IBS Software Private Limited Vs Union of India (Kerala High Court)
Summary: The petitioner, IBS Software Private Limited, is a private limited company and an assessee under the Income Tax Act, 1961. For assessment year 2020-21, the petitioner’s return was subjected to scrutiny and the assessment was finalised. Subsequently, the petitioner received a notice under Section 148A proposing reassessment on the ground that certain income had escaped assessment.
The basis of the proposed reassessment was an amount of Rs.8,05,92,988/- claimed as a deduction towards “Marked to Market valuation of hedge reserve”. According to the proposed basis, deduction was not allowable under Section 40A(13) in respect of marked-to-market valuation of hedge reserve computed in accordance with ICDS VI.
The petitioner initially sought an adjournment. Thereafter, by email dated 07.11.2024, it explained that the sum of Rs.8,05,92,988/- deducted in the computation for AY 2020-21 had already been included in its tax computation for AY 2019-20. The petitioner furnished computation statements for AYs 2019-20 and 2020-21 in support of its explanation. According to the petitioner, the amount had already been included in taxable income for AY 2019-20 and had suffered tax, and its deduction while preparing the computation for AY 2020-21 was an accounting consequence.
The petitioner also requested that, if its explanation was not accepted, it be given an opportunity to submit a further reply and be heard.
The Assessing Authority nevertheless passed an order under Section 148A(3). Though the petitioner’s email and supporting documents were referred to, the petitioner contended that the explanation was not considered and that the Assessing Authority instead proceeded to determine the taxability of the disputed amount.
Before the High Court, the petitioner raised two principal grounds. First, it contended that Section 148A(1) required the information suggesting escapement of income to be furnished with the show-cause notice, whereas the subsequent Section 148A(3) order referred to an audit objection which had not been mentioned in the notice. Secondly, it contended that the Assessing Authority had failed to consider its specific explanation and the computation statements demonstrating that the disputed amount had already been subjected to tax in AY 2019-20.
The Revenue submitted that Section 148A(1) did not require disclosure of the entire set or source of information and that the notice contained sufficient particulars of the information and grounds for proposing reassessment. On the second issue, the Revenue contended that the petitioner had not furnished copies of the returns or other documents and had only supplied an email with computation statements, which were not statutory documents. It therefore argued that the Assessing Authority was justified in not considering them.
The High Court accepted the Revenue’s submission on the first issue. It held that Section 148A does not require the source of information to be furnished to the assessee. What is required is that the show-cause notice be accompanied by information suggesting that income chargeable to tax has escaped assessment for the relevant assessment year. Since the annexure to the notice contained sufficient details of the reason for proposing reassessment, the Court held that the notice complied with Section 148A(1).
On the second issue, however, the Court found merit in the petitioner’s case.
The Court noted that the petitioner’s case was not that the disputed amount was non-taxable. Its precise contention was that the amount had already been included in taxable income for AY 2019-20. The computation statements furnished with the petitioner’s explanation supported that contention. Therefore, the relevant question before the Assessing Authority while passing the order under Section 148A(3) was whether the amount had already been subjected to tax, as claimed by the petitioner, and what consequences followed from that position.
Although the materials relied upon by the petitioner were acknowledged in the Section 148A(3) order, the Assessing Authority did not consider the substance of the explanation. Instead, it proceeded to determine the taxability of the amount for the assessment year in question.
The High Court rejected the Revenue’s submission that the returns were not available to the Assessing Authority. The Court observed that the returns were available with the Assessing Authority and could have been verified to determine whether the petitioner’s explanation was correct. The Court also rejected the argument that the computation statements were not statutory documents. The documents were relied upon for the specific purpose of demonstrating that the disputed amount had been included in the taxable income for AY 2019-20. The Assessing Authority therefore had an obligation to verify the claim.
The Court held that an enquiry into this aspect was necessary for finalising the issue, but such enquiry was not seen to have been undertaken.
Accordingly, the High Court disposed of the writ petition by **quashing the Section 148A(3) order** and directing the Assessing Authority to reconsider the matter after providing the petitioner an opportunity of being heard and specifically considering its contention that the disputed amount had already been included as taxable income in AY 2019-20.
The petitioner was permitted to furnish additional documents. The Court further directed that the period from the filing of the writ petition until receipt of the certified copy of the judgment would be excluded for computing the limitation period for completing the assessment.
FULL TEXT OF THE JUDGMENT/ORDER OF HIGH COURT OF KERALA
The petitioner is a Private Limited Company, registered under the Companies Act and an assessee under the provisions of the Income Tax Act, 1961.
2. The facts that led to the filing of this writ petition are as follows:
Pertaining to the assessment year 2020-2021, the petitioner submitted returns. The same was subjected to scrutiny and as per Ext.P12 order of assessment, it was finalized. Subsequently, the petitioner was served with Ext.P1 notice under Section 148A of the Income Tax Act, where it was proposed to re-assess the petitioner, as according to the assessing authority, as per the information received by them, certain income has escaped from the assessment. Annexure to Ext.P1 notice indicates the specific reasons, based on which, such a re-assessment was proposed. It was to the effect that, the petitioner claimed an amount of Rs.8,05,92,988/- as deduction towards “Marked to Market valuation of hedge reserve”. However, as per Section 40A(13) of the Income Tax Act, no deduction of allowance shall be allowed in respect of “Marked to Market valuation of hedge reserve” as computed in accordance with ICDS (ICDS 6-Effects of changes in foreign exchange rates).
3. The petitioner responded to Ext.P1, by submitting Ext.P3 Email, where, the petitioner sought for adjournment. Accordingly, as per Ext.P5, the matter was adjourned to 08.11.2024 and the petitioner was offered for an opportunity of hearing on that date. Later, on 07.11.2024, the petitioner issued Ext.P6 Email, where it is pointed out that, a sum of Rs.8,05,92,988/- which has been reduced in the Assessment Year 2020-2021 was included in the tax computation of Assessment Year 2019-2020. To substantiate the said fact, the petitioner produced the returns submitted for the years 2019-2020 and 2020-2021, which are produced in this writ petition as Exts.P7 and P8 respectively. According to the petitioner, a perusal of the said documents would clearly indicate that, the amount referred to above has been included in the taxable income of the petitioner for the assessment year 2019-2020. It was in these circumstances, the said amount was deducted, as part of accounting practice, while preparing the returns for the year 2020-2021. In Ext.P6, the petitioner also requested to the assessing authority that, in case explanation offered by the petitioner finds no favour with the said authority, the petitioner may be allowed an opportunity to file another reply and also an opportunity be extended to be heard.
4. However, the assessing authority proceeded to pass the order as per Ext.P10 under Section 148A (3) of the Income Tax Act, 1961. According to the petitioner, in Ext.P10, even though Ext.P6 Email and the documents produced along with the same were referred to, without considering the explanation offered by the petitioner, the assessing authority proceeded to determine the taxability of the amount deducted by the petitioner as “Marked to Market valuation of hedge reserve”. This writ petition is submitted by the petitioner in such circumstances, challenging Ext.P10 order, as according to the petitioner, the said order was not in fulfillment of the statutory requirement contemplated under Section 148A of the Act, as the explanation offered by the petitioner was not considered.
5. A detailed statement has been submitted on behalf of the 2nd and 3rd respondents, in response to the averments contained in the writ petition, where, the procedure adopted by the respondents while completing the procedure that culminated in Ext.P10 order, were explained. The statutory provisions invoked by the respondents while completing the said assessment were discussed and contended that, no interference is warranted in the orders passed by the authority, as the same is in compliance of the legal provisions contemplated under the Act. Thus, they sought dismissal of the writ petition.
6. I have heard Sri.Raja Kannan, the learned counsel for the petitioner and Sri.P.G.JayaShankar, learned Senior Standing Counsel for the respondents.
7. The learned counsel for the petitioner mainly raised two grounds while challenging Ext.P10 order. Firstly, it is contended that, as per the statutory stipulations contained in Section 148A(1), there is an obligation upon the authority concerned, while issuing a show-cause notice, to furnish the information which suggest that the income chargeable to tax has escaped assessment. According to the learned counsel for the petitioner, in this case, in Ext.P10 order, the information has been specified as the audit objection received by the assessing officer, whereas in Ext.P1 show-cause notice, there is no reference of any audit objection. Therefore, the same is not in compliance of the statutory requirement contemplated under Section 148A of the Income Tax Act.
8. Secondly, it was contended that, despite the fact that the petitioner had offered a clear explanation with regard to the deduction of amount of Rs.8,05,92,988/- towards “Marked to Market valuation of hedge reserve”, by submitting Ext.P6 along with Exts.P7 and P8, to substantiate such explanation, the same has not been referred to in Ext.P10 order. It is pointed out that, instead of answering the said explanation, the assessing authority proceeded to determine the taxability of the amount, which according to the petitioner was never in dispute, as the petitioner has already included it in the taxable income, in the computation which formed part of the return for the assessment year 2019-2020.
9. On the other hand, the learned Standing Counsel for the respondents submitted that, insofar as the first contention raised by the learned counsel for the petitioner is concerned, namely, the alleged non-disclosure of the information contemplated under Section 148A(1), it is the specific case of the respondents that, the said provision does not mandate the furnishing of the entire set of information. According to the respondents, furnishing the particulars of the information that formed the basis for initiating the reassessment proceedings would itself constitute sufficient compliance with the requirement under the said provision. The learned standing counsel brought to the attention of this Court to Ext.P1 notice,
10. With regard to the 2nd contention, it is pointed out by the learned standing counsel for the respondents that, the assessing authority was not provided with the copies of the returns or other documents, along with the reply submitted and only an Email along with computation statement which according to the petitioner formed the basis of the returns for the assessment year 2019-2020 and 2020-2021 alone were produced. According to the learned standing counsel, the computation statements are not statutory documents and therefore, it was not obligatory for the assessing authority to consider the same, in the absence of any other documents referred to in the statute. Therefore, actions of the respondents are justified.
11. I have carefully gone through the records, perused the relevant statutory provisions and considered the contentions of both sides. When it comes to the first question, namely, the obligation regarding the disclosure of the information, on carefully going through the statutory stipulations contained in Section 148A, I find merit in the submission of the learned standing counsel. This is because, there is nothing in the said provision that provides that, the source of information should be furnished, but what is contemplated therein is that, while issuing show-cause notice, it should be accompanied with information which suggests that income chargeable to tax has escaped assessment for the relevant assessment year. Therefore, what is contemplated in that provision is that, details of the information should be conveyed to the assessee and it is not mandatory that source of information has to be furnished to the assessee. In this case, as rightly pointed out by the learned standing counsel, in Annexure to Ext.P1, the reason for suggesting re-assessment was clearly mentioned, with sufficient details, so as to enable the petitioner/assessee to submit a reply to the same. Therefore, I find that Ext.P1 show-cause notice issued, is in conformity with the requirements contemplated under Section 148A(1) of the Income Tax Act and therefore, contentions raised by the learned counsel for the petitioner in this regard cannot be accepted.
12. However, when it comes to the 2nd contention raised by the petitioner, I find merits therein. In response to the show-cause notice issued, the petitioner submitted Ext.P6 along with Exts.P7 and P8. The relevance of Exts.P7 and P8 are clearly specified in Ext.P6 Email, as it is clearly stated therein that, the amount of Rs.8,05,92,988/-, which has been deducted for the assessment year 2010-2021 was included in the tax computation for the assessment year 2019-2020. On perusal of Exts.P7 and P8 computation statements, the said contention is substantiated. On going through Ext.P1 show-cause notice, it can be seen that the assessing authority was proceeding on the assumption that the amount referred to above was deducted by the petitioner while submitting the returns for the assessment year 2020-2021, in view of the fact that, the amount is not assesseble to tax. In Ext.P10 order also, what was considered by the assessing authority was the taxability of the amounts specified therein.
13. In fact, going by the explanation offered by the petitioner as evidenced by Ext.P6, coupled with the contents of Exts.P7 and P8, it can be seen that, it was not the case of the petitioner that the amount specified above was not taxable, but on the other hand, the contention was that, the said amount was already subjected to tax in the year 2019-2020. Therefore, the proper question that ought to have been considered while passing the order under Section 148A was whether, the said amount is already subjected to tax, as claimed by the petitioner in Ext.P6 and consequences thereof. Although the materials highlighting this aspect were produced before the assessing authority, which are seen acknowledged by the assessing authority in paragraph No.3 to Ext.P10 order, the same has not been considered and instead, the authority proceeded to determine the question of assessebility of the said amount for the purpose of tax. As mentioned above, the petitioner never disputed the taxability of the said amount. The precise contention of the petitioner is that the said amount had already been included in the return of income for the assessment year 2019–2020 and, therefore, could not have been brought to tax once again, for the assessment year in question.
14. Therefore, the relevant question which ought to have been considered by the assessing authority while passing an order under Section 148 A(3), was not considered in Ext.P10 order. Of course, the learned standing counsel for the respondent submitted that, the relevant returns were not submitted by the petitioner and therefore, the assessing authority could not examine the same. The said contention cannot be accepted for more than one reason. Firstly, that is not the reason mentioned in Ext.P10 for not considering the explanation offered by the petitioner. Secondly, as far as the returns are concerned, those are available with the assessing authority and it could be verified by the assessing authority to determine the correctness of the explanation offered by the petitioner as per Ext.P6. Another aspect highlighted by the learned standing counsel for the respondents is that, the computation statements are not statutory documents and therefore, in the case of computation statements produced by the petitioner in Exts.P7 and P8, there is no obligation on the part of the assessing authority to consider the same. However, the said statements submitted by the petitioner to show that, that amount which is the subject matter of the dispute is included in the assessment year 2019-2020 and tax is suffered. Those documents are relied on, only to establish the said inclusion. Therefore, it was the obligation of the assessing authority to verify whether, the said statement made by the petitioner was correct or not. Thus, an enquiry with respect to the same was absolutely necessary for finalizing the issue, which is not seen considered. Therefore, I find that the matter requires reconsideration.
In such circumstances, this writ petition is disposed of quashing Ext.P10, with a direction to the assessing authority to re-consider the matter, after giving the petitioner an opportunity for being heard and also adverting to the contention raised by the petitioner with regard to the inclusion of the said amount in the assessment for the assessment year 2019-2020 as taxable income. As this writ petition is pending since 19.12.2024, it is clarified that the period from the date of filing of this writ petition till the date of receipt of certified copy of this judgment shall be excluded for the purpose of computing the period of limitation for completing the assessment. It is also clarified that, the petitioner shall be at liberty to furnish additional documents if desired by it.
