ITA No. 1274 of 2007 & Others Page 1 of 22 Reportable * IN THE HIGH COURT OF DELHI AT NEW DELHI ITA No. 1274 of 2007 With ITA No. 1270 of 2007, ITA No. 1273 of 2007, ITA No. 1275 of 2007, ITA No. 1285 of 2007, ITA No. 1286 of 2007, ITA No. 24 of 2008, ITA No. 26 of 2008, ITA No. 67 of 2008 and ITA No.331 of 2008. Reserved On: August 12, 2010 % Pronounced On: September 14, 2010 1) ITA No. 1274 of 2007 COMMISSIONER OF INCOME TAX . . . Appellant Through : Ms. Prem Lata Bansal, Advocate. VERSUS XEROX MODICORP LIMITED . . .Respondent Through: Mr. Ajay Vohra with Ms. Kavita Jha and Mr. Somnath Shukla, Advocates. 2) ITA No. 1270 of 2007 COMMISSIONER OF INCOME TAX . . . Appellant Through : Ms. Prem Lata Bansal, Advocate. VERSUS XEROX MODICORP LIMITED . . .Respondent Through: Mr. Ajay Vohra with Ms. Kavita Jha and Mr. Somnath Shukla, Advocates. 3) ITA No. 1273 of 2007 COMMISSIONER OF INCOME TAX . . . Appellant Through : Ms. Prem Lata Bansal, Advocate. ITA No. 1274 of 2007 & Others Page 2 of 22 VERSUS XEROX MODICORP LIMITED . . .Respondent Through: Mr. Ajay Vohra with Ms. Kavita Jha and Mr. Somnath Shukla, Advocates. 4) ITA No. 1275 of 2007 COMMISSIONER OF INCOME TAX . . . Appellant Through : Ms. Prem Lata Bansal, Advocate. VERSUS XEROX MODICORP LIMITED . . .Respondent Through: Mr. Ajay Vohra with Ms. Kavita Jha and Mr. Somnath Shukla, Advocates. 5) ITA No. 1285 of 2007 COMMISSIONER OF INCOME TAX . . . Appellant Through : Ms. Prem Lata Bansal, Advocate. VERSUS XEROX MODICORP LIMITED . . .Respondent Through: Mr. Ajay Vohra with Ms. Kavita Jha and Mr. Somnath Shukla, Advocates. 6) ITA No. 1286 of 2007 COMMISSIONER OF INCOME TAX . . . Appellant Through : Ms. Prem Lata Bansal, Advocate. VERSUS XEROX MODICORP LIMITED . . .Respondent Through: Mr. Ajay Vohra with Ms. Kavita Jha and Mr. Somnath Shukla, Advocates. ITA No. 1274 of 2007 & Others Page 3 of 22 7) ITA No. 24 of 2008 COMMISSIONER OF INCOME TAX . . . Appellant Through : Ms. Prem Lata Bansal, Advocate. VERSUS XEROX MODICORP LIMITED . . .Respondent Through: Mr. Ajay Vohra with Ms. Kavita Jha and Mr. Somnath Shukla, Advocates. 8) ITA No. 26 of 2008 COMMISSIONER OF INCOME TAX . . . Appellant Through : Ms. Prem Lata Bansal, Advocate. VERSUS XEROX MODICORP LIMITED . . .Respondent Through: Mr. Ajay Vohra with Ms. Kavita Jha and Mr. Somnath Shukla, Advocates. 9) ITA No. 67 of 2008 COMMISSIONER OF INCOME TAX . . . Appellant Through : Ms. Prem Lata Bansal, Advocate. VERSUS XEROX MODICORP LIMITED . . .Respondent Through: Mr. Ajay Vohra with Ms. Kavita Jha and Mr. Somnath Shukla, Advocates. ITA No. 1274 of 2007 & Others Page 4 of 22 10) ITA No. 331 of 2008 COMMISSIONER OF INCOME TAX . . . Appellant Through : Ms. Prem Lata Bansal, Advocate. VERSUS XEROX MODICORP LIMITED . . .Respondent Through: Mr. Ajay Vohra with Ms. Kavita Jha and Mr. Somnath Shukla, Advocates. CORAM :- HON’BLE MR. JUSTICE A.K. SIKRI HON’BLE MS. JUSTICE REVA KHETRAPAL 1. Whether Reporters of Local newspapers may be allowed to see the Judgment? 2. To be referred to the Reporter or not? 3. Whether the Judgment should be reported in the Digest? A.K. SIKRI, J. The Background: 1. All these appeals pertain to the same assessee, viz., M/s. Xerox Modicorp Limited. Only the assessment years are different. Otherwise, the question of law, which arises for consideration is common and relates to the permissibility of the allowance under Section 32A of the Income Tax Act (hereinafter referred to as „the Act‟). Income Tax Appellate Tribunal (hereinafter referred to as „the Tribunal‟) rendered a common decision dated 8th February, 2007 whereby five appeals filed by the assessee and five appeals filed by the Revenue were disposed of together. ITA No.1274 of 2007 is filed against the decision in respect of ITA No. 1274 of 2007 & Others Page 5 of 22 the assessment year 1986-87 which is the first relevant assessment year. Therefore, we shall take note of the facts appearing in this appeal before spelling out the exact formulation of the question of law that arises for consideration. 2. The assessee is engaged in manufacturing of xerographic machines, toner, developer and photoreceptor. It filed return of income for the Assessment Year 1986-87 on 30.06.1986. The returns for subsequent years up to 1990-91 were filed on different dates. During the assessment proceedings in respect of first assessment year, the assessee claimed that commercial production had not commenced at company‟s Modipur plant. As on the date of balance sheet, no provision of depreciation on fixed assets capitalized at Modipur was made. A note was appended to the aforesaid effect and in that note, it was also averred that the investment allowance reserve would be credited in the year of assessable profits. As per the assessee, the accounting year ended on 30.04.1985 and though trial production stated on 01.02.1985, the commercial production began only from 01.05.1985. Since no production commenced in the assessment year under consideration and there was only trial run production of 53 machines, that is why no depreciation on the plant and machinery had been claimed, but was claimed in the subsequent assessment year. It is for this reason that the assessee did not claim the investment allowance also. 3. The Assessing Officer (AO), however, found that the distinction between the commercial production and trial production made by the assessee was on artificial lines, which was not permitted. He was of the opinion that once the production had been started for the ITA No. 1274 of 2007 & Others Page 6 of 22 manufacturing of xerographic machines, whatever is sold after the production in the form of xerographic machines, is definitely a trading receipt because receipt of the same was the result of selling of the goods by the assessee company in which the assessee deals. The reason for arriving at this view was that it appeared on record that 43 machines out of 53 machines had been sold to different, separate and independent customers. Once such a view was expressed by the AO, the assessee submitted his reply (during assessment proceedings) claiming the depreciation as well as investment allowance, as according to the assessee in the aforementioned facts it had become entitled to the depreciation and also the investment allowance. 4. It was in this backdrop that in the final assessment order passed by the AO, he discussed the admissibility of investment allowance and allowed the same to the assessee in the assessment year under consideration, i.e., Assessment Year 1986-87. Needless to mention that the original assessment was completed under Section 143(3) of the Act after eliciting various information on different queries raised by the AO including qua the investment allowance. Likewise for the subsequent years, i.e., 1987-88, 1988-89, 1989-90, 1990-91, the original assessment under Section 143(3) was completed on 26.12.1990, 04.03.1991, 12.02.1992 and 29.03.1993 respectively. In all these assessment years also, claim for deduction of investment allowance was computed and was allowed to the assessee. Circumstances leading to re-assessment ITA No. 1274 of 2007 & Others Page 7 of 22 5. Subsequently, it appears that while considering the claim of the assessee for deduction under Section 80-I, the learned CIT (A) for the assessment year 1994-95 held that the assessee company was manufacturing office machines and apparatus, falling within ambit of entry at Sl. No.22 of Schedule XI and therefore, the assessee was not entitled to deduction. The AO observed that provisions of Section 80-I of the Act were similar to Section 32A of the Act and, therefore, the assessee was also not entitled to investment allowance. 6. On the basis of this order of CIT (A) for the assessment year 1994- 95, the AO initiated reassessment proceedings by issuing notice under Section 148 of the Act on 20.03.1997, for all the assessment years. The AO completed the reassessment under Section 147 read with Section 143(3) of the Act on 12.03.1999 for all the assessment years whereby investment allowance claimed by the assessee for these assessment years was withdrawn on the ground that items manufactured by the assessee fell in the prohibited category mentioned at Sl. No.22 of Schedule XI of the Act. 7. The Ld. CIT (A) considered the submission and noted that the provisions of Section 147 have been amended with effect from 1.4.1989. He considered the action of the Assessing Officer for initiating the reassessment proceedings for the assessment year 1986-97, 1987- 88 and 1988-89, under the pre-amended provisions. The Ld. CIT (A) observed that assessee had furnished complete details of the items manufactured before allowing the investment allowance for the various assessment years. It was for the Assessing Officer to have drawn the proper inference from the facts that had been disclosed and were ITA No. 1274 of 2007 & Others Page 8 of 22 before him to draw the inference. He also observed that the assessee was expected to disclose the primary facts necessary for making the assessment. He relied on the judgment of Kerala High Court in the case of M/s Palla Marketing Cooperative Society Ltd., Vs. State of Kerala & Another, 236, ITR 604. He also observed that it was for the Assessing Officer to have considered whether the assessee was entitled to investment allowance or not and whether these articles were covered by the list in the XIth schedule. Thus, he concluded that by no stretch of imagination it could be said that there was any failure on the part of the assessee to disclose all material facts fully and truly. To this extent, the Ld. CIT (A) accepted the contention of the assessee. 8. The Ld. CIT (A) than proceeded to examine whether there was any material in possession of the AO which constituted information justifying for reopening the assessment. He observed that provisions of Section 80-I were analogous to provision of Section 32A. For the assessment year 1994-95, the Ld. CIT (A) held that items being manufactured by the assessee fell within the ambit of Sl. No.22 of XI schedule and, therefore, the assessee was not entitled to deduction under that section. He observed that the findings of the Ld. CIT (A) in the assessment year 1994-95 constituted information within the meaning of Section 147 (b) of the Act and such order had become available to the AO after he had completed the original assessment u/s 143 (3) for all these assessment years. The fact that the order of CIT (A) constituted information justifying the reopening of assessment u/s 147 (b) of the IT Act was supported by the judgment of the Punjab & Haryana High Court in the case of Kumar Engineers Vs. CIT 223 ITR 18. Thus, he upheld the ITA No. 1274 of 2007 & Others Page 9 of 22 action of the AO for initiating the reassessment proceedings for the assessment year 1986-87, 1987-88 and 1988-89 under the pre- amended provisions of the Act. 9. Thereafter he considered the action of the AO for reinitiating the assessment proceedings for the assessment year 1989-90 and 1990-91 under the post amended provisions of Section 147. He accepted the contention of the assessee for the assessment year 1989-90 and 1990- 91 like assessment year 1986-87 to 1988-89 that there was no failure or commission on the part of the assessee to disclose fully and truly all material facts necessary for the assessment in respect if subsequent assessment years. However, Ld. CIT (A) observed that the decision of the Ld. CIT(A) for the assessment year 1994-95, had become available after completion of the original assessments u/s 143 (3) and therefore, the reopening of the assessment even for the subsequent assessment years was valid. Thus he upheld the action of the AO for initiating the reassessment proceedings in respect of all the assessment years. 10. As regards the merits of the claim of the assessee under Section 32A the Ld. CIT (A) held that provisions of Section 32A were similar to section 80-I. The issue for deduction u/s 80-I came up before the ITAT, Delhi Bench in the case of assessee in ITA No. 3034 (Del)/1996 and ITA No. 3290(Del.)/1997 for the assessment year 1991-92 and 1992-93 reported in 67ITD 252 where it was held that the Xerographic machine was the article which came within the ambit of item 22 of XI schedule. Whereas, toner, developer and photoreceptors were not the items included in XI schedule. Thus, the Tribunal held that the assessee was entitled to deduction u/s 80-I of the IT act in respect of profits derived ITA No. 1274 of 2007 & Others Page 10 of 22 from the manufacture and sale of toners, developers and photo receptors and the assessee were not entitled to deduction u/s 80-B in respect of profit derived from manufacture of xerographic machines. Relying on the order of the Tribunal, the Ld. CIT (A) held that the assessee was not entitled to investment allowance in respect of additions to plant & machinery of the unit engaged in the manufacture of xerographic machines whereas it was eligible to investment allowance in respect of plant & machinery of the unit engaged in the manufacture of toner, developer and photo receptors. 11. The assessee felt aggrieved by the orders of CIT (A) on the issue of upholding the action of the AO for initiating the reassessment proceedings and also not allowing the investment allowance in respect of profit from unit engaged in the manufacture of xerographic machines. On the other hand, the revenue was aggrieved with the order of the Ld. CIT (A) for allowing investment allowance in respect of profits derived from manufacture of toner, developer and photo receptors for all the assessment years. 12. It was in these circumstances, both the assessee as well as Revenue filed five appeals each in respect of all these assessment years. Order of the Tribunal 13. The Tribunal primarily went into two questions, viz: (i) Whether notice under Section 148 of the Act was warranted, beyond four years from the date when the assessments were made, and the related aspect which was examined was as to whether ITA No. 1274 of 2007 & Others Page 11 of 22 there was complete and full disclosure of particulars/information by the assessee? (ii) Whether the AO had considered the issue of allowing investment allowance in his original assessments under Section 143(3) in detail and it was a case of mere change of opinion, not warranting reopening of the assessments? 14. On both these counts, the Tribunal has held in favour of the assessee. Commenting on the first aspect, the Tribunal held that even the order of the CIT (A) while upholding initiation of reassessment proceedings had given a clear finding that there was no failure on the part of the assessee to disclose all the material facts fully and truly, necessitating the reassessment for the relevant assessment year. CIT (A) had also recorded the finding that all the relevant facts were fully discussed and considered by the AO at the time of completing the original assessment under Section 143(3) of the Act. However, the CIT (A) upheld the initiation of the reassessment proceedings only on the ground that the AO had rightly entertained a plea that income chargeable to tax had escaped assessment for the reason that the assessee was not entitled to investment allowance. This, according to the Tribunal, was not permissible in view of proviso to Section 147 of the Act, which provided limitation of four years for issuing notice under Section 147 of the Act and since beyond four years it could be reopened only if there was non-disclosure of full and complete material facts. The Tribunal further observed that even in the reassessment order passed by the AO, there was no allegation made in the reasons recorded that the escaped assessment was by reason of the failure of the assessee to disclose fully and truly all material facts necessary for the assessment for these assessment years. That apart, observed the Tribunal, ITA No. 1274 of 2007 & Others Page 12 of 22 necessary material was placed on record and referred to by the AO in the original assessment proceedings clearly demonstrating that the assessee had disclosed all material facts relating to its claim for investment allowance for all the assessment years. Relevant portion of the order of the Tribunal, in this behalf, is as under: “A perusal of the same shows that there is no allegation made by the AO in the reasons recorded that escapement of income was due to failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessments for the relevant assessment years. Even otherwise, we find that the material placed on record and referred to above clearly show that the assessee had disclosed all material facts relating to its claim for investment allowance for all the assessment years. In fact, the claim was examined by the AO in detail after referring to the items being manufactured by the assessee and thereafter, the same was allowed. The Ld. CIT (A) has himself accepted that there was no failure on the part of the assessee to disclose material facts necessary for the assessments and the revenue has not challenged such findings in the cross appeals. Therefore, such findings of CIT(A) have attained finality. Thus, we hold that AO has initiated such re-assessment proceedings without establishing that income had escaped assessment by reason of failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessments. The mandatory requirement of law has not been satisfied before assuming jurisdiction to initiate reassessment proceedings by the AO and, therefore, the action of AO for initiating the reassessment proceedings was illegal and without jurisdiction. In the light of these facts and circumstances and the legal position, the reassessment completed by AO for all the assessment years are liable to be quashed on this point itself.” 15. Insofar as merits of allowing assessment proceedings are concerned, the Tribunal held the view that in the original assessment, issue of investment allowance was discussed by the AO in detail. Therefore, it was only a case of change of opinion, which could not be ITA No. 1274 of 2007 & Others Page 13 of 22 valid basis for initiating reassessment proceedings. We would like to reproduce the relevant discussion in the Tribunal‟s order on this aspect as well, which is as under: “8.2 We have already held that the AO had considered this issue in detail at the time of completing the original assessments u/s 143(3) for all the assessment years. Therefore, the action of the AO for initiating reassessment proceedings was only on the basis of mere change of opinion. Such course of action is not permission under law. Reliance in this regard, is placed on the judgment of the Hon‟ble Delhi High Court in the case of Jindal Photo Films Ltd., Vs. CIT 234 ITR 170, where it was held that re-assessment proceedings could not be initiated merely on the basis of change of opinion. The High Court further observed that from the date of order of assessment sought to be reopened and the date of forming of opinion by Income-tax Officer nothing new had happened. There was no change of law and no material had come or record. Thus, the action of the AO for initiating the reassessment proceedings was held to be bad in law. The full Bench of the Hon‟ble Delhi High Court in the case of CIT Vs. Kelvinator of India Ltd., 256 ITR 1; again considered this issue. It was held that if an order had been passed without application of mind, the same could not confer jurisdiction upon the AO to reopen the proceeding without anything further, as the same could amount to giving premium to an authority exercising quasi judicial function to take benefit of its own wrong. Hence, section 147 of the Act does not postulate conferment upon the AO to initiate reassessment proceedings upon a mere change of opinion. In the case of CIT Vs. Foramer France reported in 264 ITR 566 the Hon‟ble Supreme Court has approved the judgment of the Hon‟ble Allahabad High Court and has held that the assessment cannot be reopened on the basis of mere change of opinion and the amendment of section 147 introduced with effect from 1.4.89 has not altered the position. In as much as that even under the amended provisions the issue cannot be re-opened on mere change of opinion. This view is further supported by the judgment of Hon‟ble Punjab & Haryana High Court in the cases of M/s. Mahavir Spinning Mills Vs. CIT, 270 ITR 290, CIT Vs. Smt. Binda Devi (2006) 150 Taxman 95, Duli Chand Singhania, 269 ITR 192. Now in the present case, there is no doubt in our mind that assessment proceedings have been initiated on the basis of mere change of opinion. On same facts, ITA No. 1274 of 2007 & Others Page 14 of 22 ITAT, Delhi Bench in the case of Modi Xerox Ltd., Vs. DCIT, 67 ITD 252, for the assessment years 1991-92 and 1992-93, where the CIT revised the order u/s 263 had held that the CIT assumed the jurisdiction on the basis of change of opinion. Further, on same facts, ITAT Delhi Bench in the case of the assessee considered this issue for the A.Y. 1991-92 (supra) where the order of CIT(A) was upheld on the ground that the AO initiated proceedings merely on the basis of change of opinion. Thus, we hold that the reassessments completed by the AO are also liable to be quashed on the point that these were initiated merely on the basis of change of opinion.” The Arguments : Revenue 16. Ms. Prem Lata Bansal, learned counsel for the Revenue, has submitted that the Tribunal has erred on both the counts. In the first place, her contention is that concededly the assessee had not claimed investment allowance in the return filed by it. In fact, according to the assessee, in that year only trial production was done and no commercial production had started. Rather, the assessee had appended note to the effect that it would claim investment allowance in the year of profits. Thus, when during the assessment proceedings the assessee claimed the investment allowance, the AO examined the matter only from a limited angle, viz., whether there was commercial production in that year as well and, therefore, the assessee could be given investment allowance. Otherwise, contended the learned counsel, the issue about the permissibility of the allowance under Section 32A of the Act was not examined on merit at all. She submitted that the AO did not go into the question as to whether the goods manufactured by the assessee would fall in any of the entries mentioned in Schedule-XI and therefore, the investment allowance would be impermissible, except in the case of small scale industries. She further submitted that there was not full ITA No. 1274 of 2007 & Others Page 15 of 22 disclosure of the facts, as the assessee never informed that it was not a small scale industry. Thus, there was no evidence before the AO on the basis of which the deduction of investment allowance could be given. It was, therefore, not a case of full disclosure of all material facts by the assessee, contended the learned counsel. 17. Proceeding further on the basis of the above, she also argued that when the issue regarding applicability of Schedule XI and whether the assessee-company is small scale industry or not was not even in the contemplation of the AO and was not discussed, the question of change of opinion does not arise. This becomes clear when