1 IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION WRIT PETITION NO.2514 OF 2009 Rallis India Limited, a Company incorporated under the provisions of the Companies Act, 1956 having its registered Office at Apeejay House, 3, Dinshaw Vachha Road, Mumbai – 400 020 ..Petitioner. Versus 1. Assistant Commissioner of Income Tax, Range 1(3), having his Office at 540, Aayakar Bhavan, M.K. Road, Churchgate, Mumbai – 400 020. 2. The Union of India, through the Secretary, Department of Revenue, Ministry of Finance, North Block, New Delhi – 110 001. ..Respondent. Mr.Percy J. Pardiwala, Senior Advocate with Mr.Jitendra Jain i/by Mr.Atul K. Jasani for the petitioner. Mr.Vimal Gupta for the respondent. 2 CORAM : Dr.D.Y. Chandrachud & J.P. Devadhar, JJ. DATE : 4th March, 2010. ORAL JUDGMENT (Per Dr.D.Y. Chandrachud, J.) 1. Rule. With the consent of Counsel, rule is made returnable forthwith. By consent of Counsel for both the parties, the petition is taken up for hearing and final disposal. 2. A notice was issued on 18th July 2008 under Section 148 of the Income Tax Act, 1961 (‘Act’) for re-opening an assessment for assessment year 2004-2005. An order has been passed on 30th November 2009 disposing of the objections filed by the petitioner to the re-opening of the assessment. Both the notice and the order have been challenged. 3. The petitioner filed its return of income for assessment year 2004-2005 on 29th October 2004 and declared a loss of Rs.52.87 crores. While computing this loss, the petitioner claimed a deduction of bad debts amounting to Rs.12,00,43,394/-. The petitioner also computed a book loss in the amount of Rs. 42,14,40,497/- under Section 115JB. The return of income was revised on 31st March 2006 so as to declare a loss of Rs.53.20 crores. The return was selected for scrutiny assessment by a notice under Section 143(2). The Assessing Officer issued two questionnaires during the course of the assessment proceedings, one of them being on 29th September 2006. A specific query was raised in regard to the allowability of the bad debts claimed by the petitioner under Section 36(1)(vii) 3 read with Section 36(2) and on the computation of book profits under Section 115JB. The petitioner responded to the queries by its letters dated 6th, 8th, 14th and 27th December 2006. The Assessing Officer passed an order of assessment on 29th December 2006, by which the claim in respect of bad debts was disallowed to the extent of Rs.5.54 crores. The Assessing Officer however allowed the claim to the extent of Rs.6.46 crores. After recomputing the book profits, the Assessing Officer assessed the income of the petitioner under Section 115JB at Rs.41.95 crores. While recomputing the book profits, the Assessing Officer rejected the exclusion on the profit of the sale of undertaking and fixed assets but accepted the computation in relation to other items. The petitioner thereupon preferred an appeal before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) by an order dated 26th June 2008 allowed relief to the petitioner in respect of the bad debts but confirmed the dis-allowance in respect of book profits under Section 115JB. As a result of the order passed by the Commissioner of Income Tax (Appeals), the entire claim on account of bad debts in the amount of Rs. 12 crores came to be allowed under Section 36(1)(vii). Cross-appeals filed by the petitioner and by the Revenue are pending before the Tribunal. 4. On 16th July 2008, a notice under Section 148 was issued to the petitioner by the Assessing Officer. The basis on which the assessment is sought to be re-opened is set out in the reasons supplied to the petitioner on 25th June 2009. For the purposes of convenience, it would be appropriate to extract the reasons as provided, which are as follows : “It is seen that the assessee has claimed bad debts and advances amounting to Rs.12,00,43,394/-. During assessment proceedings, the 4 assessee’s claim of Rs.5,54,19,503/- was disallowed and the balance claim of Rs.6.46.23.891/- was allowed to the assessee. 3. It is further noticed that the assessee has not debited any amount on account of write off of debts / advances to Profit and Loss A/c. as in Schedule 17 of Balance Sheet, the “Sundry Irrecoverable Balances Written off is shown at Nil. Moreover, the assessee has claimed bad debts written off by way of debiting Provision for Doubtful Debts and Advances. Further, while computing the Book Profit u/s. 114JB the assessee has not considered the following provisions made in the books of accounts. 1. Provision for doubtful debts Rs.13,46,95,323 2. Provision for doubtful advances Rs. 3,65,54,281 3. Provisions for doubtful debts Rs. 19,72,712 Being incorporate deposits subsidiaries 4. Provisions for diminution in value of investments Rs. 15,72,000 ---------------------- Rs.17,47,94,316 ========= 3. Thus, this has resulted in escapement of income of Rs. 23,94,18,207/- (Rs.6,46,23,891 + Rs.17,47,94,816) within the meaning of Section 147 of the I.T. Act, 1961. 4. Hence, I have reason to believe that there is escapement of income of Rs.36,21,500/- and accordingly it is a fit case for reopening u/s.147 of the I.T. Act, 1961 within the time limit of four years from the end of the relevant assessment year. Hence, the assessment for A.Y. 2004-05 is hereby re-opened.” The petitioner filed objections to the re-opening of the assessment on 13th November 2009. The objections have been disposed of by an order dated 30th November, 2009. 5. From the reasons which have been furnished to the petitioner while re-opening the assessment and the order that has been passed disposing of the objections, the basis on which the assessment is sought to be re-opened pertains to two items. The first relates to the write-off of bad debts in the amount of Rs.6.46 5 crores. The second relates to the computation of book profits under Section 115JB. In so far as the write-off of the bad debts is concerned, the Assessing Officer has stated that the petitioner had not debited any amount on account of write-off of debts / advances to the profit and loss account and that in Schedule 17 of the balance sheet, the sundry irrecoverable balances written off are shown at nil. While disposing of the objections of the petitioner, the Assessing Officer has again reiterated that the assessee has not debited an amount of Rs.6.46 crores in the profit and loss account and that consequently the assessee would not be entitled to allowance of bad debts under Section 36(2). In so far as the computation of book profits is concerned, the Assessing Officer has stated that the assessee had not considered the following provisions namely those relating to doubtful debts and advances and for the diminution in value of investments in the books of account. These are the two grounds on which the Assessing Officer has come to the conclusion that the income chargeable to tax had escaped assessment so as to warrant an exercise of the power to re-open the assessment under Section 147 of the Act. 6. Counsel appearing on behalf of the petitioner has challenged the basis on which the assessment is sought to be re-opened under both the heads noted earlier. In so far as the claim for bad debts is concerned, it was urged on behalf of the petitioner that during the course of the assessment proceedings, a detailed inquiry was made by the Assessing Officer. During the course of inquiry, the petitioner clarified by its letter dated 14th December 2000 that the write-off had been made out of debtors provided in the books of account for assessment years 6 2002-2003 and 2003-2004 and earlier years which income had been added back to the income and offered to tax in the respective assessment years. Since in the earlier assessment years, these amounts had been added back to the income and offered for taxation, a claim had been made during the assessment year in question as an allowable expense since the debts were not realizable and had been written off in the books of account. A list of the debts written off was provided to the Assessing Officer. Apart from this, during the course of assessment proceedings, the petitioner furnished a further clarification to the Assessing Officer on 27th December 2006. On the basis of the material provided, the Assessing Officer allowed the claim for bad debts to the extent of Rs.6.46 crores but made a dis-allowance to the extent of Rs.5.54 crores. In appeal, the Commissioner of Income Tax (Appeals) held that the entire claim was justified. Counsel submitted that the reasons which have been furnished by the Revenue for re-opening the assessment are extraneous to the provisions of Section 36(1)(vii) since the Statute does not require that the write-off of debts / advances be reflected in the profit and loss account for the assessment year in which the claim for deduction is made. In the present case, it was submitted that a debit was made to the profit and loss account in the initial year against which a credit was reflected in the provision for doubtful debts. No claim was made however for a deduction in the year in which a provision for doubtful debts was made by virtue of the explanation to Section 36(1)(vii). However, in the subsequent year when the debts in question were treated as having become bad and irrecoverable, the provision for doubtful debts was duly debited against a corresponding credit to the debtors’ accounts. In any event, it was submitted that the re-opening of the assessment was not warranted since the Assessing Officer had specifically applied his mind to the issue during the course of the assessment 7 proceedings. Moreover, the assessment is sought to be re-opened on a basis which is not contemplated by Section 36(1)(vii). 7. In so far as the computation of book profits under Section 115JB is concerned, Counsel appearing on behalf of the petitioner submitted that on the basis of the law as it then stood a provision for doubtful debts and advances and for diminution in the value of investments did not fall within the purview of clause (c) to explanation (1) to Section 115JB. This, it was submitted, was the law which held the field in view of the judgment of this Court in Commissioner of Income Tax V/s. Echjay Forgings Private Limited1 and the judgments of the Delhi High Court in Commissioner of Income Tax V/s. Eicher Limited2 and Commissioner of Income Tax V/s. HCL Comnet Systems and Services Limited3. As a matter of fact, it was submitted that the Supreme Court in the appeal which arose out of the judgment of the Delhi High Court in HCL (Supra) held that the provision for doubtful debts and advances could not be regarded as a provision for a liability other than an ascertained liability within the meaning of clause (c) of the Explanation (1) to Section 115JA. Consequently, the order of the Assessing Officer was consistent with the judgments of this Court and the Delhi High Court. The order of assessment is also in accord with the law as declared by the Supreme Court, though subsequently. As a matter of fact, Parliament stepped in after the judgment of the Supreme Court and amended the provisions of the Explanation to Section 115JB so as to specifically include the amount or amounts set aside as provision for diminution in value of asset as clause (i) to Explanation (1), by the 1 (2001) 251 ITR 15 2 (2006) 287 ITR 170 3 (2007) 292 ITR 299 (Delhi) 8 Finance Act of 2009. Though the amendment by the Finance Act of 2009 was with retrospective effect from 1st April 2001, the amendment was brought about after the notice was issued by the Assessing Officer, seeking to re-open the assessment. The validity of the notice of the Assessing Officer seeking to re-open the assessment would have to be determined on the law as it prevailed on the date of the notice having regard to the judgment of the Supreme Court in Commissioner of Income Tax V/s. Max India Limited4. 8. On the other hand, it was urged by Counsel on behalf of the Revenue that (i) Whether the bad debts had as a matter of fact been written off by the assessee was not clear during the course of assessment proceedings. Counsel submitted that the assessee had in Schedule 17 to the annual accounts for assessment year 2003-2004 reflected a nil provision for bad debts for the year ending 31st March 2004. Consequently, it was submitted that since the assessee had not written off the bad debts in the profit and loss account for the year ending on 31st March 2004 and had in fact shown nil debts under the head of bad debts in Schedule 17 dealing with the operating expenses, the assessee would not be entitled to a deduction under Section 36(1)(vii). On the second aspect of the matter, namely, the computation of book profits under Section 115JB, the submission of Counsel for the Revenue was that the issue was not raised during the course of the assessment proceedings. Consequently, it was submitted that the Assessing Officer was not precluded from re-opening the assessment under Section 147. Counsel submitted that the judgment of the Supreme Court in Max India Limited on which reliance has been placed must be confined to Section 80HHC of 4 (2008) 166 Taxman 188 (S.C.) 9 the Income Tax Act, 1961. 9. For convenience of exposition, it would be appropriate to take both the grounds, which have been furnished for re-opening the assessment separately. (A) THE CLAIM FOR BAD DEBTS : 10. During the course of the assessment proceedings, the assessee claimed a deduction of bad debts in the amount of Rs.12 crores. The computation of total income for assessment year 2004-2005 reflects inter alia income under the head of profits and gains of business or profession to which is added a provision for doubtful debts in the amount of Rs.13.46 crores. A separate provision was made for doubtful advances, doubtful debts by way of inter-corporate deposits to subsidiaries and for diminution in the value of investments. A deduction was thereupon specifically claimed on account of bad debts written off by debiting the provision for doubtful debts and advances to the extent of Rs.12 crores. During the course of the assessment proceedings, the Assessing Officer specifically applied his mind to the claim of the assessee for a deduction on account of bad debts. Two letters were addressed by the assessee to the Assessing Officer on 14th December 2006 and 27th December 2006. By these letters, the assessee clarified that the write-off had been made out of debtors provided for in the books of account for assessment years 2002-2003 and 2003-2004 and earlier years which had been added back to the income and offered to tax in the respective assessment years. However, the management confirmed that the debts were not realizable and were hence to be written-off in the books. Party-wise details of debts written-off were furnished to the Assessing Officer. The assessee clarified that since in the earlier years the amount had been added back to the income and offered for taxation, the claim is an 10 allowable expenses in the current year. The assessee also recorded that it had produced debtors’ accounts for verification. A list of debtors whose debts had gone unpaid due to closure of the business of the debtor, bankruptcy of the debtor or cessation of the business relationship between the assessee and the debtor was furnished. The assessee clarified that in respect of some of the debtors, there was an ongoing business relationship and efforts were being made to recover the debt; on recovery of the amount, it would be credited to the profit and loss account. On this basis the Assessing Officer initially allowed the claim for bad debts to the extent of Rs.6.46 crores. In appeal, the Commissioner of Income Tax (Appeals) however held that there was no justification to make a dis-allowance to the extent of Rs.5.54 crores since as a matter of business expediency , the assessee was justified in effecting a write-off. Consequently, the entire amount was allowed under Section 36(1)(vii). 11. Section 36(1) provides that the deductions provided for in its succeeding clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in Section 28. Clause (vii) postulates that subject to the provisions of sub-section (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year is allowable as a deduction. The explanation to clause (vii), which was inserted by the Finance Act of 2001, provides that for the purposes of the clause, any bad debt or part thereof written off as irrecoverable in the accounts of the assessee shall not include any provision for bad and doubtful debts made in the accounts of the assessee. Consequent upon the explanation, the write-off on account of bad debts has not been effected in those years in which a provision for 11 bad and doubtful debts has been made in the accounts of the assessee. In the present case, the narration of facts would show that during the course of the assessment proceedings, the Assessing Officer brought his mind to bear upon the question as to whether the assessee is entitled to claim a deduction under Section 36(1)(vii), with respect to bad debts, details of which were furnished to the Assessing Officer, pursuant to which an assessment order came to be passed under Section 143(3). The reason which weighed with the Assessing Officer to re-open the assessment is that the assessee has not debited any amount towards the write- off of debts / advances to the profit and loss account. Such a requirement is not contained in Section 36(1)(vii). In fact, it would also be necessary to notice at this stage that as a result of the order that was passed by the Commissioner of Income Tax (Appeals), the assessee has been allowed a deduction in the amount of Rs. 12,00,43,394/- which comprises of an amount of Rs.6.46 crores, which was allowed by the Assessing Officer and the amount of Rs.5.54 crores which came to be allowed in the order of the Commissioner of Income Tax (Appeals). The re-opening of the assessment is sought to be effected only in respect of the deduction of an amount of Rs.6.46 crores that was granted by the Assessing Officer and not in respect of the additional amount which was allowed by the order of the Commissioner of Income Tax (Appeals). The learned counsel appearing on behalf of the Revenue submitted during the course of hearing that the Assessing Officer was perhaps not aware of the order passed by the Commissioner of Income Tax (Appeals). The order of the Commissioner of Income Tax (Appeals) was passed on 26th June 2008 whereas the notice for re-opening the assessment was issued on 16th July 2008. 12. We are conscious of the circumstance that in the present case the re- 12 opening of assessment is sought to be effected within a period of four years of the expiry of the relevant assessment year. However, it is now a well settled position of law that a mere change of opinion would not justify the Assessing Officer in seeking a recourse to the powers under Section 147 and 148 and there must be tangible material before the Assessing Officer to prove that income chargeable to tax has escaped assessment. The principle that there must be tangible material on the basis of which an assessment is sought to be re-opened even within a period of four years is now established in view of the judgment of the Supreme Court in Commissioner of Income Tax V/s. M/s.Kelvinator of India Limited5. The Supreme Court has held thus : “.........Therefore, post 1st April, 1989, power to re-open 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 re-open assessments on the basis of “mere change of opinion”, which cannot be per se reason to re-open. We must also keep in mind the conceptual difference between power to review and power to re- assess. The Assessing Officer has no power to review; he has the power to re-assess. But re-assessment has to be based on fulfillment of certain pre-condition and if the concept of “change of opinion” is removed, as contended on behalf of the Department, then, in the garb of re-opening the assessment, review would take place. Once must treat the concept of “change of opinion” as an in-built test to check abuse of power by the Assessing Officer. Hence, after 1st April, 1989, Assessing Officer has power to re-open, provided there is “tangible material” to come to the conclusion that there is escapement of income from assessment.” In the present case, there was an absence of tangible material on the basis of which the assessment could have been re-opened. The reason which weighed with the Assessing Officer is extraneous to the basis on which the deduction can legitimately be claimed under Section 36(1)(vii). This is a case of a 5 320 ITR 561 (S.C.) 13 mere change of opinion without any tangible material. The re-opening of the assessment on this ground is hence unsustainable. B) COMPUTATION OF BOOK PROFITS : 13. The Assessing Officer has while re-opening the assessment stated that in the process of computing the book profits under Section 115JB the assessee had not considered the following provisions made in the books of account, namely (i) Provisions for doubtful debts; (ii) Provisions for doubtful advances; (iii) Provisions for doubtful debts being inter-corporate deposits to subsidiaries; and (iv) Provisions for diminution in the value of investments. While disposing of the objection of the assessee, the Assessing Officer has also noted that at the initial stage when the computation of income under the provisions of Section 115JB was made, the Assessing Officer had not formed any opinion nor had he called for details with regard to the provisions made under the heads noted above and while not adding the same to the total income. The issue which falls for determination is, as to whether the reasons which have been furnished by the Assessing Officer were germane to the provisions made for book profits in Section 115JB. 14. For the purposes of Section 115JB, explanation (1) provides that “book profit” means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2), as increased by the clauses that immediately follow. Sub-section (2) of Section 115JB provides that every assessee, being a company, shall, for the purposes of the section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956. Now, it is a settled 14 principle of law that for the computation of book profits under Section 115JB, the Assessing Officer has to accept the authenticity of the accounts maintained in accordance with the provisions of Parts II and III of Schedule VI of the Companies Act, 1956 which are certified by the auditors and passed by the company in its general meeting. The Assessing Officer does not have jurisdiction to go beyond the net profits as shown in the profit and loss account, save and except to the extent which is provided for in the Explanation. The Assessing Officer can increase the net profits as reflected in the profit and loss account prepared under Parts II and III of Schedule VI to the Companies Act, 1956 only to the extent that is permissible in the Explanation noted above. Apollo Tyres V/s. CIT6 and CIT V/s. HCL Comnet Systems and Services Limited7. Clause (c) of Explanation (1) deals with “the amount