IN THE HIGH COURT OF JUDICATURE AT MADRAS Dated : 17-9-2010 Coram THE HONOURABLE MR.JUSTICE N.PAUL VASANTHAKUMAR W.P.No.28457 of 2008 & M.P.No.1 of 2008 W.P.No.19260 of 2009 & M.P.No.1 of 2009 M/s.Tamil Nadu Petroproducts Limited, P.B.No.9, Manali Express Highway, Manali, Chennai – 600 068 rep.by its Director Finance & CFO V. Ramani .. Petitioner in both writ petitions Vs. 1. The Commissioner of Income Tax, Large Tax Payer Unit, 1175, J.N.Inner Ring Road, Anna Nagar Western Extension, Chennai – 101. 2. The Assistant Commissioner of Income Tax, Large Tax Payer Unit, 1175, J.N.Inner Ring Road, Anna Nagar Western Extension, Chennai – 101. .. Respondents in both writ petitions Prayer in W.P.No.28457/2008: This writ petition is filed under Article 226 of the Constitution of India, praying this Court to issue a writ of certiorari, calling for the records of the petitioner on the file of the second respondent in impugned notice in PA.No.AAACT 1295 M, dated 3.8.2007 for the assessment year 2001-02 and quash the same. Prayer in W.P.No.19260/2009: This writ petition is filed under Article 226 of the Constitution of India, praying this Court to issue a writ of certiorari, calling for the records of the second respondent in impugned order dated 19.11.2008 for the assessment year 2001-02 and quash the same. For Petitioner : Mr.Arvind B.Dattar, Senior Counsel for M/s.Subbaraya Aiyar, Padmanabhan & Ramamani https://hcservices.ecourts.gov.in/hcservices/ For Respondents : Mr.J.Narayanaswamy, Standing Counsel for Income-Tax Deprtment COMMON ORDER Both the writ petitions are filed by the same petitioner, namely M/s.Tamil Nadu Petroproducts Limited, Chennai. The issue involved in both the cases being one and the same, both the writ petitions are disposed of by this common order. 2. In W.P.No.28457 of 2008 the petitioner has challenged the notice dated 3.8.2007 calling for returns for re-assessment of income for the Assessment Year 2001-2002 insofar as escaped assessment under section 147 of the Income Tax Act, 1961. 3. In W.P.No.19260 of 2009 the petitioner has challenged the order dated 19.11.2008 overruling the objection filed by the petitioner for the notice dated 3.8.2007. 4. The brief facts necessary for the disposal of these writ petitions are as follows: (a) The petitioner Company is engaged in the business of manufacture and export of Linear Alkyl Benzene and Epichlorhydrin and it is eligible for claiming deduction under Section 80HHC of the Income Tax Act, 1961 in respect of its export activities. Petitioner is also having four power generating Units for production of power, which is partly consumed for its own use and the balance is sold to the Tamil Nadu Electricity Board. Petitioner also claims deduction under Section 80IA of the Act in respect of one power generation Unit. (b) According to the petitioner, for the Assessment Year 2001- 2002 the petitioner filed its returns of income on 31.10.2001 by declaring total income of Rs.57,36,72,000/-. The said return was processed by the Assessing Officer under Section 143(1) of the Act on 22.3.2003. The Assessing Officer however reopened the assessment under Section 147 by issuing notice under section 148 on 3.9.2004 by stating that the petitioner had claimed a sum of Rs.8,56,47,000/- as revenue expenditure instead of treating the amount as capital expenditure. (c) According to the petitioner, the re-assessment was completed on 13.2.2006 and no addition was made in respect of which assessment was reopened. However, the Assessing Officer has disallowed the provision for bad and doubtful debts and re-computed the deductions under section 80HHC and denied deductions under section 80IA of the Act. https://hcservices.ecourts.gov.in/hcservices/ (d) Petitioner preferred an appeal before the Commissioner of Income Tax (Appeals) in ITA No.669 of 2005-06 and on 1.12.2006 the said order was set aside. According to the petitioner the Assessing Officer again re-opened the assessment under section 147 by issuing notice dated 3.8.2007 and directed the petitioner to file returns of income. (e) Petitioner submitted a reply on 8.8.2007 and stated that the return filed on 31.10.2001 may be treated as return for reassessment. The petitioner also requested to furnish the reasons recorded for reopening the assessment. On 7.8.2008 the second respondent gave reasons for re-opening the assessment. (f) On receipt of the said reasons, petitioner filed its objections by letter dated 15.11.2008 and contended that there is no material or reason available for re-opening the assessment for the year 2001-2002 as all materials were disclosed in the returns already filed. The said objection was overruled by the second respondent by order dated 19.11.2008 by stating that notice under Section 148 of the Act for the accounting year 2001-2002 was issued by the Assessing Officer after getting prior approval of the appropriate authority of the department as per the provisions of Section 148. In the order dated 19.11.2008 it is stated that the petitioner has misrepresented the facts and therefore re-assessment notice was issued as deductions under Section 80HHC has been claimed by the assessee in excess by wrongly including the interest receipt as the business receipt. The benefit of deduction under section 80HHC has been wrongly claimed on interest receipts as export incentives. The receipt of compensation from M/s.CIBA India Pvt Ltd., for the cessation of supply agreement for the supply of Epichlorohydrin to Petro Araldite Pvt Ltd., has been wrongly shown as capital receipt without any basis. (g) Since the relevant material evidence was found after verification of the records of M/s.CIBA India Pvt Ltd, particularly the receipt of compensation was for the cessation of supply agreement for the purpose of supply of Epichlorohydrin to the petitioner, the same is directly related to business income. Further the claim of section 80IA has been wrongly made without reducing the 80HHC profits of the year as per the provisions of Section 80IA of the Act. Hence the objection raised was overruled and stated that the re-assessment proceeding were validly initiated. The petitioner was directed to produce the corresponding submission before the second respondent during the next date of hearing on 27.11.2008 at 4.00 p.m. 5. The respondents have filed counter affidavit stating that notice for re-assessment was issued on the information available on record relating to the assessment of M/s.CIBA India Pvt. Ltd., for the Assessment Year 2001-2002 wherein the entire amount of Rs.63.02 crores was stated to be paid only as compensation to the petitioner for terminating the supply agreement dated 22.1.1998 and entering https://hcservices.ecourts.gov.in/hcservices/ into the new supply agreement dated 22.3.2001. The petitioner has misrepresented the facts in the original returns of income by way of notes of account Schedule 12 under the heading 'Contingent Liabilities' and therefore there is non-disclosure of full and true material facts before the Income Tax Authorities. The petitioner's objection submitted for the re-assessment notice stating that mere change of opinion on the part of the Assessing Officer cannot be accepted in terms of Explanation-1 to Section 147 and the Judgment of the Delhi High Court reported in (2006) 281 ITR 394 (Consolidated Photo and Finvest Ltd v. Assistant Commissioner of Income-Tax) and the judgment of the Supreme Court reported in (1996) 221 ITR 538 (Sri Krishna (P) Ltd. v. ITO). Petitioner having wrongly stated the above receipt of Rs.63.02 crores under the heading 'Contingent Liabilities' in the notes of accounts and as there was no actual liability on the part of the petitioner during that year, the objection was overruled and speaking order was passed. The petitioner having wrongly claimed excess deductions under Section 80HHC by ignoring the provisions contained in Section 80IA(9) cannot contend that re-assessment notice was issued wrongly and the objection raised was also rejected. It is also stated in the counter affidavit that the writ petitions are not maintainable since the petitioner has an alternate remedy by way of filing appeal as prescribed under the Income Tax Act, 1961 if it is aggrieved, if a final order is passed after production of records by the petitioner for the re-assessment proceeding. 6. Heard the learned Senior Counsel for the petitioner and the learned Standing Counsel for the Income Tax Department. Several decisions were cited by both the counsels in support of their respective submissions. I have considered the rival submissions. 7. The re-assessment notice under Section 148 was issued on 3.8.2007 on finding out escaped assessment. For the said notice, the petitioner was informed of reasons by stating that verification of records of M/s.CIBA India Pvt. Ltd., for the Assessment Year 2001- 2002 revealed that they have paid compensation of Rs.63.02 crores to the petitioner for the termination of supply agreement. The said amount has been paid as compensation to the petitioner for terminating the supply agreement dated 22.1.1998 and for entering into supply agreement dated 22.3.2001. Though the petitioner company claimed the entire amount of Rs.63.02 crores as capital receipt, the facts gathered show that at least a part of it should be on revenue account. Therefore the entire sum could not have been paid to the assessee for surrender at its first right of purchase of CIBA's share. The petitioner Company continued to have its share in Petro Araldite. The substantial part of Rs.63.02 crores should be in relation to compensation for the alleged termination of contract and it should be treated as revenue receipt. The Supreme Court in the decisions reported in (1959) 35 ITR 148 (Commissioner of Income Tax, Nagpur v. Rai Bahadur Jairam Valji) and (1967) 63 ITR 651 (Miss Dhun Dadabhoy Kapadia v. Commissioner of Income Tax, Bombay) held that any https://hcservices.ecourts.gov.in/hcservices/ amount of compensation received for cancellation of supply agreement is only a business income. 8. The petitioner Company has also made wrong claim under Section 80HHC treating the interest receipt as export incentive. Therefore the second respondent has reason to believe that the income chargeable to tax has escaped assessment in view of the failure on the part of the assessee Company to disclose true and full material facts as required by proviso to Section 147. The objection raised by the petitioner was also considered and overruled by order dated 19.11.2008 and a direction was issued to consider the matter on merits to produce the corresponding submissions during the next hearing on 27.11.2008. 9. W.P.No.28457 of 2008 challenging notice dated 3.8.2007 is not maintainable after filing objections, which were overruled by the subsequent order dated 19.11.2008 and therefore the prayer made in W.P.No.28457 of 2008 has become infructuous even on the date of filing of the said writ petition on 28.11.2008 and the said writ petition is dismissed as infructuous. 10. The objections raised have been considered and overruled and the respondent is having an honest reason to believe that there is non-disclosure of true and full facts in the accounts already submitted. The requirement to initiate re-assessment under Section 147 of the Income Tax Act, 1961 is explained by the Honourable Supreme Court in the decision reported in (2010) 2 SCC 723 (Commissioner of Income Tax, Delhi v. Kelvinator of India Ltd.). In paragraphs 3 to 8 it is held thus: "3. After enactment of the Direct Tax Laws (Amendment) Act, 1987 i.e. prior to 1-4-1989, Section 147 of the Act reads as under: “147. Income escaping assessment.— If the assessing officer, for reasons to be recorded by him in writing, is of the opinion that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of Sections 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 depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in Sections 148 to 153 referred https://hcservices.ecourts.gov.in/hcservices/ to as the relevant assessment year):” (emphasis supplied) 4. After the Amending Act, 1989, Section 147 reads as under: “147. Income escaping assessment.— If the assessing officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of Sections 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 depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in Sections 148 to 153 referred to as the relevant assessment year):” (emphasis supplied) 5. On going through the changes, quoted above, made to Section 147 of the Act, we find that, prior to the Direct Tax Laws (Amendment) Act, 1987, reopening could be done under the above two conditions and fulfilment of the said conditions alone conferred jurisdiction on the assessing officer to make a back assessment, but in Section 147 of the Act (with effect from 1.4.1989), they are given a go-by and only one condition has remained viz. that where the assessing officer has reason to believe that income has escaped assessment, confers jurisdiction to reopen the assessment. Therefore, post-1-4-1989, power to reopen is much wider. However, one needs to give a schematic interpretation to the words “reason to believe” failing which, we are afraid, Section 147 would give arbitrary powers to the assessing officer to reopen assessments on the basis of “mere change of opinion”, which cannot be per se reason to reopen. 6. We must also keep in mind the conceptual difference between power to review and power to reassess. The assessing officer has no power to review; he has the power to reassess. But reassessment has to be based on fulfilment of certain precondition and if the concept of “change https://hcservices.ecourts.gov.in/hcservices/ of opinion” is removed, as contended on behalf of the Department, then, in the garb of reopening the assessment, review would take place. 7. One must treat the concept of “change of opinion” as an in-built test to check abuse of power by the assessing officer. Hence, after 1-4- 1989, the assessing officer has power to reopen, provided there is “tangible material” to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief. Our view gets support from the changes made to Section 147 of the Act, as quoted hereinabove. Under the Direct Tax Laws (Amendment) Act, 1987, Parliament not only deleted the words “reason to believe” but also inserted the word “opinion” in Section 147 of the Act. However, on receipt of representations from the companies against omission of the words “reason to believe”, Parliament reintroduced the said expression and deleted the word “opinion” on the ground that it would vest arbitrary powers in the assessing officer. 8. We quote hereinbelow the relevant portion of Circular No.549 dated 31-10-1989, which reads as follows: “7.2. Amendment made by the Amending Act, 1989, to reintroduce the expression ‘reason to believe’ in Section 147.—A number of representations were received against the omission of the words ‘reason to believe’ from Section 147 and their substitution by the ‘opinion’ of the Assessing Officer. It was pointed out that the meaning of the expression, ‘reason to believe’ had been explained in a number of court rulings in the past and was well settled and its omission from Section 147 would give arbitrary powers to the Assessing Officer to reopen past assessments on mere change of opinion. To allay these fears, the Amending Act, 1989, has again amended Section 147 to reintroduce the expression ‘has reason to believe’ in the place of the words ‘for reasons to be recorded by him in writing, is of the opinion’. Other provisions of the new Section 147, however, remain the same.” (emphasis supplied)" https://hcservices.ecourts.gov.in/hcservices/ Applying the said decision to the facts of this case, the proceedings initiated for re-assessment cannot be quashed at the threshold. It is open to the petitioner to produce records and satisfy the authority that there is no necessity for re-assessment and there was no suppression or non-disclosure of true and full accounts while submitting the returns for the original assessment and it is for the authority to consider all aspects and pass final orders. If any final order is passed after placing all the records and if that order is adverse to the petitioner, it is always open to the petitioner to file appeal before the appellate authority as well as before the Income Tax Appellate Tribunal and thereafter approach this Court. Thus, there are remedies available to the petitioner and the writ petition filed challenging the notice and overruling of objection for reassessment cannot be entertained in the light of the judgment of the Supreme Court reported in (2010) 4 SCC 772 : 2010 (4) LW 1 (Raj Kumar Shivhare v. Directorate of Enforcement). In the result, both the writ petitions are dismissed. No costs. It is made clear that no finding is rendered by this Court regarding the liability of the petitioner for paying any additional income tax and it is open to the Assessing Officer to decide the same on its own merits and in accordance with law. Sd/- Asst. Registrar //true copy// Sub Asst.Registrar vr To 1. The Commissioner of Income Tax, Large Tax Payer Unit, 1175, J.N.Inner Ring Road, Anna Nagar Western Extension, Chennai – 101. 2. The Assistant Commissioner of Income Tax, Large Tax Payer Unit, 1175, J.N.Inner Ring Road, Anna Nagar Western Extension, Chennai – 101. 2 cc to Mr.R.Venkatnarayanan, Advocate, Sr.No.68712 Common Order in W.P.No.28457/2008 & 19260/2009 RJ {CO} TP/28.9.2010. https://hcservices.ecourts.gov.in/hcservices/