Case Law Details
As regards Assessment Years 2007-08 and 2008-09, the notices re-opening the assessment are admittedly within a period of four years. At the same time, a fundamental aspect which must be emphasised is that the first year in respect of which a claim for deduction under section 80IB was made was 2004-05. The claim was allowed. As noted earlier, the re-opening of the assessments for A.Ys. 2005-06 and 2006-07 which are the second and third years has been set aside in the earlier part of this judgement. In consequence, the claim for deduction under section 80IB for A.Ys. 2004-05, 2005-06 and 2006-07 which has been allowed in the original orders of assessment would stand.
The attempt on the part of the Assessing Officer to reopen the assessments for A.Ys. 2007-08 and 2008-09 would amount to a change of opinion and would be unsustainable. This is particularly so having regard to the fact that the re-opening of the assessment for the earlier years has been held to be unsustainable and the assessee would be entitled to a deduction under section 80IB in consequence.
HIGH COURT OF BOMBAY
Dynacraft Air Controls
v.
Smt. Sneha Joshi
Writ Petition (L) No. 57 of 2013
FEBRUARY 8, 2013
JUDGMENT
Dr. D.Y. Chandrachud, J. – Rule, by consent made returnable forthwith. Counsel appearing for the Respondents waives service on behalf of the Respondents. By consent, the Petitions are taken up for hearing and final disposal.
2. In the four Writ Petitions that are before the Court, the Petitioner has challenged the validity of notices issued under section 148 of the Income-tax Act, 1961 on 29 March 2012 purporting to re-open the assessments for Assessment Years 2005-06, 2006-07, 2007-08 and 2008-09. The re-opening of assessments for A.Ys. 2005-06 and 2006-07 has taken place beyond the period of four years of the relevant assessment years. The re-opening for A.Ys. 2007-08 and 2008-09 is within four years. The reasons on the basis of which the assessments are sought to be re-opened are similar.
3. The Petitioner is a manufacturer of grills, diffusers, dampers, fire dampers, VAV boxes, VAV terminals, sound attenuators, ducting, false ceilings and electrical lighting fixtures. The Petitioner has a manufacturing facility at Dadra and is registered as a small scale industry.
4. The Petitioner filed a return of income for A.Y. 2004-05 in which, inter alia, it claimed the benefit of section 80IB of the Income-tax Act, 1961. In the course of the assessment proceedings, a notice was issued to the Petitioner by the Assessing Officer under section 143(2) on 23 June 2006, inter alia, requiring the Petitioner to furnish information on the nature of the business and in respect of various other details that were set out in an annexure to the notice. The Petitioner filed a reply dated 24 June 2006 recording that it carries on business as a manufacturer of grills, diffusers, false ceilings and other products needed for air handling and control to be used with or in central air-conditioning plants. The Petitioner, inter alia, relied upon information furnished in form 10CCB. An order of assessment was passed under section 143(3) on 7 September 2006 for A.Y. 2004-05 allowing the Petitioner the benefit of the deduction under section 80-IB.
5. For A.Y. 2005-06, the Petitioner inter alia furnished particulars in form 3CD. The information furnished included, for a manufacturing concern, quantitative details of the principal items of raw-materials, finished products and by-products. A questionnaire was issued to the Petitioner by the Assessing Officer in pursuance of a notice under section 142(1) dated 24 April 2007 during the course of the assessment proceedings. As regards the deduction under section 80IB, the questionnaire required a disclosure of the following information:-
“3. Details of deduction u/s. 80IB.
(a) When the manufacturing Unit setup in the Backward area i.e. Gala No.F/2, 3, 4 and G/1, 2,3, Parth Industrial Estate-II, Village Dadara, U.T. of D & N.H. Proof of the same.
(b) When the new machineries are purchased and installed for manufacturing the goods with proof.
(c) Complete details of Production Registers Electricity consumption, salary register of the workers and staff etc. fulfilling all the condition laid down in the Act for claiming deduction u/s.80IB.
(d) Since when the deduction u/s 80IB has been claiming with documentary evidence.”
The Petitioner furnished this information on 7 June 2007 stating that the manufacturing unit was set up in the financial year 2003-04 and that commercial operations commenced on 23 October 2003. The Petitioner enclosed details of the new machinery purchased in F.Y. 2004-05, copies of electricity bills and monthwise details of employees. The Assessing Officer was informed that for A.Y. 2004-05 the claim for a deduction under section 80IB was duly verified when an order of assessment was passed under section 143(3). A further notice was issued by the Assessing Officer on 14 June 2007 in connection with the assessment proceedings under section 143(3) for A.Y. 2005-06 in which the following details were sought:-
“1. Complete details of salary register monthwise –
(a) Contractor workers
(b) Workers on payroll
with name and address of the contractors.
2. Complete details of production register monthwise –
(a) Vapi Unit – Valsad
(b) Parth Industrial Estate Unit , Dadra.
3. Who is Mr.Haria, proprietor of Developers at Vapi. Why some electric bills are in the name of Mr.Haria.
4. Please give complete details of manufacturing units set up at Vapi, Valsad.
5. Have you done any work for others in your factory at Dadra. If yes please give complete address.
6. Have you given any goods for job work to others. If yes give complete details with name and address of the party to whom the goods given for job work.
7. Copy of monthwise stock statement supplied to the bank.
8. Books of account with stock register.”
The Petitioner responded to the notice of 20 June 2007. Photo copies of monthly wage registers, bills of the labour contractor and the R.G.I. Register for finished goods maintained under the Central Excise Act, 1944 were disclosed together with other material as sought. Eventually, an order for assessment was passed under section 143(3) on 29 October 2007 for A.Y. 2005-06. While allowing the benefit of a deduction to the extent of Rs. 1.07 crores for A.Y. 2005-06, which was the second year of the claim, the Assessing Officer observed as follows:-
“Assessee is a registered partnership firm, engaged in the business of manufacturing Air Handling Products. Assessee’s manufacturing unit is located at village Dadra which is notified u/s. 80IB of I.T. Act, 1961. Produced books of account such as purchases/sales register, cash book, bank book and ledger for verification. The same were test checked. Assessee’s eligibility for claiming deduction u/s. 80IB has been verified. This is the second year the assessee claiming deduction u/s. 80IB at 100%, The case was discussed with him. After discussion and considering the details filed, the assessment is completed and the total income is computed …….”
6. For A.Ys. 2006-07, 2007-08 and 2008-09, orders of assessment were passed under section 143(3). During the course of the assessment proceedings for 2009-10, the Assessing Officer issued a questionnaire on 2 December 2011 to which the Petitioner submitted a reply. The Petitioner, inter alia, explained the nature of the process carried out on the raw-material purchased from outside. In the course of the assessment order for A.Y. 2009-10 passed under section 143(3), the Assessing Officer allowed the benefit of section 80IB to the extent of 41% of the profit. The Assessing Officer arrived at this conclusion on the basis of a break-up of purchases provided by the assessee which showed that it was manufacturing 41% of the total product in the factory while the rest was being procured from outside which according to the Assessing Officer amounted to a trading activity. Moreover, for A.Y. 2009-10, the Assessing Officer has found that the assessee has received certain income as Contract Income for installation work which is not eligible for deduction under section 80IB.
7. On 29 March 2012 the Assessing Officer sought to re-open the assessment under section 147 for A.Y. 2005-06 to 2008-09. The reasons on the basis of which the assessment is sought to be re-opened have been disclosed to the assessee. The basis on which the assessments are sought to be re-opened is that though the assessment for those years was made under section 143(3), “the actual manufacturing operation has not been duly verified to understand that whether the assessee is actually manufacturing or is just doing some misc work.” The Assessing Officer noted that an air-conditioning system requires various parts which when assembled together become a cooling system; and from the details furnished, it would appear that the assessee purchased certain parts from out of India and other raw-materials from local suppliers. The Assessing Officer held that it appears ‘from a perusal of the assessee’s submission’ that the entire manufacturing work is not carried out in the factory and there is a major element of trading of goods and providing installation services at the place of the client.
Moreover, the Assessing Officer has noted that ‘as per the information furnished by the assessee’ showing a break-up of the purchases, 41% of the total product is manufactured in the factory while the rest is procured from outside. On these facts, the Assessing Officer held that the case would require a thorough verification of the manufacturing activity of the assessee in order to decide whether it is actually carrying out any manufacturing activity.
8. The Petitioner submitted objections to the re-opening of the assessment by a letter dated 27 October 2012. The Petitioner, inter alia, submitted that the notice for re-opening of the assessment for A.Y. 2005-06 was issued beyond a period of four years and did not contain any allegation that the assessee had failed to fully and truly disclose all material facts necessary for assessment for that year. The reasons disclosed, it was submitted, contained no allegation that there was a failure of the Petitioner to disclose fully and truly all material facts. In the circumstances, it was submitted that the notice under section 148 was invalid as it was based on a mere change of opinion without any new or tangible facts. Finally, the Petitioner also submitted that during the course of the original assessment proceedings, the Petitioner had furnished the audit report in form 10CCB, Tax Audit Report and all relevant details. The objections have been disposed of by the Assessing Officer by an order dated 17 December 2012. During the course of hearing, the learned Counsel appearing on behalf of the assessee and the learned Counsel appearing on behalf of the Revenue have stated before the Court that the reasons which have been recorded for the re-opening of the assessment for all the years are the same; and the objections have been disposed of in terms of the same recording of reasons.
9. In this batch of Petitions, we will deal with the re-opening of the assessments for A.Y. 2005-06 and 2006-07 separately since the re-opening of the assessment for those two years is beyond a period of four years of the end of the relevant assessment year.
10. The submissions which have been urged on behalf of the Petitioner are: (I) The re-opening having taken place beyond a period of four years, the jurisdictional requirement under the proviso to section 147 is that there must be a failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment for that year; (ii) All the orders of assessment were passed under section 143(3); ex facie, the reasons for the re-opening of the assessment do not even purport to state that there has been any failure on the part of the assessee to fully and truly disclose all material facts; (iii) As the record would indicate, during the course of the assessment for A.Y. 2005-06, there was a full disclosure by the assessee; and the Assessing Officer had fully applied his mind as is evident from the fact that two questionnaires were issued to the assessee which were duly replied; (iv) The reasons for the re-opening of the assessment would indicate that the assessments are sought to be re-opened on the basis of material which has been furnished by the assessee which itself would indicate that there was no suppression on the part of the assessee.
11. An affidavit-in-reply has been filed by the Assessing Officer. Apart from supporting the re-opening on the basis of the averments contained therein, the learned Counsel appearing on behalf of the Revenue urged that: (i) Though the assessment has been re-opened for A.Y. 2005-06 and 2006-07 beyond a period of four years, this was sought to be done on the basis of material which was placed before the Assessing Officer during the course of the assessment proceedings for A.Y. 2009-10; (ii) Though as a matter of fact, the reasons which have been disclosed to the assessee do not state that there was a failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment that has been explained by the Assessing Officer while disposing of the objections to the re-opening of the assessment; (iii) During the course of the assessment for A.Y. 2009-10, the Assessing Officer held that the assessee would be entitled to a deduction under section 80IB only to the extent of 41% and this would furnish a valid basis for re-opening the assessment for the earlier assessment years.
12. Under section 147, for the Assessing Officer to re-open an assessment, he must have reason to believe that income chargeable to tax has escaped assessment for any assessment year. Under the proviso to section 147, where an assessment has been made under section 143(3), no action shall be taken under that section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment, for that assessment year. This is now a jurisdictional requirement which must be fulfilled where an assessment is sought to be re-opened beyond a period of four years. The existence of the jurisdictional condition must be indicated in the reasons which are furnished to the assessee. The fulfilment of the condition is a pre-requisite and if it is absent, an assessment cannot be reopened beyond four years. The Assessing Officer cannot improve upon the reasons for re-opening the assessment or bridge the lacunae later. If the reasons disclosed do not indicate the fulfilment of the jurisdictional requirement, the re-opening is invalid.
13. The reasons which have been disclosed by the Assessing Officer to the assessee for re-opening the assessment for A.Ys. 2005-06 and 2006-07 do not indicate that there was any failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. On the contrary, the reasons refer inter alia to the items mentioned by the assessee and are based upon a perusal of the submission of the assessee. If the basis for re-opening an assessment beyond four years is founded on the material produced by the assessee, the clear inference is that there is no suppression of facts material to the assessment by the assessee. The attention of the Assessing Officer was drawn to this aspect when the assessee submitted its objection to the re-opening of the assessment. Yet, he disregarded them.
14. Such objections to the reopening of an assessment are not an idle formality. That, however, is what Assessing Officers are reducing the exercise to. Treating the exercise as a meaningless formality would be a serious breach of the law laid down by the Supreme Court. The Supreme Court has now mandated that reasons must be disclosed to the assessee; that the assessee must have an opportunity to file its objections and that those objections must be disposed of by the Assessing Officer by a reasoned order (J.K.N. Drive Shafts (India) Ltd. v. ITO [2003] 259 ITR 19. The assessee drew the attention of the Assessing Officer while filing objections to the judgements of this Court in Titanor Components Ltd. v. Asstt. CIT [2012] 20 taxmann.com 805 (Bom.); Hindustan Lever Ltd. v. R.B. Wadkar [2004] 268 ITR 332 and in NYK Line (India) Ltd. v. Dy. CIT [2012] 211 Taxman 185 and to other decisions. The Assessing Officer while disposing of the objections observed as follows:-
“Notice u/s 148/ITNS-34 which is prescribed by the CBDT does not contain any provisions to disclose that the assessee has failed to disclose fully and truly all material facts necessary for assessment.”
Again the Assessing Officer while dealing with the submission that the reasons do not even state that there was a failure of the assessee to disclose fully and truly all material facts observed as follows:-
“However in the reason recorded for the re-opening the assessment through typographical error that the above stated conclusion was remained to be incorporated. Any typographical error will not make entire proceedings as bad in law.”
Now, in our view, the entire approach of the Assessing Officer is throughly misconceived. The Assessing Officer has ignored the binding precedents on the subject to which his attention was drawn. All that the Assessing Officer has stated is that the form of the notice under section 148 which is prescribed by the CBDT does not contain any provision to the effect that the assessee has failed to disclose fully and truly all material facts necessary for the assessment. This is a clear dereliction on the part of the Assessing Officer to follow the mandatory requirements of the proviso to section 147. The fact that the form which is prescribed by the CBDT does not require that the reasons should state that there was a failure of the assessee to disclose fully and truly all material facts is no answer to the jurisdictional requirement contained in section 147. The provisions of the statute enacted by Parliament bind all authorities, including the Assessing Officer. A form, which is at the highest an administrative instruction, cannot override a statutory provision. Again the Assessing Officer sought to explain away her failure to record a satisfaction of the requirement of the proviso to section 147 by stating that this was a typographical error. The omission to state a jurisdictional fact cannot by any stretch of imagination be regarded as a typographical error.
15. Hence, we are of the view that the Assessing Officer has in purporting to re-open the assessment for A.Ys. 2005-06 and 2006-07 acted in clear breach of the mandate of the law and of the jurisdictional condition prescribed by the proviso to section 147.
16. That apart, it is evident that during the course of the assessment proceedings under section 143(3) for A.Y. 2005-06, the Assessing Officer brought his mind to bear upon all relevant facts and circumstances bearing upon eligibility of the assessee to a deduction under section 80IB. The assessee had filed a Tax Audit Report together with a return of income-tax, besides form 10CCB. The detailed nature of the inquiry that was carried out by the Assessing Officer is evident from two questionnaires that were issued to the assessee during the course of the assessment proceedings on 24 April 2007 and 14 June 2007 (exh. ‘I’ and ‘K’) when the assessment was pending. It was after the assessee had furnished a reply to the questionnaires that the Assessing Officer passed an order under section 143(3). In the order of assessment, the Assessing Officer noted that the assessee had produced books of account such as purchases/sales registers, cash book, bank book and ledger for verification and that these were test checked. The Assessing Officer has also noted that the eligibility of the assessee for claiming a deduction under section 80IB has been duly verified. In this context, it would be totally contrary to the record for the Assessing Officer to state that the nature of the activity of the assessee was not verified during the course of the assessment proceedings.
17. For these reasons, we have come to the conclusion that the re-opening of the assessment for A.Ys. 2005-06 and 2006-07 failed to meet the jurisdictional requirements spelt by the proviso to section 147. Hence, the notice for re-opening the assessment would have to be quashed and set aside.
18. As regards Assessment Years 2007-08 and 2008-09, the notices re-opening the assessment are admittedly within a period of four years. At the same time, a fundamental aspect which must be emphasised is that the first year in respect of which a claim for deduction under section 80IB was made was 2004-05. The claim was allowed. As noted earlier, the re-opening of the assessments for A.Ys. 2005-06 and 2006-07 which are the second and third years has been set aside in the earlier part of this judgement. In consequence, the claim for deduction under section 80IB for A.Ys. 2004-05, 2005-06 and 2006-07 which has been allowed in the original orders of assessment would stand. For A.Ys. 2007-08 and 2008-09, the principle which has been formulated by the Supreme Court in the judgement in CIT v. Kelvinator of India Ltd. [2010] 326 ITR 561 will govern. In the judgement in the case of Kelvinator of India Ltd., 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, s. 147 would give arbitrary powers to the AO 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 AO 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 inbuilt test to check abuse of power by the AO. Hence, after 1st April, 1989, the AO 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 s. 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 s. 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 AO.…..”
The attempt on the part of the Assessing Officer to reopen the assessments for A.Ys. 2007-08 and 2008-09 would amount to a change of opinion and would be unsustainable. This is particularly so having regard to the fact that the re-opening of the assessment for the earlier years has been held to be unsustainable and the assessee would be entitled to a deduction under section 80IB in consequence.
19. For these reasons, we have come to the conclusion that the Petitions would have to be allowed. We accordingly allow the Petitions by quashing and setting aside the notices under section 148 of the Income-tax Act, 1961 purporting to re-open the assessment for A.Ys. 2005-06, 2006-07, 2007-08 and 2008-09. Rule is made absolute in the aforesaid terms. There shall be no order as to costs.
