SCA/7336/1998 1/28 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION NO. 7336 OF 1998 With SPECIAL CIVIL APPLICATION NO. 7335 OF 1998 With SPECIAL CIVIL APPLICATION NO. 5234 OF 1997 With SPECIAL CIVIL APPLICATION NO. 12910 OF 2000 For Approval and Signature: HONOURABLE MR.JUSTICE K.A.PUJ HONOURABLE MR.JUSTICE R.H.SHUKLA ====================================== 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the Civil Judge ? ====================================== HYNOUP FOOD & OIL INDUSTRIES LTD. - Petitioner(s) Versus ASSISTANT COMMISSIONER OF INCOME TAX - Respondent(s) ====================================== Appearance : Mr. J. P. Shah and Mr. S. N. Divetia for Petitioner(s). Mr. Manish R. Bhatt for Respondent(s). ====================================== CORAM : HONOURABLE MR.JUSTICE K.A.PUJ and HONOURABLE MR.JUSTICE R.H.SHUKLA SCA/7336/1998 2/28 JUDGMENT Date : 17/07/2008 ORAL JUDGMENT (Per : HONOURABLE MR.JUSTICE K.A.PUJ) Since all these petitions are filed by the same Assessee, i.e. Hynoup Food & Oil Industries Limited, and since the common issue regarding reopening of assessment under Section 147 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) is involved and since all these matters are heard together, they are being disposed of by this common judgement and order. 2. The assessment years involved are assessment years 1990- 91, 1991-92, 1992-93 and 1994-95. 2.1 For the Assessment Year 1990-91, the petitioner filed its return of income on 31.12.1990. The revised return was filed on 31.12.1991. The original assessment order under Section 143(3) was passed by the Assessing Officer, wherein the claim of deduction under Sections 32A , 80HH and 80I was allowed, stating that the Assessee is treated as manufacturing concern in view of C.I.T. (Appeals)'s decision given in Assessment Years 1987-88 and 1989-90 and no second appeal is filed against the order of the C.I.T. (Appeals) by the revenue before the Income Tax Appellate Tribunal. The notice under Section 148 for SCA/7336/1998 3/28 JUDGMENT reopening of assessment was issued by the respondent on 29.07.1998, i.e. beyond a period of four years from the end of the Assessment Year 1990-91, that is, on 31.03.1991. On receipt of the reasons recorded by the Assessing Officer for reopening of the assessment, the petitioner has filed the present petition, praying for quashing and setting aside the notice of reopening. The petition was admitted by this Court on 23.09.1998 and interim relief was granted in terms of paragraph 12(C) of the petition, whereby status quo was ordered to be maintained during pendency and final disposal of the petition. 2.2 For Assessment Year 1991-92, the return of income was filed by the petitioner on 31.12.1991. The revised return was filed on 29.05.1992. The original assessment under Section 143(3) was completed by the Assessing Officer on 28.03.1994, wherein the claim for deductions under Sections 80HH and 80I was allowed. The notice of reopening under Section 148 was issued on 29.07.1998, which is beyond a period of four years from the end of Assessment Year 1991-92, i.e. 31.03.1992. On receipt of the reasons recorded from the Assessing Officer, the present petition was filed before this Court praying for quashing and setting aside the notice of reopening issued under Section 148 of the Act. The petition was admitted on 23.09.1998 and interim relief was granted in terms of paragraph 12(C) of the petition, whereby SCA/7336/1998 4/28 JUDGMENT the order of status quo was passed and it was ordered to be maintained during pendency and final disposal of the petition. 2.3 For the Assessment Year 1992-93, the petitioner filed its return of income on 31.12.1992. The assessment under Section 143(3) of the Act was completed on 28.12.1994. The petitioner sent a letter dated 22.02.1996 to the Assessing Officer, clarifying the sale of soap stock in the Assessment Year 1992-93. The Assessing Officer passed the assessment order for the Assessment Year 1993-94 on 13.03.1996 allowing deductions under Section 80HH and depreciation, as claimed by the petitioner. The petitioner sent a detailed letter dated 17.02.1997, in reply to the query raised by the Assessing Officer for the Assessment Year 1992-93 relating to manufacturing activity. The petitioner sent a further letter on 21.02.1997 in relation to the claim under Section 80HH of the Act. The Assessing Officer thereafter issued a notice under Section 148 of the Act for reopening of the assessment on 26.03.1997, i.e. within a period of four years from the end of the Assessment Year 1992-93, i.e. on 31.03.1993. On receipt of the reasons recorded from the Assessing Officer, the present petition is filed by the petitioner challenging the notice of reopening issued under Section 148 of the Act. The petition was admitted by this Court on 03.12.1997 and interim relief was granted in terms of paragraph 12(C) of the petition, whereby the order of status SCA/7336/1998 5/28 JUDGMENT quo was passed and directed to be maintained during pendency and final disposal of the petition. 2.4 For the Assessment Year 1994-95, the petitioner filed its return of income on 30.11.1994. The revised return was filed on 28.01.1997. The notice under Section 148 was issued by the Assessing Officer for the Assessment Year 1992-93 on 26.03.1997. The regular assessment under Section 143(3) of the Act was completed on 31.03.1997 wherein depreciation at a higher rate was allowed by the Assessing Officer. The notice under Section 148 of the Act for the Assessment Years 1990-91 and 1991-92 was issued on 29.07.1998. The petitioner filed special civil applications challenging the notice issued under Section 148 of the Act for the Assessment Years 1990-91 and 1991-92 on 05.09.1998. The Assessing Officer issued notice under Section 148 for the Assessment Year 1994-95 on 06.10.2000, i.e. beyond period of four years from the end of the Assessment Year 1994-95 i.e. 31.03.1995. On receipt of the reasons recorded by the Assessing Officer, the petitioner filed the present petition before this Court challenging the notice of reassessment issued under Section 148 of the Act. The petition was admitted by this Court on 20th December, 2000 and the impugned notice dated 6th October, 2000 was stayed till pendency and final disposal of the petition. SCA/7336/1998 6/28 JUDGMENT 3. So far as Special Civil Application Nos.7336 of 1998, 7335 of 1998 and 5234 of 1997 for the Assessment Years 1990-91, 1991-92, 1992-93 are concerned, Mr. J. P. Shah, learned Counsel appears on behalf of the Assessee, and Mr. M. R. Bhatt, learned Senior Standing Counsel appears for the Revenue. So far as Special Civil Application No.12910 of 2000 for the Assessment Year 1994-95 is concerned, Mr. Sameer N. Divetia, learned Counsel appears for the Assessee, and Mr. M. R. Bhatt, learned Senior Standing Counsel appears for the Revenue. 4. The core issue involved in all these four petitions is in respect of validity of the notices issued by the Assessing Officer under Section 148, read with Section 147 of the Act. While perusing the reasons recorded by the Assessing Officer for reopening of the assessment, it appears that they are same for Assessment Years 1990-91, 1991-92 and 1992-93. It is observed by the Assessing Officer, while recording the reasons for these three years that the assessee is engaged in the business of refining of cotton seed oil, groundnut oil, sunflower oil and rap seed oil. The assessee purchased the raw oil and the same was refined and sold in the market. The assessee was granted deduction as per these orders available after appeal effect and rectification at Rs.47,40,583 and Rs.47,40,583/- under Sections 80HH and 80I SCA/7336/1998 7/28 JUDGMENT respectively. In course of the assessment proceedings for the Assessment Year 1994-95, the issue regarding the eligibility of deduction under Sections 80HH and 80I was examined and it was seen on appraisal of the activities carried out by the assessee, i.e. refining of various oil that the same does not amount to manufacture or production of article as per the requirement of provisions of Sections 80HH and 80I of the Act. These business activities carried out by the assessee merely amount to processing as no new article was being manufactured or produced by the assessee and there was no change in the identity or form of the ultimate product in the processing of refining of the oil as the cotton seed oil or groundnut oil remained the same even after the process of refining the only difference being the earlier oil being not refined and the subsequent oil being known as refined oil. The Assessing Officer has also considered certain judicial pronouncements and quoted in the reasons recorded. It was further observed by the Assessing Officer that on examination of records for the Assessment Year 1992-93 in connection with ongoing assessment proceedings for the Assessment Year 1994-95, it was found that the assessee was allowed deduction under Sections 80HH and 80I on trading income of soap stock. The assessee was not entitled to deduction under Sections 80HH and 80I. The Assessing Officer had reason to believe that the deduction was wrongly granted in the earlier Assessment Years and hence, the assessments are required to be SCA/7336/1998 8/28 JUDGMENT reopened. Over and above this, it was also observed by the Assessing Officer that as per the rule prescribed in Appendix-I to Rule 5, the motor buses and motor lorries not used in the business of running them on hire are included in block of machinery and plant on which depreciation under Section 32 of the Act is admissible at the rate of 25% from Assessment Year 1988-89 onwards. The assessee has claimed depreciation at 40% on transportation vehicles used in its own business and not in the business of running them on hire. This has resulted in excess depreciation allowance. On these facts, he had reason to believe that income chargeable to tax has escaped assessment within the meaning of provisions of Section 147 as excessive/inadmissible deduction and allowance have been allowed. On these facts, the notices were issued for Assessment Years 1990-91, 1991-92 and 1992-93. 5. While recording the reasons for the Assessment Year 1994- 95, on 6th October, 2000, the Assessing Officer has observed that in this case, the assessment has been finalised on 143(3) on 31.03.1997 determining total income/loss at Rs.2,82,60,150/-. On further verification of the records, it was found that the assessee had claimed depreciation at 40% on Rs.18,73,318/- and at 20% on Rs.19,64,023/- on transport vehicles, which were used in its own oil business, not in the business of running them on hire. The depreciation allowable under SCA/7336/1998 9/28 JUDGMENT these circumstances is at 25% for the vehicles used for the period exceeding six months and 12.5% for the period less than six months. The depreciation allowed in the assessment order under Section 143(3) resulted in excess allowance of depreciation by Rs.4,28,298/- resulting in short levy of tax amounting to Rs.4,23,586/-, including interest under Section 234B of Rs.1,77,315/-. 6. Mr. J. P. Shah, learned Advocate appearing for the petitioner, has submitted that reliefs under Sections 80HH and 80I were granted to the petitioner right from the Assessment Year 1986-87 down to Assessment Year 1993-94, except in the Assessment Year 1987-88, when the issue came to be decided in appeal by the C.I.T. (Appeals) and thereafter, by the Tribunal on an additional ground taken at the time of hearing in February-1998. He has, therefore, submitted that in respect of this issue, the assessment sought to be reopened by the revenue is nothing but mere change of opinion, which is not even permissible within a period of four years. He has further submitted that the petitioner is producing refined oil, edible oil, being a totally new commercial commodity out of wash oil, which is not an edible item and it is also known as a different commercial commodity from refined oil and on that basis, the petitioner was rightly granted the reliefs under Sections 80HH and 80I for all the Assessment Years from 1986-87 to SCA/7336/1998 10/28 JUDGMENT 1993-94. He has, therefore, submitted that the issue is squarely covered in favour of the assessee even on merits and hence, there is no justification for issuance of notice under Section 148 of the Act. 6.1 He has further submitted that so far as depreciation on trucks at the rate of 40% claimed by the assessee is concerned, the trucks were utilised by the petitioner on hire and in respect of which the petitioner has earned hiring charges which were shown as business income and also taxed as business income not only in the Assessment Year 1992-93, but also, upto the Assessment Year 1994-95. Simply because one Assessing Officer takes a different view than the view of the Assessing Officer, who made the assessment under Section 143(3) of the Act, the assessment cannot be reopened under Section 148 of the Act and that too, beyond a period of four years. He has further submitted that this issue is merely an academic issue because whether at 40% or 25%, no assessee gets depreciation of more than 100% and by now, even at 20%, 100% depreciation would have been exhausted and the Department does not get a rupee more by way of tax nor does the petitioner save a rupee more by way of tax. 6.2 He has, therefore, submitted that on none of the counts, the notices issued by the Assessing Officer for reopening of assessments are SCA/7336/1998 11/28 JUDGMENT held to be legal or valid. Even for Assessment Year 1992-93, for which the notice of reopening was issued within a period of four years, he has submitted that even if it is assumed that notice of reopening is valid, looking to the peculiar facts of the present case, the Court should not uphold the said notice in view of the decision of the Bombay High Court reported at 33 ITR 681. 7. So far as Assessment Year 1994-95 is concerned, Mr. S. N. Divetia, learned Counsel appearing for the petitioner, has submitted that there is no reason to form a belief that the petitioner's income for the Assessment Year 1994-95 has escaped assessment, much less on account of failure or omission on the part of the petitioner to disclose fully and truly all material facts for the purpose of assessment. He has further submitted that there is nothing on record of the Assessing Officer to hold a belief that depreciation on the transport vehicle was wrongly allowed at 40% on Rs.18,73,318/- and 20% on Rs.19,64,023/-. There is no new fact or any information which has come to the notice of the Assessing Officer. It is merely a change of opinion on the part of the Assessing Officer which cannot justify reopening of the assessment by issuance of the impugned notice. He has further submitted that the assessment of the petitioner has been completed in sub-section 3 of Section 143 of the SCA/7336/1998 12/28 JUDGMENT Act on 31.03.1997 and the impugned notice having been issued after a period of four years from the end of the Assessment Year, i.e. after 31.03.1995, the conditions laid down under the proviso to Section 147 for issuance of the impugned notice are not satisfied. 7.1 Mr. Divetia has further submitted that the point relating to depreciation on transport vehicles at higher percentage on account of running them on hire was specifically considered by the Assessing Officer during the assessment proceedings for the Assessment Year 1994-95. In support of this submission, he invited our attention to the contents of paragraph 7 of the affidavit in reply filed by the respondent in Special Civil Application No.5234 of 1997 wherein it is stated that “it is however, noticed further during proceedings for A.Y.1994-95, that vehicles purchased by the assessee during A.Y. 1992-93 are being used for in the assessee's own business and that not on running them on hire as required for claiming 50% depreciation. ....” In view of this factual position pointed out by the respondent in his affidavit, it cannot be said that the respondent had not applied his mind during the course of assessment proceedings for the Assessment Year 1994-95. He has further submitted that the respondent had reopened the assessment for Assessment Year 1992-93 by issuance of notice under Section 148 on 26.03.1997 and for Assessment Years 1990-91 and 1991-92, on 29.07.1998. The reasons for reopening, inter alia, refer to the higher rate SCA/7336/1998 13/28 JUDGMENT of depreciation on truck. He has, therefore, submitted that these facts were well within the knowledge of the Assessing Officer at the time of framing of the assessment for the Assessment Year 1994-95. There is another reason to show that the respondent was fully aware and had applied his mind to the allowability of depreciation at a higher rate. It is clear from the copy of the reasons recorded for reopening of assessment for the Assessment Year 1992-93 that the point relating to higher depreciation, which is the subject matter for the impugned notice and reassessment, was under consideration before the respondent and further that the said reasons were recorded by the Assessing Officer on 26.03.1997, whereas the present assessment for the Assessment Year 1994-95 has been completed by the same Assessing Officer on 31.03.1997. Thus, it can hardly be said that there was any omission or failure on the part of the petitioner to disclose these facts and that the Assessing Officer was not aware about it. 7.2 Mr. Divetia has further submitted that the trucks in respect of which the higher depreciation was claimed and allowed are the trucks which are running on hire and in respect of which the petitioner has earned hire charges which have been shown as business income and also taxed as business income. He has also adopted the arguments of Mr. Shah and submitted that the issue regarding higher rate of depreciation SCA/7336/1998 14/28 JUDGMENT is academic in nature, in the sense that whether the depreciation is allowed at 40% or at any other rate, the assessee does not get depreciation more than actual costs and by now full depreciation would have been exhausted and thus, the department does not get anything more by way of tax over a period of time. He has, therefore, submitted that the reassessment would result in avoidable arithmetic exercise and paper work for all the years involved. Since the impugned notice is absolutely without jurisdiction and patently bad in law, the same deserves to be quashed. 7.3 In support of his submission that the notice for reopening is bad, he relied on the decision of the Bombay High Court in the case of ICICI Bank Ltd. vs. K. J. Rao & Anr., [268 ITR 203 (Bombay)] and in the case of Hindustan Lever Ltd. vs. R. B. Wadkar, Assistant Commissioner of Income Tax & Ors. [268 ITR 332 (Bombay)]. In both these cases, the Bombay High Court has taken the view that the notice of reopening was clearly beyond the period of four years. The reasons recorded by the Assessing Officer nowhere stated that there was failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment for the relevant assessment year. The Assessing Officer had, therefore, no jurisdiction to reopen the assessment proceedings. Since the notice of reopening was not valid, it was liable to SCA/7336/1998 15/28 JUDGMENT be quashed. 7.4 Mr. Divetia has also relied on the decision of the Honourable Apex Court in the case of Commissioner of Income-Tax & Anr. vs. Foramer France, [264 ITR 566], wherein, while dismissing the civil appeals, the Court had not seen any reason to interfere with the decision of the Allahabad High Court in the case of Foramer vs. C.I.T. [247 ITR 436 (All)]. The High Court, inter alia, held that Section 147 substituted in the Income Tax Act, 1961 by the Direct Tax Laws (Amendment) Act, 1987, had made a radical departure from the original Section 147, inasmuch as clauses (a) and (b) had been deleted and under the proviso thereto, notice for reassessment would be illegal if issued more than four years after the end of the assessment year, if the original assessments were made under Section 143(3) and that, the notices were bad as they were only on the basis of a change of opinion and the law that an assessment could not be reopened on a change of opinion was the same before and after amendment by the Direct Tax Laws (Amendment) Act, 1987, of Section 147. 7.5 Mr. Divetia further relied on the decision of the Madras High Court in the case of Commissioner of Income-Tax vs. ELGI Finance Ltd., [286 ITR 874 (Madras)], wherein it is held that when the factual SCA/7336/1998 16/28 JUDGMENT finding was that the assessee -company had fully and truly disclosed all material facts necessary for computing the depreciation allowance in the course of the original assessments completed under Section 143(3) itself, the period of limitation applicable to the reopening for these two years would be a period of four years prescribed in the proviso to Section 147. The reassessments for the assessment years 1992-93 and 1993-94 were clearly barred by limitation. 7.6 Mr. Divetia has also relied on the decision of the Madras High Court in the case of Commissioner of Income-Tax vs. Elgi Ultra Industries Ltd., [296 ITR 573], wherein while dismissing the appeal, the Court held that there was no finding that there was failure on the part of the assessee to disclose fully and truly all material facts. Further, all the material facts were available at the time of making the original assessment. The Tribunal applying the right principles had come to the correct conclusion. There was no error or legal infirmity in the order of the Tribunal so as to warrant interference. 7.7 Based on the aforesaid factual as well as legal position, Mr. Divetia strenuously urged that the impugned notice for reopening of assessment for the Assessment Year 1994-95, deserves to be quashed and the petition, therefore, be accordingly allowed. SCA/7336/1998 17/28 JUDGMENT 8. Mr. M. R. Bhatt, learned Senior Standing Counsel appearing for the Revenue, in all these four petitions, on the other hand, has strenuously defended issuance of notices under Section 148 of the Act for reopening of assessment for the respective years, i.e. 1990-91, 1991- 92, 1992-93 and 1994-95. On behalf of the Revenue, a detailed affidavit in reply is filed only in Special Civil Application No.5234 of 1997. Basing his arguments on this affidavit-in-reply, which are equally applicable to other assessment years, Mr. Bhatt submitted that in the assessment order dated 28th December, 1994 passed by the Assessing Officer, there was no discussion as to whether the assessee is manufacturer of any article or thing and whether it is eligible for deductions under Sections 80HH and 80I of the Act. The Assessing Officer had allowed deductions to the assessee without analysing the facts of the case and ratios of similar cases decided by various High Courts and Supreme Court. The Assessing Officer has allowed deductions to the assessee mechanically and not a single line was written in the assessment order about the eligibility of the claim. Similarly, the Assessing Officer has allowed deductions under Sections 80HH and 80I to the assessee in the Assessment Year 1992-93 on trading income from soap stock. The assessee is not entitled to the deductions under Sections 80HH and 80I and yet the Assessing Officer allowed the same without verifying the claim. He has further submitted SCA/7336/1998 18/28 JUDGMENT that in the Assessment Year 1992-93, it is seen that as per the rules prescribed in Appendix-I to Rule 5, motor buses and motor lorries not used in the business of running them on hire, are included in the group of machinery and plant on which depreciation under Section 32 of the Act is admissible at the rate of 25% from Assessment Years