Deputy Commissioner of Income-tax; [1995] 214 ITR 498 (Calcutta)
VI. Karsandas Bhagwandas Patel v. Income-tax Officer; [1975] 98 ITR 255 (Gujarat)
VII. Ahmedabad Sarangpur Mills Co. Ltd v. A. S. Manohar, Income-tax Officer; [1976] 102 ITR 712
VIII. Poonjabhai Vanmalidas v. Wealth- tax Officer; [1978] 114 ITR 38 (GUJ.)
IX. Mettur Chemical & Industrial Corpn. Ltd. v. Commissioner of Income-tax; [1977] 110 ITR 822 (Madras)
X. Standard Chemical Co. (P). Ltd v. Income-tax Officer; [1977] 110 ITR 832 (Allahabad)
XI. Shree Naw Durga Bansal Cold Storage & Ice Factory v. Commissioner of Income-tax, Faizabad; [2017] 397 ITR 626 (Allahabad)
XII. T.S. Balaram, Income-tax Officer v. Volkart Brothers; [1971] 82 ITR 50 (SC)
XIII. Commissioner of Income-tax v. Hero Cycles (P.) Ltd; [1997] 228 ITR 463 (SC)
XIV. Commissioner of Income-tax v. C.D.R. Laxmidevi; [1995] 211 ITR 858 (Gujarat)
XV. Income-tax Officer v. India Foils Ltd.; [1973] 91 ITR 72 (Calcutta)
XVI. Padmavati Jaykrishna v. Commissioner of Wealth-tax; [1976] 105 ITR 115 (Gujarat)
XVII. Commissioner of Income-tax v. Smt. Pushpavati Kantilal; [1981] 129 ITR 582 (Gujarat)
XVIII. Mepco Industries Ltd. v. Commissioner of Income-tax; [2009] 319 ITR 208 (SC)
XIX. Pr. Commissioner of Income Tax Vadodara-1 v. Gulbrandsen Technologies (India) Pvt. Ltd. rendered in Tax Appeal No.278 of 2018 (original and recalled)
XX. Cosmo Films Limited v. Central Board of Direct Taxes; W.P.(C) 3598/2019 Delhi HC
XXI. Pr. Commissioner of Income Tax-1, Pune v. Aesseal India Pvt. Ltd. (Bom) rendered in Income Tax Appeal No.1368 of 2017
XXII. The Commissioner of Income-tax v. M/s. Hical Technologies Pvt. Ltd (Kar) rendered in Income Tax Appeal No.184 of 2012
XXIII. The Principal Commissioner of Income-tax-2 v. M/s. Indus Business System Ltd (Andhra) rendered in Income Tax Appeal No.409 of 2017
XXIV. Karle International (P) Ltd. v. Assistant Commissioner of Income Tax, Circle-6(1), Bangalore; [2020] 120 com 264 (Karnataka)
9. The only difference in Special Civil Application No.3981 of 2019 is that the impugned notice dated 23.02.2018 is a notice under Section 263 of the Act based on the incorrect interpretation of the decision in the case of Yokogawa India Ltd. (supra).
10.Mr.Varun Patel learned Senior Standing Counsel for the Revenue would support the notice. He would submit that only a notice under Section 154 of the Act is issued. In an order passed under Section 154 of the Act appeal could lie to the CIT(A) and therefore in view of the alternative remedy, the petition is not maintainable.
10.1 Making further submissions, Shri Patel would submit as under.
10.2 Subject notices u/s 154 of the Act were issued to rectify the order giving effect of the CIT(A)’s order. Further, it is also noticed from the order of the CIT(A) for A.Y. 2006-07 and A.Y. 2009-10 in the appellant’s case that the CIT(A) has directed to give benefit of section 10A to the assessee, on the basis of individual eligible unit and not after clubbing the income. Hence the CIT(A) clearly directed to give the benefit of the section 10A of the Act on individual unit basis and not after clubbing the income in the preceding years as well as succeeding years. The A.O. made an apparent mistake while passing the order of appeal effect by allowing the setoff of losses from 10A eligible against the non eligible income. Therefore, the notices u/s 154 of the Act was issued to rectify the apparent mistake.
10.3 The CIT(A) in earlier year as well as subsequent year has directed that the benefit of Section 10A of the Act should be given on the individual eligible unit basis. The A.O. while giving the effect of CIT(A)’s order made an apparent mistake by allowing the losses (negative profit) of eligible 10A unit namely SDF VI and VII amounting to Rs. 4,46,67,531/- to be set off against the income from house property and other income. Hence, it is clear that the A.O. rightly issued the notice u/s 154 of the Act to rectify the apparent mistake from record.
10.4 The notice u/s 154 of the Act is issued within the time limit as provided by the section 154(7) of the Act.
10.5 In this case, order u/s 143(3) r.w.s. 144C was passed on 02.02.2012. After that the assessee preferred an appeal before CIT (A). The Ld. CIT (A) passed an order on 27.08.2014. After that the A.O. passed the order giving appeal effect on 30.01.2015. In this case notice u/s 154 of the Act was issued to the petitioner on 20.03.2018 which is under the time limit provided u/s 154(7) of the Act.
10.6 In light of the above observation of the Hon’ble Supreme Court, it is clear that the profit of eligible undertaking will be excluded from the computation of income. In view of the above discussion and in light of the decision of the Hon’ble Apex Court, it is clear that the assessee wrongly set off losses from 10A eligible unit against the income from house property and other income and Assessing Officer erred in allowing the same while giving the appeal effect to the order of the CIT(A).
10.7 The A.O. rightly interpreted the order of the Hon’ble Apex Court in the case of M/s Yokogawa India Ltd. (supra). Further, it is submitted that the issue under consideration is not debatable. From observation of the Hon’ble Supreme Court it is clear that the profit of the eligible undertaking will be excluded from the computation of Income.
10.8 The mistake which can be rectified u/s 154 is not confined to clerical or arithmetical mistakes. The Supreme Court in the case of T.S. Balaram, ITO v. Volkart Brothers and ors. [1971] 82 ITR 50 (SC), had held that a mistake apparent from the record must be an obvious and patent mistake. In view of the above discussion the contention of the assessee is not acceptable.
11. Having considered the submissions made by the learned counsel, we take up the discussion thereon.
11.1 The rectification of mistakes is empowered by virtue of the provisions of Section 154 of the Income Tax Act, 1961. Section 154 of the Act, reads as under:
Rectification of mistake.
154. [(1) With a view to rectifying any mistake apparent from the record an income-tax authority referred to in section 116 may,—
(a) amend any order passed by it under the provisions of this Act ;
(b) amend any intimation or deemed intimation under sub-section (1) of section 143;]]
(c) amend any intimation under sub-section (1) of section 200A.]
(d) amend any intimation under subsection (1) of section 206CB.
[(1A) Where any matter has been considered and decided in any proceeding by way of appeal or revision relating to an order referred to in sub-section (1), the authority passing such order may, notwithstanding anything contained in any law for the time being in force, amend the order under that sub-section in relation to any matter other than the matter which has been so considered and decided.]
(2) Subject to the other provisions of this section, the authority concerned—
(a) may make an amendment under subsection (1) of its own motion, and
(b) shall make such amendment for rectifying any such mistake which has been brought to its notice by the assessee [or by the deductor or by the Collector], and where the authority concerned is the [the Joint Commissioner (Appeals) or [Commissioner (Appeals)], by the [Assessing] Officer also.
[* * *]
(3) An amendment, which has the effect of enhancing an assessment or reducing a refund or otherwise increasing the liability of the assessee [or the deductor or the Collector], shall not be made under this section unless the authority concerned has given notice to the assessee [or the deductor or the Collector] of its intention so to do and has allowed the assessee [or the deductor or the Collector] a reasonable opportunity of being heard.
(4) Where an amendment is made under this section, an order shall be passed in writing by the income-tax authority concerned.
[(5) Where any such amendment has the effect of reducing the assessment or otherwise reducing the liability of the assessee or the deductor or the Collector, the Assessing Officer shall make any refund which may be due to such assessee or the deductor or the Collector.]
(6) Where any such amendment has the effect of enhancing the assessment or reducing a refund [already made or otherwise increasing the liability of the assessee or the deductor or the Collector, the Assessing Officer shall serve on the assessee or the deductor or the Collector, as the case may be] a notice of demand in the prescribed form specifying the sum payable, and such notice of demand shall be deemed to be issued under section 156 and the provisions of this Act shall apply accordingly.
(7) Save as otherwise provided in section 155 or sub-section (4) of section 186 no amendment under this section shall be made after the expiry of four years [from the end of the financial year in which the order sought to be amended was passed.]
[(8) Without prejudice to the provisions of sub-section (7), where an application for amendment under this section is made by the assessee [or by the deductor or the Collector] on or after the 1st day of June, 2001 to an income-tax authority referred to in sub-section (1), the authority shall pass an order, within a period of six months from the end of the month in which the application is received by it,—
(a) making the amendment; or
(b) refusing to allow the claim.]”
11.2 Sub-section (7) of Section 154 provides that no rectification is permissible under the Section after expiry of four years from the end of the financial year in which the order sought to be amended was passed. In the facts on hand, the order of assessment is dated 02.02.2012. In terms of Section 154(7) of the Act, time to rectify the error expired on 31.03.2016. The rectification is sought in 2018. According to the Revenue, the period of four years has not expired as after the order of assessment was passed on 02.02.2012, the assessee preferred an appeal before the CIT(A). The CIT(A) passed an order on 27.08.2014. The Assessing Officer thereafter passed an order giving effect on 30.01.2015. Notice issued under Section 154 was dated 20.03.2018 and hence was within a period of four years as provided under Section 154(7).
11.3 In the case of Poonjabhai Vanmalidas (supra), the assessment order passed under the Wealth Tax was dated 23.02.1971. The assessee went in appeal before the Appellate Assistant Commissioner who by his order dated 23.06.1971 reduced the net wealth of the petitioner. Consequential orders in light of the appellate orders was passed on 30.03.1974. The revenue issued rectification notices on 15.01.1976. The principal contention of the assessee was that they were time barred after expiry of four years from the date of the orders i.e. 22.02.1971. Considering the issue and disposing of the matter before it, only on the ground of limitation, the Division Bench of this Court held that even after an appeal from an order of assessment is decided, a mistake in that part of the order of assessment which was not the subject matter of review by the Appellate Authority and was left untouched can be rectified, however, that part of the order which is sought to be rectified is the untouched part of the original order. Applying it to the facts of the case, what is evident is that the assessment order was dated 02.02.2012. In an appeal to the CIT(A) there was no dispute regarding Section 10A. The relief was granted in appeal on 27.08.2014. There too there was no dispute regarding Section 10A provision. The order giving effect was date 31.03.2015. Here also since benefit of 10A was ‘as per assessment order’, as held in the case of Poonjabhai Vanmalidas (supra) in relation to issues not appealable, the order of the appellate authority does not subsume the original order and the time for correcting the mistake in the original order has to relate back to passing of the original order and not the appellate order. The argument of revenue therefore that the exercise was within the time frame is misconceived. Relevant observations in the case of Poonjabhai Vanmalidas (supra) read as under:
“In Karsandas Bhagwandas Patel v. G.V. Shah, Income-tax Officer [1975] 98 ITR 255 (Guj), the Division Bench consisting of Bhagwati C.J. and one of us (P.D. Desai J.) dealt with the provisions of rectification proceedings under section 35(1) of the Indian Income-tax Act, 1922, and the question was, what part of the Appellate Assistant Commissioner’s order could be said to be the final order and what part of the original order of Income-tax Officer could be said to be the final order. At page 259, Bhagwati C.J., speaking for the Division Bench, observed:
“It is clear on a plain reading of the language of section 35, sub-section (1), that the power to rectify a mistake in an order is conferred only on the authority which passed the order. The Income-tax Officer can rectify a mistake only if it is a mistake in the order of assessment made by him and similarly the Appellate Assistant Commissioner can rectify a mistake only if it is in the order passed by him in appeal.”
Under section 35(1) of the Wealth-tax Act also the same scheme is preserved because under section 35(1)(a) the Wealth-tax Officer may amend any order of assessment or of refund or any other order passed by him. Proceeding further with the quotation from Karsandas Bhagwandas Patel’s case [1975] 98 ITR 255 at 259-60 (Guj):
“It would, therefore, seem that if the order of assessment made by the Income-tax Officer has ceased to exist by reason of having merged wholly in the order of the Appellate Assistant Commissioner, the Income tax Officer cannot rectify a mistake in the order of assessment; the . mistake, if any, which vitiated the order of assessment would then be a mistake in the order of the Appellate Assistant Commissioner who alone would be entitled to rectify it. The question is whether this hypothesis is correct. Does the doctrine of merger apply in all its fulness so that an order of assessment made by the Income-tax Officer could be said to merge in the order of the Appellate Assistant Commissioner wholly, not only in respect of items considered and decided by the Appellate Assistant Commissioner but also in respect of items not considered and decided by him?”
The Division Bench in Karsandas Bhagwandas Patel’s case [1975] 98 ITR 255 (Guj) held that, having regard to principles as well as authority, it was not possible to say that the doctrine of merger does not apply at all to income-tax proceedings. At page 261 it was pointed out:
“So also where an appeal is preferred by an assessee against an order of assessment in respect of all the items considered and decided by the Income-tax Officer so that the whole of the order of assessment made by the Income-tax Officer is for consideration by the Appellate Assistant Commissioner, the effect of the decision of the Appellate Assistant Commissioner would be to substitute his determination for that of he Income-tax Officer in respect of all items considered and decided by the Income-tax Officer and the order of the Income-tax Officer would be merged wholly in the order of the Appellate Assistant Commissioner. But, what would be the position when an appeal is preferred against an order of assessment in respect of some only out of several items considered and decided by the Income-tax Officer?”
At page 262, it was observed:
