IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH Date of Decision: 14.10.2011 (1) ITA No. 53 of 2003 Commissioner of Income Tax Ludhiana ...Appellant Versus M/s Varinder Agro Chemicals Limited …Respondent (2) ITA No. 52 of 2004 Commissioner of Income Tax Ludhiana ...Appellant Versus M/s Industrial Organic Limited …Respondent (3) ITA No. 53 of 2004 Commissioner of Income Tax Ludhiana ...Appellant Versus M/s Trident Alco Chem Ltd. …Respondent (4) ITA No. 246 of 2005 Commissioner of Income Tax Ludhiana ...Appellant Versus M/s Trident Lcho Chemical Limited …Respondent (5) ITA No. 247 of 2005 Commissioner of Income Tax Ludhiana ...Appellant Versus M/s Trident Lcho Chemical Limited …Respondent (6) ITA No. 669 of 2005 Commissioner of Income Tax Ludhiana ...Appellant Versus M/s Varinder Agro Chemicals Limited …Respondent ITA No. 53 of 2003 CORAM: HON'BLE MR. JUSTICE HEMANT GUPTA HON’BLE MR. JUSTICE G.S. SANDHAWALIA 1. Whether Reporters of local papers may be allowed to see the judgment? 2. To be referred to the Reporters or not? 3. Whether the judgment should be reported in the Digest? Present: Mr. Rohit Katoch, Advocate for appellant. Ms. Radhika Suri, Advocate for respondent in all cases except Mr. Sandeep Goyal, Advocate for respondent in ITA No. 53 of 2003 HEMANT GUPTA, J. This order shall dispose of the following six appeals at the instance of revenue claiming identical questions of law for the assessment years as mentioned below: - Income Tax Appeal Assessment year Assessee ITA No. 53 of 2003 1990-91 M/s Varinder Agro Chem. Ltd. ITA No. 52 of 2004 1993-94 M/s Industrial Organics Ltd (Now M/s Trident Alco Chem Ltd.) ITA No. 53 of 2004 1994-95 M/s Trident Alco Chem Ltd. ITA No. 246 of 2005 1995-96 M/s Trident Alco Chem Ltd ITA No. 247 of 2005 1997-98 M/s Trident Alco Chem. Ltd ITA No. 669 of 2005 1998-99 M/s Varinder Agro Chemicals In ITA No. 53 of 2003, the following substantial question of law arises for consideration: 1. “Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law in deleting the disallowance of Rs. 17,62,622/- made on account of interest on interest free advances given to the sister concerns for non- business purposes?” 2. “Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law in holding that this issue of disallowance of interest had already attained finality 2 ITA No. 53 of 2003 in the original assessment order and thus could not be reagitated in the reassessment proceedings.” The identical question No 1 arises in all other cases as well. In ITA Nos. 53 of 2003, 246, 247 and 669 of 2005, the Commissioner of Income Tax (Appeals) has set aside the order passed by the Assessing Officer deleting the disallowance of the amount on account of interest on interest free advances given to the sister concerns for non-business purposes where as in ITA Nos 52 and 53 of 2004, it is the Tribunal who has deleted the disallowance of the interest on interest free advances given to the sister concern for non-business purposes. For the facility of reference, the facts are being taken from ITA No. 53 of 2003. In the said case, the Assessment order under Section 143(3) of the Income Tax Act, 1961 (for short the ‘Act’) was passed on 7.1.1992. The Assessing Officer has deleted the amount of Rs. 3,52,212/- claimed as expenses by the assessee under Section 36 (1) (iii) as the amount of interest paid in respect of the capital borrowed for the purpose of business or provision in respect of the advances made to sister concern M/s Ganpati International (P) Ltd from the cash credit account of the assessee. In appeal, the assessee did not dispute the said deletion of the allowance. Thereafter, a notice under Section 147 of the Act was issued for re- assessment of the income allegedly escaping the assessment. In such re- assessment proceedings, it was found that the assessee has paid interest free loan to other three sister concerns i.e. M/s Aushupati Enterprises Pvt. Ltd and M/s Trimurti Chemiare Pvt. Ltd. and to Smt. Uma Khanna. The Assessing Officer recorded a finding that had the assessee not advanced the interest free loan, the same could have been available to the assessee for repayment of loan and reducing credit balance in Bank. Thus, it was found 3 ITA No. 53 of 2003 that the total amount of interest on money advanced to sister concerns comes to Rs. 17,62,622/- which is not allowable as deduction. On 14.8.1992, Commissioner of Income Tax (Appeals) found that disallowance of interest in the case of M/s Ganpati International Pvt. Ltd comes to Rs. 3,47,313/- as against disallowance of Rs. 3,52,212/- made in an order under Section 143(3) of the Act. The order passed by the Assessing Officer was affirmed by the Commissioner of Income Tax (Appeals). However, the Income Tax Appellate Tribunal set aside the order in respect of disallowance of interest claimed on two grounds firstly in view of the earlier order of the Tribunal for the assessment year 1990-91 and secondly, that the assessment has not been reopened on the question of disallowance of interest of amount advanced to other sister concerns, therefore, in view of the judgment of this Court in Vipin Khanna vs. Commissioner of Income Tax and others 255 ITR 220, the Assessing Officer cannot frame assessment in relation to the issues unconnected with the issues on which assessment has been reopened. It is the said order which is the subject matter of challenge at the instance of revenue in the present appeal. Firstly, we will take up the question No 2 raised by the revenue for the decision of this Court in ITA No 53 of 2003. It has been vehemently argued by the assessee that there was no concealment on behalf of the assessee before the Assessing Officer passed an order under Section 143(3) of the Act. In such proceedings, the amount of interest to the extent of interest accrued on the loan advanced to M/s Ganpati International (P) Ltd alone was disallowed. The assessee has disclosed the name of all creditors and debtors, therefore, the Assessing Officer could not initiate the proceedings for reassessment merely on account of change of opinion. 4 ITA No. 53 of 2003 Reliance is placed upon a judgment of this Court reported as 180 ITR 144, CIT vs. Amritsar Swadeshi Woolen Mills. We do not find any merit in the said argument. Section 147 has been amended by the Direct Tax Laws (Amendment) Act, 1989 w.e.f. 1.4.1989 and also Explanation 3 inserted vide the Finance Act No. 2 of 2009 with retrospective effect from 1.4.1989. On the basis of the amended provisions of the Act, after the Explanation No. 1 was inserted, the disclosure of material facts falling within the scope of proviso to Section 147 does not include the disclosure on the production of the account book before the Assessing Officer from which material evidence with due diligence could have been discovered by the Assessing Officer. The scope of above-said provisions was examined by Hon’ble Supreme Court in a judgment reported as Assistant Commissioner of Income Tax vs. Rajesh Jhaveri Stock Brokers P. Ltd, 291 ITR 500, wherein, it has been held 17. The scope and effect of Section 147 as substituted with effect from April 1, 1989, as also Sections 148 to 152 are substantially different from the provisions as they stood prior to such substitution. Under the old provisions of Section 147, separate Clauses (a) and (b) laid down the circumstances under which income escaping assessment for the past assessment years could be assessed or reassessed. To confer jurisdiction under Section 147(a) two conditions were required to be satisfied firstly the Assessing Officer must have reason to believe that income profits or gains chargeable to income tax have escaped assessment, and secondly he must also have reason to believe that such escapement has occurred by reason of either (i) omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for his assessment of that year. Both these conditions were conditions precedent to be satisfied before the Assessing Officer could have jurisdiction to issue notice under Section 148 read with Section 147(a) But under the substituted Section 147 existence of only the first condition suffices. In other words if the Assessing Officer for whatever reason has reason to believe that income has escaped assessment it confers jurisdiction to 5 ITA No. 53 of 2003 reopen the assessment. It is however to be noted that both the conditions must be fulfilled if the case falls within the ambit of the proviso to Section 147. The case at hand is covered by the main provision and not the proviso. 18. So long as the ingredients of Section 147 are fulfilled, the Assessing Officer is free to initiate proceeding under Section 147 and failure to take steps under Section 143(3) will not render the Assessing Officer powerless to initiate reassessment proceedings even when intimation under Section 143(1) had been issued. In another judgment reported as Commissioner of Income Tax vs. Kelvinator of India Ltd, 320 ITR 561, the Supreme Court draw distinction between change of opinion and power to reassess. It held 6. On going through the changes, quoted above, made to Section 147 of the Act, we find that, prior to Direct Tax Laws (Amendment) Act, 1987, re-opening could be done under above two conditions and fulfillment of the said conditions alone conferred jurisdiction on the Assessing Officer to make a back assessment, but in Section 147 of the Act [with effect from 1st April, 1989], they are given a go-by and only one condition has remained, viz., that where the Assessing Officer has reason to believe that income has escaped assessment, confers jurisdiction to re-open the assessment. 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 re- assess. The Assessing Officer has no power to review; he has the power to re-assess. But re-assessment has to be based on fulfillment 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. 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, Assessing Officer has power to re-open, provided there is 6 ITA No. 53 of 2003 "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. The decision of this Court in Amritsar Swadeshi Wollen Mills case (supra), is prior to amendment of Section 147 and thus cannot be made applicable in respect of present proceedings initiated after the amendment. Mere giving of details of debit and credit is not a decision approving such list. Such aspects are specifically covered by the amendment carried out in 1989. Still further, the insertion of Explanation 3 has the effect to nullify the judgment of this Court in the case of Vipin Khanna (supra), when such provision has been inserted with retrospective effect contemplating that the Assessing officer may assess or reassess the income in respect of any issue which has escaped assessment notwithstanding that the reasons for such issues have not been included in the reasons recorded under Sub-Section of Section 148 of the Act. Therefore, we find that the finding of the Income Tax Appellate Tribunal that the original assessment order has attained finality and thus in reassessment proceedings, additions cannot be made is not sustainable. Consequently the said question is decided against the assessee and in favour of the revenue. The question No. 1 is common in all the appeals. Learned counsel for respondent has argued that the Tribunal has decided the appeal in favour of the assessee on the basis of the order passed in assessee’s own case for the assessment year 1991-92. It is pointed out that such order of the Tribunal was the subject matter of challenge before this Court in ITA No. 30 of 2002. The question of law has been answered in favour of the revenue and against the assessee vide the order dated 7.11.2006 relying upon the order passed in Commissioner of Income Tax-I Ludhiana vs. M/s Abhishek Industries Limited Ludhiana (2006) 286 ITR 1(P&H). Therefore, once the 7 ITA No. 53 of 2003 question of law has been answered in favour of the revenue, for the same reasons the appeal should be accepted. To controvert the said argument, learned counsel for the assessee points out that the judgment in Abhishek Industries Limited (surpa) is the subject matter of appeal before the Hon’ble Supreme Court, wherein leave has been granted and Civil Appeal No. 244 of 2007 is pending consideration. Therefore, such judgment cannot be taken into consideration for deciding the said question of law against the assessee. Learned counsel for the assessee also relies upon another judgment of Hon’ble the Supreme Court in S.A.Builders Ltd vs. Commissioner of Income Tax (Appeals) and another (2007) 288 ITR 1SC wherein, it has been held that the transfer of borrowed funds to a sister concern is to be examined from the point of view of commercial expediency and not from the point of view whether the amount of advance was for earning profits. It is contended that the question whether the amount was advanced by the assessee as a commercial transaction has not been examined by any of the authorities, therefore, the matter be remitted for determination of the commercial expediency of the amount of interest free loan advanced to the sister concern of the assessee. We have heard learned counsel for the parties and find that the plea of the assessee that the matter be remitted back to the authorities under the Act to determine the commercial expediency of the amount of transaction cannot be permitted to be raised at this stage. The assessee has taken a stand before the assessing officer that the advances are not made for business consideration. Such explanation was recorded in the order dated 21.1.1994 by the Assessing Officer. The explanation of the assessee was that the money has not been advanced out of its own funds, therefore, no part of the fund can be disallowed was negated by the Assessing Officer. It was found that had the assessee not advanced interest free loan, the same could have been reduced for 8 ITA No. 53 of 2003 credit balance in the Bank. The interest liability of the assessee would definitely have gone down to that extent. Once, the assessee has categorically taken a stand that there was no business consideration; the assessee cannot be permitted to take a different stand only on account of a subsequent judgment of the Supreme Court. Thus, the plea of commercial expediency having been not raised by the assessee at the stage of assessment cannot be permitted to be raised only on the basis of subsequent judgment of the Hon’ble Supreme Court. The appeals against the order passed by the Court is pending consideration before the Hon’ble Supreme Court but there is no interim order staying the operation passed by this Court. Therefore as far as this Court is concerned, the matter stands concluded by the judgment reported as Abhishek Industries (Supra). The Tribunal has relied upon the order passed in respect of the earlier assessment year which order has been set aside in appeal by this court, therefore, the basis of the order passed by the Tribunal stands knocked down in the present case. In ITA 53 0f 2004, the learned Commissioner allowed expenses in respect of interest paid on the ground that interest free loans were much less as compared to share application money and cash accruals. The said order has been followed in other cases i.e. ITA 246, 247 of 2005. In ITA 669of 2005, the Commissioner has followed the earlier decision of the Tribunal in respect of assessee pertaining to assessment year 1991-92. The said decision of the Tribunal has been since been set aside in ITA No. 30 of 2002. Similar explanation has not found favour with the Tribunal or by this Court in earlier cases. The order of Tribunal deleting the disallowance on account of interest on interest free advances given to the sister concerns for the non-business purposes is thus not tenable in law. Consequently, the questions of law in all the appeals are answered in favour of the revenue and against the assessee while allowing the appeals. 9 ITA No. 53 of 2003 (HEMANT GUPTA) JUDGE 14.10.2011 (G.S. SANDHAWALIA) preeti JUDGE 10