Case Law Details
CASE LAWS DETAILS
DECIDED BY: HIGH COURT OF BOMBAY
IN THE CASE OF: Rallis India Ltd. Vs. ACIT, APPEAL NO: Writ Petition No. 2514 of 2009, DECIDED ON March 4, 2010
RELEVANT PARAGRAPH
We are conscious of the circumstance that in the present case the re-opening of assessment is sought to be effected within a period of four years of the expiry of the relevant assessment year. However, it is now a well settled position of law that a mere change of opinion would not justify the Assessing Officer in seeking a recourse to the powers under Section 147 and 148 and there must be tangible material before the Assessing Officer to prove that income chargeable to tax has escaped assessment. The principle that there must be tangible material on the basis of which an assessment is sought to be re-opened even within a period of four years is now established in view of the judgement of the Supreme Court in Commissioner of Income Tax V/s. M/s. Kelvinator of India Limited. The Supreme Court has held thus :
” …… Therefore, post 1st April, 1989, power to re-open 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 re-open assessments on the basis of “mere change of opinion”, which cannot be per se reason to re-open. 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 re-assess. But re-assessment has to be based on fulfilment of certain pre-condition and if the concept of “change of opinion” is removed, as contended on behalf of the Department, then, in the garb of re-opening the assessment, review would take place. Once 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, Assessing Officer has power to re-open, provided there is “tangible material” to come to the conclusion that there is escapement of income from assessment.”
In the present case, there was an absence of tangible material on the basis of which the assessment could have been re-opened. The reason which weighed with the Assessing Officer is extraneous to the basis on which the deduction can legitimately be claimed under Section 36(1)(vii). This is a case of a mere change of opinion without any tangible material. The re-opening of the assessment on this ground is hence unsustainable.
B) COMPUTATION OF BOOK PROFITS :
13. The Assessing Officer has while re-opening the assessment stated that in the process of computing the book profits under Section 115JB the assessee had not considered the following provisions made in the books of account, namely (i) Provisions for doubtful debts; (ii) Provisions for doubtful advances; (iii) Provisions for doubtful debts being inter-corporate deposits to subsidiaries; and (iv) Provisions for diminution in the value of investments. While disposing of the objection of the assessee, the Assessing Officer has also noted that at the initial stage when the computation of income under the provisions of Section 115JB was made, the Assessing Officer had not formed any opinion nor had he called for details with regard to the provisions made under the heads noted above and while not adding the same to the total income. The issue which falls for determination is, as to whether the reasons which have been furnished by the Assessing Officer were germane to the provisions made for book profits in Section 115JB.
14. For the purposes of Section 115JB, explanation (1) provides that “book profit” means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2), as increased by the clauses that immediately follow. Sub-section (2) of Section 115JB provides that every assessee, being a company, shall, for the purposes of the section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956. Now, it is a settled principle of law that for the computation of book profits under Section 115JB, the Assessing Officer has to accept the authenticity of the accounts maintained in accordance with the provisions of Parts II and III of Schedule VI of the Companies Act, 1956 which are certified by the auditors and passed by the company in its general meeting. The Assessing Officer does not have jurisdiction to go beyond the net profits as shown in the profit and loss account, save and except to the extent which is provided for in the Explanation. The Assessing Officer can increase the net profits as reflected in the profit and loss account prepared under Parts II and III of Schedule VI to the Companies Act, 1956 only to the extent that is permissible in the Explanation noted above. Apollo Tyres V/s. CIT6 and CIT V/s. HCL Comnet Systems and Services Limited. Clause (c) of Explanation (1) deals with “the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities” .
15. In response to the notice for re-opening of the assessment, the assessee, in the course of its objections pointed out that the view of the Assessing Officer was consistent with the law laid down by this Court in Commissioner of Income Tax V/s. Echjay Forgings Private Limited and the judgements of the Delhi High Court in Commissioner of Income Tax V/s. Eicher Limited and Commissioner of Income Tax V/s. HCL Com net Systems and Services Limited. In the decision in Echjay (supra), Honourable Mr. Justice S.H. Kapadia (as he then was) speaking for a Division Bench of this Court noted that under clause (c) of the explanation to Section 115JB, unless a provision is made for ascertained liabilities, the provision has to be included in the book profits for the purpose of taxation under Section 115J. The Delhi High Court had held in Eicher and in HCL (supra) that under Explanation (1)(c) the increase shall be of the amount or amounts set aside for meeting liabilities other than ascertained liabilities. The Delhi High Court held that ascertained liabilities are not to be included in the book profits as defined in that Section. In our view, the basic question which would arise is as to whether a provision made for doubtful debts or advances can be regarded at all as a provision made for meeting liabilities in the first place. In order that clause (c) should apply, there must be a provision; the provision must be for meeting a liability and the liability in question must be other than an ascertained liability.
16. The Supreme Court had occasion to consider the interpretation of clause (c) to Explanation (1) in its judgement in Commissioner of Income Tax V/s. HCL Com net Systems and Services Limited. The judgement of the Supreme Court arose in appeal from the judgment of the Delhi High Court to which a reference has been made earlier. Honourable Mr. Justice S.H. Kapadia, speaking for a bench of the Supreme Court held that a debt which is payable by the assessee must be distinguished from a debt which is receivable by the assessee. A provision for bad and doubtful debts is made to cover up the probable diminution in the value of the asset namely a debt which is an amount receivable by the assessee. Such a provision, the Supreme Court held, cannot be regarded as a provision for a liability because even if a debt is not recoverable, no liability could be fastened upon the assessee. The Supreme Court held thus :
” … The assessee’s case would, therefore, fall within the
ambit of item (c) only if the amount is set aside as provision; the provision is made for meeting a liability; and the provision should be for other than an ascertained liability, i.e., it should be for an unascertained liability. In other words, all the ingredients should be satisfied to attract item (c) of the Explanation to section 115JA. In our view, item (c) is not attracted. There are two types of “debt”. A debt payable by the assessee is different from a debt receivable by the assessee. A debt is payable by the assessee where the assessee has to pay the amount to others whereas the debt receivable by the assessee is an amount which the assessee has to receive from others. In the present case, the “debt” under consideration is a “debt receivable” by the assessee. The provision for bad and doubtful debts, therefore, is made to cover up the probable diminution in the value of the asset, i.e., debt which is an amount receivable by the assessee. Therefore, such a provision cannot be said to be a provision for a liability, because even if a debt is not recoverable no liability could be fastened upon the assessee. In the present case, the debt is the amount receivable by the assessee and not any liability payable by the assessee and, therefore, any provision made towards irrecoverability of the debt cannot be said to be a provision for liability. Therefore, in our view, item (c) of the Explanation is not attracted to the facts of the present case”.
In the present case also, the debts written off were those receivable by the assessee. These are not liabilities and did not fall within clause (c) to Explanation (1) as explained by the Supreme Court.
17. Subsequent to the decision of the Supreme Court in HCL (supra), Parliament stepped in to amend Explanation (1) to Section 115JB by the Finance Act of 2009. As a result of the amendment, clause (i) came to be inserted in Explanation (1) so as to provide for the amount or amounts set aside as provision for diminution in the value of an asset. Though the amendment was made with retrospective effect from 1st April 2001, it was enacted into law after the Assessing Officer had exercised the power to re-open the assessment in the present case by his notice dated 16th July 2008. Consequently, on the date on which the Assessing Officer exercised his jurisdiction under Section 148, the amendment which was brought in subsequently by the Finance Act of 2009 was not in existence.
18. A legislative amendment, though made with retrospective effect has been held not to justify a recourse to the revisional power of the Commissioner under Section 263 of the Income Tax Act in Commissioner of Income Tax V/s. Max India Limited.12 Counsel for the Revenue sought to distinguish the judgement in Max India (supra) on the ground that it dealt with Section 80HHC and one of the grounds which weighed with the Supreme Court was that the Section had been amended several times. The judgement of the Supreme Court cannot be distinguished for the reasons as suggested by the Counsel for the Revenue. The principle which has been laid down in the judgement of the Supreme Court cannot be confined to Section 80HHC. In that case, the revisional authority had sought to exercise its revisional jurisdiction under Section 263. The exercise of power was challenged firstly on the ground that two views on the interpretation of the provision were possible and hence, recourse to Section 263 was not permissible. Moreover, the second ground which appears to have been urged was that the retrospective amendment to the statutory provision in question would not have a bearing on the correctness of the recourse to Section 263 since on the date on which the power was exercised by the Commissioner, the legislative amendment had not been brought into force. The judgement of the Supreme Court notes firstly that on the date on which the Commissioner passed his order, two views on the word “profit” under Section 80HHC were possible and the provision itself had been amended on several occasions. The second ground which weighed with the Supreme Court was that the subsequent amendment in 2005 of the provisions of Section 80HHC, even though retrospective, would not attract the provisions of Section 263, particularly when the Court would have to take into account the position of law as it stood on the date when the Commissioner passed his order in purported exercise of his powers under Section 263.
19. In the present case, the principle of law which has been laid down by the Supreme Court in Max India (supra) would be attracted. On the date on which the Assessing Officer purported to exercise his power to re-open the assessment under Section 147, the legislative amendment by the insertion of clause (i) to Explanation (1) to Section 115JB had not been brought into force on the statute book. Obviously, therefore, the subsequent amendment could not have been and is not a ground which has been taken by the Assessing Officer, while re-opening the assessment. The validity of the notice issued by the Assessing Officer in seeking to re-open the assessment must be determined with reference to the reasons which are found in support of the re-opening of the assessment. These reasons cannot be allowed to be supplemented on a basis which was not present to the mind of the Officer and could not have been so present on the date on which the power to reopen the assessment was exercised. We, therefore, hold that the principle laid down by the Supreme Court in Max India (supra) would be attracted to the present case. Consequently, it is evident that the order of the Assessing Officer with reference to the computation of book profits under Section 115JB was at the least a probable view and as a matter of fact the correct view to take in view of the decision of the Supreme Court in HCL (supra). It is well settled that the law laid down by the Supreme Court is declaratory of the position as it always stood. In any event, as we have noted, the view of the Assessing Officer was supported by the interpretation placed even contemporaneously in the judgement of this Court in Echjay (supra) and in the judgements of the Delhi High Court in Eicher and HCL (supra). In the circumstances, there was no warrant for re-opening the assessment in exercise of the power conferred under Section 147.
