HIGH COURT OF BOMBAY
NYK Line (India) Ltd.
Deputy Commissioner of Income-tax
WRIT PETITION NO. 159 OF 2012
Date of pronouncement – 10.02.2012
Dr. D.Y. Chandrachud, J.
Rule; with the consent of Counsel for the parties returnable forthwith. With the consent of Counsel and at their request the Petition is taken up for hearing and final disposal.
2. An assessment in the present case for Assessment Year 2006-07 is sought to be reopened by a notice dated 28 March 2011. The Assessee is before this Court in proceedings under Article 226 of the Constitution.
3. The Petitioner is a wholly owned subsidiary of a non resident shipping line. Under an agreement dated 1 April 1993, the Petitioner is under a contractual obligation to render services to its foreign principal including inter alia in relation to vessel operations and towards collection and remittance of freight. The Petitioner collects Container Detention Charges (CDCs) which are levied upon importers on behalf of the foreign principal. Under the agreement, the Petitioner was entitled to a commission for services rendered to its foreign principal. The Reserve Bank of India issued a circular on 15 September 1993 under which modalities were prescribed for considering applications for appropriation of Container Detention Charges. Under the circular, a sum of US $ 1.5 for a container per day was to be retained to meet local expenses of the agent towards administration charges. The Petitioner maintained a separate bank account for debiting and crediting receipts and payments on account of its principal. The Container Detention Charges were also credited to the account upto 31 March 2009. On 25 May 2009, the Petitioner entered into an agreement with its foreign principal by which the Petitioner was authorized to retain an amount of US $ 1.5 per day per container collected on behalf of the principal between 1993 to 2009. The Petitioner has offered the whole of the amount received as its own income during the period 1993 to 2009 for Assessment Year 2010-11. The total amount offered to tax is Rs. 9.34 crores for Assessment Year 2010-11 including an amount of Rs.1.16 crores which is sought to be taxed in these proceedings.
4. For Assessment Year 2006-07, the Petitioner filed a return of income on 28 November 2006. In the notes forming part of accounts, the following disclosure was made:-
“The Company collects freight, detention and terminal handling charges (THC) on behalf of its Principal in separate bank accounts held in the name of the Company. After effecting payments in connection with the Principal’s activity, the surplus funds of the Principal are held in these bank accounts, on behalf of the Principal. These bank balances are matched by a corresponding liability to the Principal.
Vide a circular, RBI has granted permission for retention of container detention charges @ USD 1.5 per day, per twenty feet equivalent units (TEU) as administrative charges for an agent’s local use. Since, the Company’s agreement with its Principal does not provide for such retention, it has credited an amount aggregating Rs. 44,743,264/- as at 31 March 2006 (previous year: Rs. 33,053,628/-) to the Principal’s account. The management believes that if the Company is required to retain this amount in compliance with RBI regulations, its commission income on cargo or vessels handled will be revised to the extent of such retention amount. Hence the management believes that the aforesaid does not have an impact on the financial statements of the Company.”
5. In the report filed by the statutory auditors together with the return, the following note was placed on record:-
“4. We draw attention to Note 20 to the financial statements. As more fully explained in the note, the Company has not allocated for its local use, certain Container Detention Charges as per the RBI circular. The Company’s management believes that this does not have an impact on the financial statements.”
6. The Assessing Officer passed an order of assessment on 23 December 2009 under Section 143(3).
7. During the course of assessment proceedings, the Petitioner had addressed a letter dated 18 November 2009 which was submitted, as stated therein, together with the details as requested by the Assessing Officer. The letter inter alia contained the following disclosure:-
“As the company is the shipping agent of Nippon Yusen Kaisha, it collects freight, detention and terminal handling charges on behalf of its principal. These are kept in a separate bank account matched by a corresponding liability to the principal. Currently, credit balances in debtors account and unpaid brokerage account are only outstanding with the principal.
5. At the outset please note that the containers are not owned by the company but by Nippon Yusen Kaisha, the principal. Container Detention Charges (CDC) are charges levied on third party importers by the principal when the containers are not unloaded by the importers at the port of destination but are instead moved/ transported by the importers to their respective factories and retained by the importers for a certain number of days. In view thereof, the potential freight income is lost as the containers are not available. The principal thus levies CDC on importers to recover the opportunity cost of earning the freight income and also to re-compensate the port charges that the principal has to bear. These charges are collected by the company as agent of the principal and are deposited in the separate bank account. These funds are then used to meet the expenses of the principal in India or could be remitted back to the principal in accordance with the Foreign Exchange Regulations.
Remittance of CDC by the shipping agents in India of the overseas Principal has been a subject matter of regulation under the Foreign Exchange Management Act and erstwhile Foreign Exchange Regulation Act. Only a permitted part of the CDC is allowed to be remitted overseas and the balance can be retained by the shipping agent in India for meeting expenses of the Principal in India.
Circular No.EC By.Pass.II.361/Misc-93/94 dated 15th September, 1993 issued by the Exchange Control Department of the Reserve Bank of India (RBI), a copy of which is enclosed at Annexure 3 prescribes guidelines for appropriation of CDC collected in India.”
A reference was then made to the guidelines contained in a circular of the Reserve Bank of India including to the amount of US $ 1.5 which has to be retained by the agents in India. The letter concluded with the following statement:-
“The CDC belongs to the principal and is deposited by the company into a separate bank account of the principal which is matched by a corresponding liability to the principal. The company from time to time incurs expenses in India on behalf of the principal and remits the same to it in accordance with the prescribed ceiling limit by the Foreign Exchange Management Act.
The sums collected on account of CDC belong to the principal and is income of the principal. The company is the shipping agent of the principal whereby its main source of income is commission income. These amounts belong to the principal which is retained by company as an agent, and can under no circumstances be considered as income of the company. As the principal continues to retain the ownership of the income these sums cannot be treated as the income of the company. In view thereof, it is respectfully submitted that no addition be made on account of the same.”
8. The order of assessment contained a specific discussion on items in respect of which the Assessing Officer made a disallowance. However, as regards the submission of the Petitioner on an amount representing US $ 1.5 of the container detention charges, the Assessing Officer did not make any specific observation.
9. The reasons which have been furnished to the Petitioner for reopening the assessment are as follows:-
“The assessee is a wholly owned subsidiary of a Japanese company, NYK Ltd. It handles with freight booking and collection for the Principal. Apart from that, it also takes care of the management of the containers, collecting container rent, paying the ports and other agents for container on behalf of the Principal. The assessee company doesn’t charge anything for these services and towards the expenses it incurs for rendering these services. The RBI to stop such practice has issued a directive/circular No.EC By Pass II.361/Misc.93.94 dt. 15.09.03 issued by Exchange Control Department of RBI notifying the remission of container rent so collected whereby it is mandatory for the agent (like assessee company) to retain 1.50 $ per TOU paid out of 12.50$ CDC collected towards its own administrative expenses. This amount cannot be remitted to the holding company abroad. The assessee company has kept this amount which it could not remit to the holding company in a separate account and shows it as payable to the holding company whereas in reality is should have shown as part of the receipts of the assessee company. The amount for the year is Rs. 1,16,89,636/-. This amount was added as income of the assessee company in the scrutiny assessment for A.Y. 2007-08. The facts being the same, similar treatment has to be given for this amount in A.Y. 2006-07.”
10. On behalf of the Petitioner it has been submitted that though the reopening of the assessment has taken place within a period of four years, there is no tangible material on the basis of which the assessment is sought to be reopened. A full disclosure was made by the Petitioner of the fact that the Reserve Bank of India had not permitted the Petitioner to remit an amount equivalent to US $ 1.5 per container per day. However, according to the Petitioner, this amount which was part of the Container Detention Charges belonged entirely to the principal and was income of the principal. The Petitioner had made a submission before the Assessing Officer that the amount did not represent its income. The assessment is sought to be reopened on the basis of an order of assessment for a subsequent Assessment Year, 2007-08. The learned counsel submitted that no new facts have been brought on the record for Assessment Year 2007-08. Consequently, the reopening of the assessment for Assessment Year 2006-07 cannot be justified and would constitute a mere change of opinion, which is impermissible. The reopening would amount to permitting a review of the order.
11. On the other hand, the learned counsel appearing for the Revenue submitted that under Clause (c)(i) of Explanation 2 to Section 147, where an assessment has been made, but income chargeable to tax has been under assessed, this shall also be deemed to be a case where income chargeable to tax has escaped assessment. In the present case, it was urged that the reopening has taken place within a period of four years. The Assessing Officer had not discussed in the course of his order, whether, the amount representing US $ 1.5 per container represented the income of the Petitioner. Consequently, it was urged that the Assessing Officer is within his jurisdiction in seeking to reopen the assessment.
12. The reopening of the assessment in the present case has taken place within a period of four years of the end of the relevant assessment year. The power of the Assessing Officer to reopen an assessment within a period of four years of the relevant assessment year is undoubtedly wider than where a period of four years has elapsed. Once a period of four years has elapsed, the proviso to Section 147 stipulates that there must be a failure on the part of the Assessee to disclose fully and truly all material facts necessary for assessment as a result of which income chargeable to tax has escaped assessment. But, that is not to say that within a period of four years, the power of the Assessing Officer to reopen an assessment is untrammelled. Even within a period of four years, it is now a settled principle of law that an assessment cannot be reopened on the basis of a mere change of opinion. The Supreme Court has emphasized that the Assessing Officer has no power to review, but his power is a power to reassess. If a mere change of opinion cannot furnish a ground for reopening of an assessment, then, under the garb of reopening an assessment, a review would not equally be permissible. Consequently, the test is that there should be tangible material to come to a conclusion that there is an escapement of income from assessment.
13. These principles have been emphasized in the judgment of the Supreme Court in CIT v. Kelvinator of India Ltd.  320 ITR 561/187 Taxman 312. The Supreme Court has observed as follows:-
“6. ….. Therefore, post 1st April, 1989, power to reopen is much wider. However, one needs to give a schematic interpretation to the words “reason to believe” failing which, we are afraid, section 147 would give arbitrary powers to the Assessing Officer to reopen assessments on the basis of “mere change of opinion”, which cannot be per se reason to reopen. 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 preconditions 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. 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 1st April, 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. Our view gets support from the changes made to section 147 of the Act, as quoted hereinabove. Under the Direct Tax Laws (Amendment) Act, 1987, Parliament not only deleted the words “reason to believe” but also inserted the word “opinion” in section 147 of the Act. However, on receipt of representations from the companies against omission of the words “reason to believe”, Parliament reintroduced the said expression and deleted the word “opinion” on the ground that it would vest arbitrary powers in the Assessing Officer. …..”
14. Now, undoubtedly an order of assessment which has been passed for a subsequent assessment year may furnish a foundation to reopen an assessment for an earlier assessment year. However, there must be some new facts which come to light in the course of assessment for the subsequent assessment year which emerge in the order of assessment. Otherwise, a mere change of opinion on the part of the Assessing Officer in the course of assessment for a subsequent assessment year would not by itself legitimise the reopening of an assessment for an earlier year.
15. In Raymond Woollen Mills Ltd. v. ITO  236 ITR 34 (SC), the case of the Revenue was that the Assessee was charging to its profit and loss account, fiscal duties paid during the year as well as labour charges, power, fuel, wages, chemicals etc.. However, while valuing its closing stock, the elements of fiscal duty and the other direct manufacturing costs were not included by the Assessee. This resulted in undervaluation of inventories and understatement of profits. This information, as the Supreme Court emphasized, was obtained by the Revenue in the assessment proceedings of a subsequent year. Consequently, the reopening of the assessment was held to be valid. The point to be emphasized is, therefore, that where in the case of assessment proceedings for a subsequent year certain additional information is obtained by the Revenue which was not available to it in the course of an assessment for an earlier year, that may legitimately be utilized as a ground for reopening an assessment of the earlier year. Where the reopening has taken place within four years that may legitimately give rise to an inference of escapement of income. The new information which has come to the knowledge of the Revenue would, therefore, constitute tangible material.
16. The judgment of the Division Bench of this Court in Multiscreen Media (P.) Ltd. v. Union of India  324 ITR 54/7 taxmann.com 38 (Bom.) adverts to a decision of the Supreme Court in Ess Ess Kay Engg. Co. (P.) Ltd. v. CIT  247 ITR 818/ 124 Taxman 491 as laying down the principle that merely because the case of the Assessee was accepted as correct in the original assessment for the assessment year in question that would not preclude the Assessing Officer to reopen an assessment of an earlier year on the basis of a finding of fact made on the basis of fresh material in the course of an assessment for a subsequent assessment year. This Court in its judgment in Multiscreen Media (P.) Ltd. (supra) also adverted to a decision of the Division Bench in Siemens Information System Ltd. v. Asstt. CIT  295 ITR 333/ 168 Taxman 209 (Bom.). The Division Bench held that the judgment in Siemens Information System Ltd. (supra) would not preclude the Assessing Officer to reopen an assessment for an earlier year on the basis of fresh material which has come in the course of assessment for a subsequent assessment year.
17. Now, in this background and considering these tests, the facts of the present case would have to be evaluated. The Assessee in the present case had made a disclosure in the notes forming part of the accounts of the nature of payments required to be made to the foreign principal on account of Container Detention Charges. A reference was made to the fact that as a result of a circular issued by the Reserve Bank of India, the Assessee was not permitted to remit a certain proportion equivalent to US $ 1.5 for each container. The statutory auditors had also included a note in the report. During the course of assessment proceedings, the Assessee addressed a comprehensive letter dated 18 November 2009 making a full disclosure of facts. Now it is in this background that the order of assessment under Section 143(3) must be considered. The Assessing Officer specifically discussed in the course of the assessment order the matters in respect of which he has made a disallowance either fully or in part. Since the Assessing Officer did not find any justification to reject the claim of the Assessee in respect of the issue of container detention charges, there was no specific discussion in the course of order. In this regard the following observations of a Division Bench of this Court in Idea Cellular Ltd. v. Dy. CIT  301 ITR 407 have relevance:-
“9. It was also sought to be contended that since the Assessing Officer had not expressed any opinion regarding this matter in his original assessment order, it could not be said that there was any change of opinion in this case. In our view, once all the material was before the Assessing Officer and he chose not to deal with the several contentions raised by the petitioner in his final assessment order, it cannot be said that he had not applied his mind when all material was placed by the petitioner before him.”
18. Consequently and in this background the mere fact that the Assessing Officer for Assessment Year 2007-08 had come to a different conclusion would not justify the reopening of the assessment for Assessment Year 2006-07. In order to establish that the reopening of the assessment for Assessment Year 2006-07 is not a mere change of opinion, the Revenue must demonstrate before the Court that during the course of the assessment proceedings for the subsequent year i.e. Assessment Year 2007-08 some new information or material had been brought on record which was not available when the assessment order was passed for Assessment Year 2006-07. That indeed is not the case of the Revenue. All material which was relevant to the determination was available when the assessment was completed for Assessment Year 2006-07. Consequently, the mere formation of another view in the course of assessment proceedings for Assessment Year 2007-08 would not justify the Revenue in reopening the assessment for Assessment Year 2006-07 though the reopening of the assessment has taken place within a period of four years. The power to reopen assessments is structured by law. The guiding principles which have been laid down by the Supreme Court in Kelvinator of India Ltd. (supra) must be fulfilled. In the present case there was no tangible material, no new information and no fresh material which came before the Revenue in the course of assessment for Assessment Year 2007-08 which can justify the reopening of the assessment for Assessment Year 2006-07.
19. Moreover it must be noted that in pursuance of the agreement which was entered into by the Assessee with its foreign principal on 25 May 2009 allowing the Assessee to retain an amount of US $ 1.5 per container, the Assessee has offered to tax the entire amount collected between 1993 to 2009 in the immediately following Assessment Year, 2010-2011. The entire amount has consequently been offered to tax.
20. For these reasons, we allow the petition by making Rule absolute by quashing and setting aside the impugned notice dated 28 March 2011. There shall be no order as to costs.