ITA No.740/2008 Page 1 of 38 REPORTED * IN THE HIGH COURT OF DELHI AT NEW DELHI + ITA No. 740/2008 COMMISSIONER OF INCOME TAX, DELHI-VIII .....Appellant Through: Ms. Prem Lata Bansal, Advocate versus INDIAN FARMERS FERTILIZERS CO-OP. LTD. .....Respondent Through: Mr. Satinder S. Gulati and Mr. Kamaldeep Gulati, Advocates % Date of Decision : December 24, 2010 CORAM: HON’BLE MR. JUSTICE A.K. SIKRI HON'BLE MS. JUSTICE REVA KHETRAPAL 1. Whether reporters of local papers may be allowed to see the judgment? 2. To be referred to the Reporter or not? 3. Whether judgment should be reported in Digest? : REVA KHETRAPAL, J. 1. This appeal seeks to assail the order dated 31.07.2007 passed by the Income Tax Appellate Tribunal (“ITAT” in short), pertaining to the assessment year 1993-94, whereby and whereunder the ITAT quashed the order of the CIT(A) dated 23.03.2001 on the ground that initiation of action under Section 147 of the Income-Tax Act, 1961 (hereinafter referred to as the “Act”) read with Section 148 thereof was without jurisdiction. The aforesaid order was passed by the ITAT by observing ITA No.740/2008 Page 2 of 38 that by way of re-assessment for the assessment year 1992-93, the carried forward losses of assessment years 1989-90 and 1990-91 had been adjusted by the Assessing Officer against profits of the assessment year 1992-93 for the purpose of deduction under Section 80-I of the Act, and the balance unabsorbed losses were carried forward to be adjusted in succeeding years. Since the re-assessment order for assessment year 1992-93 had been quashed by the ITAT in ITA No.901/D/2004, no unabsorbed losses survived to be carried forward for assessment year 1993-94 and, therefore, the re-assessment proceedings for the assessment year 1993-94 were without any foundation and jurisdiction. 2. The following question of law arises for the consideration of this Court: “Whether ITAT was correct in law in quashing the reassessment order passed by Assessing Officer u/s 143(3)/147 of the Act on the ground that the reassessment proceeding initiated by the Assessing Officer u/s 147 R/W Section 148 of the Act was without jurisdiction?” 3. In order to appreciate the legal and factual points at issue in the present appeal, the facts attending this matter need to be marshalled at the outset. The respondent is a cooperative society manufacturing fertilizers. During the assessment year 1989-90, the respondent had set up a new manufacturing Unit at Aonla. For the assessment year under consideration, i.e., the assessment year 1993-94, the respondent filed the original return claiming deduction under Section 80-I at ` 33,06,68,598/-, being 20% of the profits of the Aonla Unit, i.e., ITA No.740/2008 Page 3 of 38 ` 1,65,33,43,991/-. The assessment was initially framed by the Assessing Officer on 20th December, 1995 under Section 143(3) of the Act at an income of ` 1,54,81,13,730/-, which was reduced to ` 97,66,99,320/-, by order dated 22.10.1997 under Section 250 of the Act. Subsequently, the assessment was revised under Section 147 of the Act to an income of ` 1,30,73,67,920/- by an order dated 16.03.2000, which was later modified under Section 154 by order dated 31.03.2000 reducing the income to ` 1,04,57,24,720/-. 4. In the aforesaid backdrop, during the course of assessment proceedings for the assessment year 1998-99, when the respondent/assessee was requested to furnish details of the profits/losses of different units over various years computed in accordance with the provisions of Chapter-IV-D, for each year, starting from the year of commercial production, it came to light that the eligible industrial undertaking at Aonla had incurred losses for the assessment years 1989- 90, 1990-91 and 1991-92, which had not been set off against its income for the present year as per the mandatory provisions engrafted in sub- section (6) of Section 80-I. Thus, it was noticed by the Assessing Officer that the assessee had incurred losses of ` 1,64,75,67,085/- and ` 63,61,68,737/- in respect of the Aonla Unit for the previous years relevant to the assessment years 1989-90 and 1990-91 and had earned profit of and ` 11,43,31,588/- and ` 79,54,13,000/- for the previous years relevant to the assessment years 1991-92 and 1992-93 ITA No.740/2008 Page 4 of 38 respectively. In this manner, a loss of ` 1,37,39,91,234/- in respect of the Aonla Unit was to be carried forward to the subsequent assessment year. 5. In his order dated 23.03.2001, the Assessing Officer, keeping in view the provisions of Section 80-I (6) of the Act, was of the view that the profits and gains of an industrial undertaking, for the purpose of computing deduction under Section 80-I for the assessment year immediately succeeding the initial assessment year or any subsequent year must be computed as if such industrial undertaking was the only source of income of the assessee during the previous years, relevant to the initial assessment year and other subsequent years upto and including the assessment year for which the determination is to be made. Thus, the carried forward loss of the earlier years of the new industrial undertaking has to be taken into account while determining the quantum of deduction permissible under Section 80-I even though they may have actually been set off against the profit of the assessee from the other units/sources. The Assessing Officer observed that since the information regarding losses incurred in Aonla Unit in the earlier years was neither disclosed in the return originally filed by the assessee nor made available during the assessment proceedings, the assessee had been allowed deduction under Section 80-I on the entire profits. The assessee in its return, which was filed in respect of the said accounting period, had made a claim for deduction under Section 80-I which was grossly in violation of sub- ITA No.740/2008 Page 5 of 38 sections (1) and (6) of Section 80-I. Subsequently, though the assessment was revised under Section 147 since the A.O. had reason to believe that the assessee’s income chargeable to tax had escaped assessment, the assessee having claimed deduction under Section 80-I without excluding certain income which had not at all been derived from the eligible industrial undertaking at Aonla, even at that time information regarding losses in earlier years was neither disclosed nor made available. As a result, excess deduction of ` 27,47,98,246/- was again allowed to the assessee under Section 80-I. It was during the course of assessment proceedings for the assessment year 1998-99, as already stated hereinabove, when the assessee was requested to give details of profit/loss of different units for each year starting from the year of commercial production, that information regarding the losses incurred in the Unit in the previous years relevant to the assessment years 1989-90 and 1990-91 came to the knowledge of the Department. Since the income of ` 27,47,98,246/- had escaped assessment, a notice under Section 148 of the Act was issued to the assessee on 19.01.2001 after obtaining the approval of the Commissioner of Income-Tax, Delhi-VII, requiring the assessee to file the revised return of income. In response thereto, the return was filed by the assessee on 20th February, 2001 declaring an income of ` 97,61,84,320/-. The present impugned second re-assessment was thereafter framed by the Assessing Officer on 23.03.2001 wherein it was held that the respondent Society was eligible ITA No.740/2008 Page 6 of 38 to a deduction of only ` 2,18,84,751/- under Section 80-I in view of the provisions of sub-section (6) of the said Section. 6. Aggrieved by the assumption of jurisdiction under Section 147 of the Act by the Assessing Officer, the respondent Society filed an appeal before the CIT(A) challenging the same. The CIT(A), however, dismissed the appeal holding that the Assessing Officer had validly invoked powers under Section 147 of the Act. Even on merits, the CIT(A) held that the Assessing Officer had correctly computed deduction under Section 80-I of the Act. 7. The respondent Society thereupon filed an appeal before the ITAT, which quashed the assessment order dated 23.03.2001 on the ground that the initiation of action under Section 147 read with Section 148 of the Act by the Assessing Officer was without jurisdiction. The relevant portion of the order of the ITAT which has led to the filing of the present appeal is being reproduced hereunder: “8. During hearing of this appeal it was sensed that in view of the decision of the Hon’ble ITAT given for A.Y. 1992-93, as discussed above, the reason given for re-opening of the assessment for the second time does not survive and hence the Assessing Officer lacked a valid justification to initiate action u/s 147 of the Act. The reason for re-opening given by the Assessing Officer was that the assessee did not disclose the fact that the eligible industrial undertaking at Aonla had incurred losses during the assessment years 1989- 90 and 1990-91 which were required to be reduced from the profits of the present year under sub- section (6) of section 80-I of the Act. Thus, as per the reason so recorded, excess deduction u/s 80-I was again allowed to the society even in the ITA No.740/2008 Page 7 of 38 reassessment dated 16.03.2000. There is no dispute about the above reason recorded by the ld. Assessing Officer for re-opening the assessment for the second time, apart from the challenge that no requisite satisfaction of Commissioner of Income-tax was made available to the assessee in spite of repeated requests. “Section 72 of the Income-tax Act, 1961 states that wherein for any A.Y. the net result of computation under head “Profit and Gains of Business or profession is a loss to the assessee, and such losses cannot be or if not wholly set-off against the income under any head of income in accordance with the provisions of section 71, so much of the loss has not been so set-off, subject to the provision of this Chapter, be carried forward to the following A.Y.:- (i) It shall be set-off against the profit and gains of any business or profession carried on by him and assessable for the A.Y. (ii) If the losses cannot be wholly so set- off shall be carried forward to the following A.Y. and so on. The Hon‟ble High Court in the case of Cambey Electric Supply Industrial Company Limited [1978-(113)-ITR-74- (SC)] while analyzing the provisions of section 80E observed as under:- “It is not possible to accept the view that section 72 has no bearing on or is unconnected with, the computation of total income of an assessee under the head “Profit and Gains of Business or Profession”. Actually section 72(1) provides that where the net result of computation under the head “Profit and Gains of Business or Profession” is a loss and such loss cannot be or is not wholly set-off against the income under any head of income in accordance with the provisions of section 71, so much of the loss as has not been so set-off, subject to other provisions of the ITA No.740/2008 Page 8 of 38 chapter, shall be carried forward to the following A.Y. and shall be set-off against the profit and gains, if any, of any business or profession for that A.Y. Therefore, section 72(1) has a direct impact upon the computation under the head “Profit and Gains of Business or Profession”. Further, as per section 80 of the Income-tax Act, 1961, which is reproduced hereunder:- “80. Notwithstanding anything contained in this chapter, no loss which has not been determined in pursuance of the return filed shall be carried forward and set-off under sub-section (1) of section 72……..” Thus for carrying forward the loss it is mandatory that the loss should be determined by the Assessing Officer. The determination of the loss to be carried forward is the mandatory condition for setting-off the loss in succeeding years. That the re-assessment proceedings in the case of the appellant assessee were initiated on the ground that past years unabsorbed losses of eligible Unit i.e., Aonla for the A.Ys. 1989-90 to 1990-91 were to be set- off/adjusted against the profit for the A.Y. 1992-93 for the purpose of 80-I. It is pertinent to mention that in the A.Ys. 1989- 90 to 1990-91, no losses for Aonla Unit were determined by the Assessing Officer to be carried forward. In the A.Y. 1992-93, the Assessing Officer allowed the deduction of 80-I in the original assessment order dated 10.03.1995 and there is no mention of any losses of Aonla Unit. The re-assessment proceedings were initiated by the Assessing Officer for the A.Y. 1992-93 for setting-off the losses of Aonla Unit for the A.Ys.1989- 90 to 1990-91 and on this basis the Assessing Officer passed the reassessment order dated 20.02.2001. Since by way of reassessment for the A.Y. 1992-93, the Assessing Officer carried forward the losses of A.Ys. 1989-90 to 1990- ITA No.740/2008 Page 9 of 38 91 to be set-off/adjusted against the profits for the A.Y. 1992-93 for the purpose of 80-I and the balance unabsorbed losses to be adjusted in succeeding years and since this reassessment order for the A.Y. 1992-93 in ITA No.901/DEL/2004 has been quashed by Hon‟ble ITAT, hence no unabsorbed losses survives to be carried forward for the A.Y. 1993-94 and the re-assessment proceedings for the A.Y. 1993-94 are without any foundation and jurisdiction.” For the above mentioned reasons, the very foundation for assumption of jurisdiction u/s 147 becomes non-extent and hence it is held that the initiation of action u/s 147 read with section 148 is without jurisdiction and is, therefore, quashed. The consequential assessment order is also quashed. In view of our above finding it is not necessary to decide any other ground of this appeal. 9. In the result, the appeal of the assessee is allowed.” 8. It may be pointed out at this juncture that the ITAT in paragraph 8 of its order, reproduced hereinabove, has verbatim reproduced the written submissions of the respondent Society within quotes as the basis and foundation of its order, which is impugned in the present appeal. Significantly also, the ITAT in the aforesaid paragraph has observed: “There is no dispute about the above reasons recorded by the ld. Assessing Officer for re- opening the assessment for the second time …………………………….” 9. It may also be noticed that consequent to the first re-assessment proceedings under Section 147, the Assessing Officer had, by his order dated 16.03.2000, disallowed the whole deduction of ` 3306.69 lakhs allowed to the assessee in the original assessment order dated 20th ITA No.740/2008 Page 10 of 38 December, 1995 under Section 80-I of the Act. Subsequently, the Assessing Officer passed the rectification order on 31.03.2000 under Section 154 allowing the deduction under Section 80-I to the extent of ` 2616.43 lakhs, thus disallowing the balance deduction of ` 690.25 lakhs to the assessee. On an appeal preferred to the CIT(A), the learned CIT(A) upheld the re-opening of the assessment, as also the finding that there was no nexus between interest, subsidy and miscellaneous receipts and the activities of the assessee Aonla Unit, and consequential disallowances of ` 33,06,68,598/- under Section 80-I of the Act. Aggrieved, the assessee preferred further appeal before the ITAT. The ITAT vide its order dated 17.02.2006 allowed the assessee full deduction under Section 80-I, as claimed by the assessee. 10. Now we advert to the second re-assessment proceedings initiated on the ground that the carried forward loss from the assessment year 1992-93 was required to be set off against the profits of the eligible Unit (Aonla Unit) before computing the deduction under Section 80-I. The Assessing Officer by his order dated 23rd March, 2001 held that there was no manner of doubt that the losses suffered in the Aonla Unit in the previous years relevant to the assessment years 1989-90 to 1991-92 are to be carried forward separately and required to be set off against the profits of the Aonla Unit for the subsequent assessment years before computing deduction under Section 80-I though the losses of Aonla Unit had already been set off against the profits of other units in earlier years. ITA No.740/2008 Page 11 of 38 On this basis, the Assessing Officer computed the deduction under Section 80-I as ` 2,18,84,751/-. The CIT(A) held that the learned A.O. had validly invoked his powers under Clause (c) of Explanation to Section 147 of the Act in respect of the said assessment year and had committed no error in computing the deduction under Section 80-I which was eligible to the appellant Society. By its impugned order dated 31st July, 2007, the ITAT held that the initiation of action under Section 147 read with Section 148 was without jurisdiction and quashed the same. 11. We have heard Ms. Prem Lata Bansal, the learned counsel for the Revenue and Mr. Satinder S. Gulati and Mr. Kamaldeep Gulati, the learned counsel for the respondent. Written submissions were also filed by the learned counsel for the respondent supporting the order of the ITAT and praying for the dismissal of the appeal. 12. The principal contentions of the learned counsel for the respondent were: A. No losses survived to be carried forward for the Assessment Year 1993-94, hence re-assessment proceedings are without foundation. For the assessment years 1989-90 to 1990-91, no losses for the Aonla Unit were determined by the Assessing Officer to be carried forward. In the assessment year 1992-93, the Assessing Officer allowed the deduction of Section 80-I in the original assessment order dated 10.03.1995 and there is no mention of any losses of Aonla Unit. The re- ITA No.740/2008 Page 12 of 38 assessment proceedings were initiated by the Assessing Officer for the assessment year 1992-93 for setting off the losses of Aonla Unit for the assessment years 1989-90 to 1990-91, and on that basis the Assessing Officer passed the re-assessment order dated 20.02.2001 for the assessment year 1992-93. Since this re-assessment order, for the assessment year 1992-93, was subsequently quashed by the ITAT by its order dated 05.01.2007 in ITA No.901/DEL/2004, no unabsorbed losses survived, whch could be carried forward for the assessment year 1993- 94 and thus the re-assessment proceedings for the assessment year 1993- 94 were without jurisdiction. It is further submitted that the aforesaid order dated 05.01.2007 passed by the ITAT was challenged by the Department in appeal before this Court and the said appeal was dismissed by order dated 17.09.2007 passed by this Court in ITA No.884/2007. Therefore, the order passed by the ITAT for the assessment year 1992-93 had attained finality. B. Unabsorbed losses must be set off during the immediate succeeding year and must enter the assessment of every following year. The next submission of the learned counsel for the respondent is that where the losses sustained are not set off against the profits of the immediately succeeding year or years, they cannot be set off against profits and gains of any business, profession or vocation at a later date. It is contended that the unabsorbed losses can be carried forward from year to year, as the case may be, for a maximum period of eight years, ITA No.740/2008 Page 13 of 38 whereafter the respondent is not entitled to have the loss suffered by him in the preceding assessment years set off against the profits earned by him in the subsequent assessment year. In this context, the respondent heavily relied upon the following decisions: (i) Hiralal Jairamdas vs. CIT, (1965) 58 ITR 1 (Bom). (ii) Tyresoles India vs. CIT, (1963) 49 ITR 515 (Mad). (iii) B.C.S. Kartar Chit Fund and Finance Company Pvt. Ltd. vs. CIT, (1989) 179 ITR 137 (P&H). C. Change of opinion cannot form the basis of re-opening. It is contended by the learned counsel for the respondent that the legal position with regard to initiation of proceedings under Section 148 is well settled and was considered in detail by a Full Bench of this Court in the case of Commissioner of Income Tax vs. Kelvinator of India Ltd., (2002) 256 ITR 1 (Del), wherein this Court after discussing at length the legal position and relying upon the decision of the Supreme Court in the case of Calcutta Discount Company Ltd. vs. ITO, (1961) 41 ITR 191 (SC) and various other authorities, held that mere change of opinion would not confer jurisdiction on the Assessing Officer to re- open the assessment. It was further contended that when a regular assessment is made in terms of sub-section (3) of Section 143 of the Act, a presumption can be raised that such an order has been passed on application of mind, i.e., scrutiny of material furnished in the course of the assessment proceedings. Consequently, mere change of opinion will ITA No.740/2008 Page 14 of 38 not give the Assessing Officer jurisdiction to re-open an assessment already framed. On facts, it was submitted that it was quite clear from the records that the information regarding past losses of the Aonla Unit was available with the Assessing Officer at the time of the original assessment as well as at the time of the first re-assessment. Accordingly, the assumption of jurisdiction in the instant case was not valid. The power to re-open an assessment, it was submitted, is not conferred by the legislature with an intention to enable the Assessing Officer to re-open the final decision made in respect of questions that directly arose for decision in earlier proceedings, as has been held by this Court in the case of Jindal Photo Films Ltd. vs. DCIT and Anr., 234 ITR 0170 (Del). Reliance is also placed by the respondent on a questionnaire issued by the Assessing Officer requiring the assessee to furnish the project-wise profit and loss account along with comparative GP rate of earlier years and fixing the date of compliance to be 10.07.1995. It is the case of the respondent that in response to the aforesaid questionnaire, the respondent by its letter dated 10.07.1995 provided the information giving the plant-wise profitability for the last four years, clearly depicting the losses of the Aonla Unit. D. Section 147 of the Act does not empower the A.O. to review its own order or the orders of his predecessor. It is the contention of the respondent that in the garb of re-opening the assessment, the Assessing Officer in effect reviewed his own decision on deduction under Section 80-I, which is not permissible under ITA No.740/2008 Page 15 of 38 Section 147 of the Act. Reference in this context is made to the following decisions: (i) Commissioner of Income Tax vs. Indian Overseas Bank Ltd., (2001) 252 ITR 640 (Mad). (ii) Sita World Travels India Ltd. vs. CIT, (2002) 140 Taxman 381 (Del). E. Issue of notice under Section 148 of the Act is time barred. The respondent contends that by virtue of the proviso to Section 147 the issuance of notice to the respondent Society is barred by time. In this context, it is submitted that all the information regarding past years’ losses of Aonla Unit were available with the Assessing Officer and he has admitted the same in his letter No.JCIT/SPL.R(10)/2000- 01/430 dated 20.02.2001. The relevant portion is being reproduced hereunder: “…………………However, as per information available from records losses of ` 164,75,67,085/-, ` 63,61,68,737/- and ` 11,43,31,588/- computed in accordance with the provisions of Chapter-IV-D of the Income Tax Act, 1961 was incurred in respect of Aonla for the previous year relevant to the assessment years 1989-90, 1990-91 and 1991-92 respectively.” According to the respondent, the last date of assessment of the assessment year 1993-94 ended on 31.03.1994, and the four year period mentioned in the proviso to Section 147 expired on 31.03.1998. Admittedly, the notice for the second re-opening was issued on 19.01.2001, which was beyond four years. Hence, the notice was time ITA No.740/2008 Page 16 of 38 barred and the assumption of jurisdiction by the Assessing Officer on the basis of the aforesaid notice was unsustainable. The learned counsel for the respondent relied upon the case of Foramer vs. CIT, (2001) 247 ITR 0436 (All), wherein it is held that where the failure as indicated in the proviso has not been established, the four