Reassessment not justified if no failure by petitioner to disclose truly & fully all material facts

HIGH COURT OF GUJARAT

Surat District Co-op Milk Producers Union Ltd.

Versus

Income-tax Officer

Special Civil Application No. 18592 of 2011

September 27, 2012

ORDER

1. Rule. Learned counsel Mr Sudhir Mehta waives service of Rule. Petition is taken up for hearing forthwith.

2. The petitioner, a Cooperative Milk Producers’ Union, has challenged notice dated 30th March 2011 issued by the respondent, Income Tax Officer under Section 148 of the Income Tax Act, 1961 (‘Act’, for short). By such notice he proposed to reopen the assessment of the petitioner for the Assessment Year 2004-05.

3. The petitioner is filing regular returns and is regularly assessed to tax. For the Assessment Year 2004-05, the petitioner filed return of income on 21st October 2004 declaring nil income. In such return the petitioner had claimed a gross deduction of Rs.1,81,27,606 under Section 80P 2(d) of the Act. However, the actual deduction claimed considering the gross total income under this head was Rs. 87,03,078.

4. The return of the petitioner was taken in scrutiny. The Assessing Officer framed assessment under Section 143(3) of the Act on 27th December 2006 determining the net taxable income of the petitioner at nil. In the assessment order he recorded as under:-

5. It is this return which the Assessing Officer desires to reopen for which impugned notice came to be issued beyond a period of four years from the end of the relevant assessment year.

6. The petitioner was supplied the reasons recorded by the Assessing Officer for issuance of such notice. The reasons read as under:

“11. Reasons for the belief that the income has escaped assessment:

During the assessment for A.Y. 2006-07, 2007-08 and 2008-09 it was found that the assessee has been claiming deduction u/s. 80P of the IT Act without first deducting its interest expenses in contravention to section 80AB. It was held by the assessing officers in their assessment orders u/s 143(3) for the above three assessment years that the assessee did not net the interest expenses with the income deductible u/s 80P of the IT Act. The assessing officers had invoked section 80AB to net the income deductible u/s 80P with the amount of interest expenses of the assessee. In this regard the provisions of section 80AB of the Act is reproduced hereunder:

’80AB. Deductions to be made with reference to the income included in the gross total income.

Where any deduction is required to be made or allowed under any section (except section 80M) included in this Chapter under the heading “C.-Deductions in respect of certain incomes” in respect of any income of the nature specified in that section which is included in the gross total income of the assessee, then, notwithstanding anything contained in that section, for the purpose of computing the deduction under that section, the amount of income of that nature as computed in accordance with the provisions of this Act (before making any deduction under this Chapter) shall alone be deemed to be the amount of income of that nature which is derived or received by the assessee and which is included in his gross total income.’

3. On this issue the deduction u/s 80P was disallowed at Rs. 81,13,580/- for AY 2006-07, Rs. 1,74,82,509 for A.Y. 2007-08 and Rs. 2,15,30,155/- for A.Y. 2008-09. For the A.Y. 2004-05, it is found from the computation of income filed for the period that the assessee has claimed a deduction u/s 80P(2) (d) of the I.T. Act. However, it is also found that the assessee has not netted the income eligible for deduction with the interest expenses at Rs. 1,41,63,494/- by virtue of which its income has been shown at Rs. Nil resulting in a refund of all taxes paid. The assessee has failed to adjust such expenses before claiming the deduction which has led to the escapement of income in proportion to the extent of the interest expenses.

4. In view of the above, I am of the opinion that the assessee’s income has escaped assessment within the meaning of section 147 of the I.T. Act. Hence, the case needs re-opening u/s 147 of the I.T. Act, 1961.”

7. Upon receipt of such reasons, the petitioner filed detailed objections to the notice for reopening under communication dated 15th December 2011. the petitioner contended that the reopening is based on impermissible grounds. There was no failure on the part of the petitioner to disclose material facts. The petitioner also contended that the deduction was rightly claimed and granted by the Assessing Officer during the original assessment. It was pointed out that the interest expenses referred to by the Assessing Officer in the reasons recorded do not have any direct nexus with the interest earned for which deduction under Section 80P(2)(d) of the Act was claimed. Such objections were, however, summarily rejected by the Assessing Officer vide order dated 16th December 2011. The petitioner has, therefore, filed this petition calling in question the legality of very notice of reopening.

8. Counsel for the petitioner submitted that the petitioner had made full disclosure of all material facts in the return filed. All the details of the interest and dividend income for which deduction under Section 80P(2)(d) of the Act was claimed were mentioned. The expenditure incurred by the petitioner in various activities including for earning of interest/dividend, which were not relatable to the exempt income, were also filed.

9. Counsel further submitted that even the basis to form a belief that the income charge to tax is wholly invalid. He submitted that the expenditure incurred by the petitioner for earning interest/dividend income had no correlation with the income for which the petitioner had claimed deduction under Section 80P(2)(d) of the Act. The question of netting the income for such purpose, therefore, would not arise.

10. Learned counsel further submitted that the gross income for which deduction under Section 80P(2)(d) of the Act is available came to more than Rs. 1.81 crores. Since the gross total income of the petitioner was Rs. 87,03,078, such deduction was limited to the amount of gross total income. Therefore, even after netting, as suggested by the Assessing Officer, the tax liability of the petitioner would not change.

11. On the other hand, learned counsel, Mr Sudhir Mehta for the Department opposed the petition. Relying on the reasons recorded and the affidavit-in-reply filed by the respondent he contended that after recording proper reasons the notice for reopening has been issued, which suffers from no infirmity.

12. Having thus heard learned counsel for the parties and having perused the materials on record, we notice that in the return filed by the petitioner, in addition to claiming deduction of gross income of interest and dividend of Rs.1,81,27,606 under Section 80P(2)(d) of the Act, the petitioner further provided various details. For example, in the Annexure- VII to the return, such deduction under Section 80P(2)(d) was bifurcated into dividend income of Rs. 53,71,450 and interest income of Rs. 1,27,56,156. Further, the petitioner had also supplied the full details of the statement showing dividend and interest income received from cooperative societies along with dividend counters in the original. Additionally, along with Tax Audit Report under Section 44AB of the Act the petitioner had given details of the dividend income, interest income as well as interest expenses for the said year, which included interest expenditure on fixed deposit, interest expenditure on the Society Savings, Employee Savings, etc.

13. Thus, it can be seen that full details with respect to petitioner’s claim for deduction under Section 80P(2)(d) of the Act was very much before the Assessing Officer in the original return accompanied by the audited accounts of the petitioner society. There was, thus, no failure on the part of the petitioner to disclose fully and truly all the material facts necessary for assessment. The essential requirement to enable the Assessing Officer to reopen the assessment and the period of four years is, thus, not satisfied. Therefore, without going into the further question of the very maintainability of the belief of the Assessing Officer that the assessee’s income has escaped assessment within the meaning of section 147 of the Act, we find sufficient justification in the petitioner’s questioning the reopening the process only on the ground that there was no failure on the part of the petitioner to disclose truly and fully all the material facts.

14. In the result, the petition is allowed. Impugned notice dated 30th March, 2011 is quashed. Rule is made absolute.