CWP No. 10390 of 2010 -1- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH CWP No. 10390 of 2010 Date of Decision: 2.12.2010 Atlas Cycles (Haryana) Limited ....Petitioner. Versus Deputy Commissioner of Income Tax ...Respondent. CORAM:- HON'BLE MR. JUSTICE ADARSH KUMAR GOEL. HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: Mr. Ashim Aggarwal, Advocate for the petitioner. Mr. I.P. Singh, Advocate for the respondent. AJAY KUMAR MITTAL, J. 1. This order shall dispose of Civil Writ Petition Nos. 10390, 10391 and 10392 of 2010 relating to the assessment years 2003-04, 2004-05 and 2005-06, respectively as according to learned counsel for the parties common questions of law and facts are involved therein. For brevity, the facts are being taken from CWP No. 10390 of 2010 in which Civil Miscellaneous No.12673 of 2010 had been filed for amendment of the writ petition. 2. In the amended petition filed under Articles 226/227 of the Constitution of India, the petitioner seeks issuance of writ of certiorari for quashing the impugned notice dated 3.3.2010 (Annexure P-1) issued under Section 148 of the Income Tax Act, 1961 (in short “the Act”), notice dated 11.5.2010 (Annexure P-2) issued under Section CWP No. 10390 of 2010 -2- 143(2) of the Act and order dated 23.8.2010 (Annexure P-3) passed by the respondent disposing of the objections to the validity of initiating reassessment proceedings in respect of the return of income for the assessment year 2003-04. 3. The brief facts for adjudication as narrated in the petition are that the petitioner is a Public Limited Company and is engaged in the business of manufacture and sale of bicycle, bicycle parts and steel tubes. It filed its return for the assessment year 2003-04 on 1.12.2003 declaring an income of Rs.3,60,30,500/-. The return was accompanied by the audited financial results, tax audit report under Section 44AB, audit report under Section 80HHC and deductions under Section 80-IB of the Act. The assessee claimed deduction of Rs.10,77,813/- under Section 80HHC and Rs.3,57,44,297/- under Section 80-IB of the Act. The Assessing Officer vide order dated 28.3.2006 computed the income of the petitioner at Rs.3,81,08,270/-. The Assessing Officer apart from making minor disallowance, allowed deduction of Rs.10,46,375/- under Section 80HHC, Rs.3,57,44,297/- under Section 80-IA and Rs.7,19,250/- under Section 80G of the Act. Feeling aggrieved, the assessee went in appeal and the Commissioner of Income Tax (Appeals) [in short “the CIT(A)”] vide order dated 1.3.2007 partly allowed the appeal. Against the order of the CIT(A), the revenue approached the Income Tax Appellate Tribunal (for brevity, “the Tribunal”) by filing an appeal, who vide order dated 19.2.2009 dismissed the appeal. Subsequently, the respondent issued a notice dated 3.3.2010 under Section 148 of the Act asking the petitioner to file its return of income for the assessment year in question as certain CWP No. 10390 of 2010 -3- income had escaped assessment. The reasons recorded read thus:- “The assessee filed its return of income for the A.Y. 2003-04 on 01.12.2003, declaring income of Rs.3,60,30,500/-, along with profit and loss account, balance sheets and audit report in form – CD, the same was processed u/s 143(1) at the returned income of Rs.3,60,30,500/- on 17.02.2004. The case was taken up in scrutiny and the assessment was completed u/s 143(3) vide order dated 28.03.2006 at a total income of Rs.3,81,08,270/-. It is noticed that the assessee company has invested Rs.2,50,00,000/- in bonds of Central Bank of India. The income earned from the said investment does not form the part of total income being exempted from tax. The assessee has also declared borrowed fund of Rs.35,34,06,759/- on which interest amounting to Rs.3,54,79,130/- was charged to its P/L account. The assessee has invested its interest bearing funds in non-trade investment as mentioned above, the income of which is exempted from tax and does not form part of total income. Hence, the provision of section 14A of IT Act are applicable in this case and interest attributable to this investment is liable to be added in the declared income. Keeping in view the facts, as stated above, I have reasons to believe that the income to the extent of CWP No. 10390 of 2010 -4- interest attributable to Rs.2,50,00,000/- which comes to Rs.2,51,050/- (taken on average base) has escaped assessment. It has also been noticed that the company has given an interest free advance/loan to Sh. Arun Kapoor amounting to Rs.8,00,75,723/-. Sh. Arun Kapoor is a related person under the provision of the IT Act. The interest attributable on the loan given to Sh. Kapoor comes to Rs.80,41,210/- (taken on average base) is liable to be disallowed, since the company has paid its interest on borrowed funds. Hence, I have reasons to believe that interest of Rs.82,92,260/- debited to P/L account attributable to the investment made by the assessee in bonds, the income of which does not form the part of total income and interest attributable to loan advanced to Sh. Arun Kapoor, has escaped assessment and therefore the provisions of section 147 of IT Act are attracted. And also re-assess, any other income found to have escaped assessment, during the course of reassessment u/s 148 of the IT Act. Necessary approval for issue of notice u/s 148 has been accorded by the worthy Commissioner of Income Tax vide its F. No. CIT/Judl./6460 dated 25.02.2010. CWP No. 10390 of 2010 -5- In view of the above, issue notice u/s 148 of the IT Act for the A.Y. 2003-04.” A perusal of the above reasons recorded clearly spells out that proceedings for reassessment had been initiated as, according to the assessing officer, following income had escaped assessment:- (a) The assessee had declared borrowed funds of Rs.35,34,06,759/- on which interest amounting to Rs.3,54,79,130/- had been charged to profit & loss account. Therefore, in view of Section 14A of the Act, interest attributable to investment in interest bearing funds in non- trade investments is liable to be added in the declared income. (b) Income to the extent of Rs.2,51,050/- (taken on average basis) as interest attributable to Rs.2,50,00,000/- as investment in bonds of Central Bank of India. (c) Interest attributable amounting to Rs.80,41,210/- on interest free advance/loan of Rs.8,00,75,723/- to Sh. Arun Kapoor. 4. The petitioner-company filed its reply to the show cause notice stating that the return filed earlier may be treated as a return in response to the notice issued under Section 148 of the Act. The petitioner-company on 19.4.2010 filed objections. The respondent vide order dated 23.8.2010 rejected the said objections and had already issued notice dated 11.5.2010 under Section 143(2) of the Act for re- assessment proceedings. Hence, the present writ petition. 5. Learned counsel for the assessee stressed that the CWP No. 10390 of 2010 -6- proceedings having been initiated after expiry of four years from the end of the assessment year in respect of which assessment had been framed under Section 143(3) of the Act and there being no allegation of non disclosure of facts fully and truly in the original return, the reassessment proceedings are vitiated. He relied upon following judgments in support of his submissions:- (i) Duli Chand Singhania vs. ACIT, [2004] 269 ITR 192 (P&H). (ii) Mahavir Spinning Mill Ltd. v. CIT, [2004] 270 ITR 290 (P&H) (iii) Haryana Acrylic Manufacturing Pvt. Ltd. v. CIT, [2009] 308 ITR 38 (Del). (iv) JSRS Udyog Ltd. v. ITO, [2009] 313 ITR 321 (Del). (v) D.T. and T.D.C. Ltd. v. ACIT, [2010] 324 ITR 234 (Del). 6. He further submitted that all primary facts had been disclosed in the return filed and the petitioner had specifically claimed deduction under Section 36(1)(iii) of the Act. According to learned counsel in view of Apex Court decision in Calcutta Discount Co. Ltd. v. CIT, [1960] 41 ITR 191 (SC), the reopening was not justified. 7. The notice for assessment was sought to be challenged by placing reliance on the judgment of this Court in CIT v. Hero Cycles Ltd. 31 DTR 301 (P&H) on the ground that Section 14A was not attracted to the present case. Mere change of opinion and no new material has come to light after framing of original assessment under Section 143(3) of the Act were the other grounds of challenge to the reassessment CWP No. 10390 of 2010 -7- proceedings. Further where an assessment is made under Section 143(3) of the Act, the presumption is that every issue arising in the assessment proceedings has been considered. Support has been drawn from the following decisions:- (a) Commissioner of Income Tax v. Foramer France 264 ITR 566 (SC). (b) CIT v. Kelvinator India Limited, 228 CTR 488 (SC). (c) Jindal Photo Films Vs. CIT, 234 ITR 170 (Del). (d) CIT Vs. Kelvinator of India Limited 256 ITR 1 (Del) (FB). (e) M/s Transworld International Inc. v. JCIT, 273 ITR 242 (Del). (f) United Electrical Co. Pvt. Ltd. v. CIT, 258 ITR 317 (Del). (g) KLM Royal Dutch Airlines v. Assistant Director of Income Tax, 292 ITR 49 (Del). (h) Techspan India Pvt. Ltd. v. ITO, 283 ITR 212 (Del). (i) Satnam Overseas Ltd. v. Addl. CIT 33 DTR 81 (Del). (j) CIT v. Goetze India Ltd., 229 CTR 167 (Del). (k) CIT v. Mittal Castings, 124 Taxman 16 (Del). (l) Sheth Bros v. JCIT, 251 ITR 270 (Guj). (m) Delhi Farming & Const. v. ACIT, 240 ITR 127 (Del). (n) Andhra Bank Ltd. v. CIT, 225 ITR 447 (SC). (o) Bapalal and Company v. JCIT, 289 ITR 37 (Mad). 8. Learned counsel while placing reliance upon the following judgments submitted that proceedings cannot be initiated without any fresh material:- CWP No. 10390 of 2010 -8- (i) Bappalal & Exports v. JCIT, 289 ITR 37 (Mad). (ii) Shipra Srivastava v. ACIT, 319 ITR 221 (Del). (iii) CIT v. Batra Bhatta Company, 174 Taxman 444 (Del). (iv) Carlton Overseas Pvt. Ltd. v. ITO, 318 ITR 295 (Del). (v) Aventis Pharma Ltd. v. ACIT, 37 DTR 353 (Bom). (vi) Pancharatna Cement Pvt. Ltd. v. Union of India and others, 317 ITR 259 (Gau). 9. Learned counsel for the assessee further placed reliance on the following judgments to contend that the existence of tangible and relevant material is pre-requisite for the formation of belief:- I. ACIT v. Rajesh Jhaver Stock Brokers Pvt. Ltd., 291 ITR 500 (SC). II. United Electrical Co. Ltd. v. CIT, 258 ITR 317 (Del). III. CIT v. Kelvinator of India Ltd., 320 ITR 561 (SC). IV. Ashok Kumar Sen v. ITO, 132 ITR 707 (Del). 10. According to the learned counsel, reason to believe is not the same thing as reason to suspect and, reasons are justiciable and placed reliance on the following judgments in support of his submission:- (i) CIT v. Indian Oil Corporation, 159 ITR 956 (SC). (ii) CIT v. Paramjit Kaur, 311 ITR 38 (P&H). (iii) ITO v. Madnani Engineering Works Limited, 118 ITR 1 (SC). (iv) ITO v. Lakhmani Mewal Das, 103 ITR 437 (SC). 11. Learned counsel for the revenue, on the other hand, CWP No. 10390 of 2010 -9- submitted that after transposition of Explanation 2 as Explanation I to Section 147 by Taxation Laws (Amendment) Act, 1987 w.e.f. 1.4.1989, since there was no discussion in the assessment order passed by the Assessing Officer relating to the grounds for reopening, it could not be said that there was true and full disclosure made by the assessee. It would not amount to either change of opinion or mere suspicion or lack of application of mind as argued by learned counsel for the assessee. Learned counsel for the revenue has placed reliance upon the judgment of Allahabad High Court in EMA India Ltd. v. Assistant Commissioner of Income Tax [2009] 226 CTR (All) 65 and a recent judgment of this court in CWP No. 13806 of 2010 (R.N. Gupta & Co. Ltd. v. ACIT) decided on 30.11.2010 in support of his submissions. He further submitted that the judgments relied upon by the learned counsel for the assessee has no relevancy with respect to the controversy as Explanation I to Section 147 of the Act was not under consideration in any of those judgments. 12. We have heard learned counsel for the parties. 13. The primary issue in these petitions is whether in view of Explanation 1 to Section 147 of the Act, could the mere production of documents and other evidence before the Assessing Officer during the regular assessment proceedings, amount to true and full disclosure within the meaning of Section 147 of the Act. 14. The said issue came up for consideration before this Court in a recent judgment dated 30.11.2010 in M/s R.N. Gupta & Co. Ltd's case (supra), wherein, it was held as under:- “8. The question that arises for determination in this CWP No. 10390 of 2010 -10- petition is whether the assessee is entitled to challenge validity of initiation of reassessment proceedings under Section 147 of the Act after expiry of four years on the ground of lack of jurisdiction with the Assessing Officer even where the assessee had produced the entire material during assessment proceedings though there was no specific reference to that material during original assessment proceedings. 9. In our opinion, the answer to the said question is in the negative. The legislature by Direct Tax Laws (Amendment) Act, 1987 effective from 1.4.1989 had substituted Section 147 of the Act. The provisions contained in Explanation I now were earlier under Explanation 2. There has been transposition without any material change. 10. It would be appropriate to reproduce Section 147 along with Explanation I which reads thus:- “147. Income escaping assessment.-If the AO has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of ss. 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the CWP No. 10390 of 2010 -11- depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereinafter in this section and in ss. 148 to 153 referred to as the relevant assessment year): Provided that where an assessment under sub-s. (3) of s. 143 or this section has been made for the relevant assessment year, no action shall be taken under this 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 make a return under s. 139 or in response to a notice issued under sub-s. (1) of s. 142 or s. 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year. Explanation 1- Production before the AO of account books or other evidence from which material evidence could with due diligence have been discovered by the AO will not necessarily amount to disclosure within the meaning of the foregoing proviso.“ 11. Section 147 of the Act empowers the Assessing Officer to assess or reassess income chargeable to tax where he has reason to believe that income for any assessment year has escaped assessment. However, the CWP No. 10390 of 2010 -12- said provision does not authorize the Assessing Officer to take recourse to reassessment proceedings where after having adopted a particular opinion during original assessment proceedings, on second thought, he wishes to conclude otherwise. In other words, change of opinion is no ground for initiating reassessment proceedings. According to the explanation, the duty cast upon assessee to disclose truly and fully all material facts does not get discharged by mere production of the account books or other documents. Even where, the Assessing Officer could have with due diligence deduced the truth if he had been circumspect, still it will amount to non-disclosure of material facts within the meaning of Section 147 of the Act. The fiction created by the said explanation is to ensure that the Assessing Officer who is to act fairly and reasonably for the public exchequer as well as the tax payers cannot be imputed knowledge and consciousness to the entire bulky record produced by the assessee during assessment proceedings unless there has been conscious deliberations with regard to such an issue in the assessment order.” 15. Answering identical question, the Allahabad High Court in EMA India Ltd's case (supra) observed :- “3.2. Explanation 1 to proviso to s. 147 is explicit and clear on the point. The Explanation gives a quietus to contention that where account books or other evidence has been produced, there is no duty on the assessee to disclose CWP No. 10390 of 2010 -13- further facts, which on due diligence could be discovered by the AO. Nor will the assessee be able to contend successfully that by disclosing certain evidence, he should be deemed to have disclosed other evidence, which might have been discovered by the assessing authority if he had pursued investigation on the basis of what has been disclosed. The position remains that so far as the primary facts are concerned, it is the assessee's duty to disclose all of them including particular entries in account books, particular portions of documents, and documents, and other evidence which could have been discovered by the assessing authority, from the document and other evidence disclosed. 3.3 In other words, the mere production of evidence before the AO is not enough and there may be an omission or failure to make a full and true disclosure if some material for the assessment lies embedded in that evidence which the assessee can uncover but does not. However, if it be merely a question of interpretation of evidence, the assessee cannot be subjected to s. 147, merely because the AO miscarried in his interpretation of evidence. 3.4 To put it differently, if material evidence is not writ large on the document but is embedded in some voluminous records/books of account requiring a careful scrutiny and delving deep into it to notice the necessary material, it is quite possible that having regard to the nature CWP No. 10390 of 2010 -14- of the documents, material evidence cannot be discovered from such records despite due diligence and the case would attract application of the said Expln. 1 to hold that mere production of the books of account or the documents, etc. without pointing out the relevant entries therein, does not amount to disclosure within the meaning of s. 147(a) of the Act [See, Rakesh Aggarwal vs. Asstt. CIT (1997) 137 CTR (Del) 65: (1996) 221 ITR 492 (Del) 499]. 3.5 The assessee does not discharge his duty by merely producing the books of account or other evidence. He has to further bring to the notice of the AO particular items in the books of account or portions of document which are relevant. Even if it is assumed that, from the books produced, the AO could have found out the truth, he is not on that account precluded from exercising the power to reassess the escaped income [see, Kantamani Venkata Narayana & Sons vs. Addl. ITO (1967) 63 ITR 638 (SC); Sowdagar Ahmed Khan vs. ITO (1968) 70 ITR 79 (SC); ITO & Ors. vs. Lakhmani Mewal Das 1976 CTR (SC) 220: (1976) 103 ITR 437 (SC), 445]. 3.6. The fact that the AO could have found out the correct position by further probing the matter does not exonerate the assessee from the duty to make a full and true disclosure of the material facts.” 16. Applying the aforesaid principles to the facts of the present case, it cannot be held that there was true and full disclose made by the CWP No. 10390 of 2010 -15- assessee. A perusal of the assessment order, no where suggests that the Assessing Officer had dealt with the issues on which reassessment is sought to be made while determining the taxable income of the assessee. Once it is held that mere production of account books and the documents where from the Assessing Officer could have gathered the details of escaped income, would not amount to true and full disclosure within the meaning of Section 147 of the Act, necessarily, it is to be held that the action taken by the Assessing Officer beyond 4 years shall be within limitation. 17. Learned counsel for the assessee was unable to demonstrate that in the light of Explanation I to Section 147 of the Act, the record produced by the assessee during the original assessment proceedings would amount to full and true disclosure under the said Act. Nothing could be pointed out with reference to the original assessment order that the assessing authority had specifically dealt with these issues at the time of framing original assessment. The plethora of judgments on which reliance has been placed by learned counsel for the assessee do not come to the rescue of the assessee as none of them was dealing with interpretation of Explanation 1 to Section 147 of the Act. Therefore, none of the grounds of challenge relating to initiation of reassessment proceedings raised on behalf of the assessee carry any material substance and advance the case of the petitioner any further. However, the merits of the controversy relating to additions to be made shall be gone into by the Assessing Officer at the time of finalisation of reassessment proceedings. CWP No. 10390 of 2010 -16- 18. In view of the above, there is no merit in these writ petitions and the same are hereby dismissed. (AJAY KUMAR MITTAL) JUDGE December 2, 2010 (ADARSH KUMAR GOEL) gbs JUDGE