Everest Kanto Cylinder Ltd. v. Union of India

1. Rule. Rule made returnable forthwith. By consent, taken up for final hearing.

2. Petitioner has impugned notice dated 27th March 2021 issued under Section 148 of the Income Tax Act, 1961 (“Act”) and also the order dated 30th November 2021 rejecting Petitioner’s objections.

3. Petitioner had filed its return of income on 30th November 2015 for Assessment Year (“AY”) 2015-16 declaring loss of Rs.84,81,34,368/- under normal provision of the Act and book loss of Rs.75,29,01,959/- under Section 115JB of the Act. The case was selected for scrutiny and assessment order for AY 2015-16 under Section 143(3) of the Act was passed on 25th December 2018 with assessed loss under the normal provisions of the Act at Rs.82,62,66,577/- and book loss under Section 115JB of the Act at Rs.74,88,93,282/-.

4. Subsequently, Petitioner received the impugned notice dated 27th March 2021 under Section 148 of the Act alleging escapement of the income assessable to tax for AY 2015-16. The reasons were recorded in a communication dated 17th November 2021 and the reasons read as under: "2. Subsequently on perusal of the records it was observed that the assessee had debited certain expenditure which was not allowable as per different provisions under Income Tax Act: a. Form 3CD (Annexure V) showed delayed remittance of Employees contribution to Employees Provident Fund on one occasion viz. Rs.3,47,819/- (Due date 20 Sep. 2014, Actual date 01 Oct 2014). b. Rs.65,00,000/- has been debited under the head Consultancy for project. It should be part of the Capital Work in progress of the project and not part of the P&L as it is not in the nature of revenue expense. c. Rs.11,08,024/- has been debited under Registrar and Share Transfer agent fees. It was to be treated as capital expenditure instead of revenuè expenditure. Thus, allowance of above three expenses resulted in aggregate under assessment of Rs.79,55,843/- (3,47,819+65,00,000+11,08,024). 2.[1] Therefore I am of the view that income to the extent of amount of Rs.79,55,843/-, as explained above, has escaped assessment. 2.[2] Further, it was observed that the Independent auditor had expressed its Qualified opinion on the Investment of Rs.69,25,07,000/- (Equity shares: Note-18 of Financials) in the assessees fully owned subsidiary in China M/s EKC Industries (Tianjin) C. Ltd. It mentioned that the investee company had significant accumulated losses and its value had substantially eroded and also that they were unable to comment upon its impact on the assessees financials, in the absence of appropriate evidences. Note-17 also indicated similar fact wherein majority stake of Rs.4,31,72,000/- was in its another subsidiary M/s Calcutta Compression & Liquefication Engineering Limited (CC&L). The net-worth of the Company had fully eroded. Provision for diminution in the value of these investments were also debited in the P&L Account however the same was added back in computation. However, the fact remained that the assessee had debited Rs.50,10,54,000/- (Previous year Rs.48,55,59,000/-) towards finance cost. Average borrowings of the assessee was as under: FY 2014-15 FY 2013-14 Average Long term borrowings 286,13,92,000/- 270,87,61,000/-278,50,76,500/- Short term borrowings 105,97,70,000/- 86,26,39,000/- 96,12,04,500/- Total Borrowings 392,11,62,000/- 357,14,00,000/-374,62,81,000/-(A) Interest paid 50,10,54,000/- 48,55,59,000/- 49,33,06,500/-(B) The interest rate (Bx100/A) on the above two years average borrowing and the finance cost debited works out to be 13.16%. Keeping in view that the investment was eroded and there was no possibility of any income therefrom, the proportionate interest from the aggregate investments of Rs.73,56,79,000/- (4,31,72,000/- 9,25,07,000/-), at the same rate of 13.16% amounting to Rs.9,68,15,356/- was required to be reversed and added back to income in terms of section 36(1)(iii) of the Act. Exact working could not be made due to absence of specific details hence the average of two years has been taken as base. Thus, the allowance of the same resulted in underassessment to the same extent. 2.[3] Therefore I am of the view that income to the extent of amount of Rs.9,68,15,356/-, as explained above, has escaped assessment."

5. Since the notice under Section 148 of the Act has been issued more than four years after the expiry of the relevant Assessment Year, proviso to Section 147 of the Act shall apply inasmuch as reassessment is not permissible unless there has been failure to truly and fully disclose necessary facts required for the assessment. A bare perusal of the reasons recorded would indicate that there is not even allegation in the notice that there was failure to fully and truly disclose material facts. Moreover, the entire basis is on perusal of the records filed by Petitioner. Paragraph 2 starts with words “Subsequently on perusal of the records, it was observed ……., Form 3CD (Annexure V) showed----------Rs.65,00,000/- has been debited under the head Consultancy for project.…… Rs.11,08,024/- has been debited under Registrar and Share transfer agent fees………........... ". Paragraph 2.[2] says "Further it was observed that the independent auditor had expressed its Qualified opinion on the investment......, Note 17 also indicated similar fact.......",“Provision for diminution in the value of these investments was also debited in P&L Account........ the assessee had debited…...towards finance cost”, etc. Therefore, the entire basis has been dug out from the records filed by Petitioner.

6. Mr. Suresh Kumar submitted that (a) there were audit objections because of which the reopening had to be made and (b) there is no discussion on the issue raised in the assessment order and hence, there is no question of change of opinion. Mr. Suresh Kumar also submitted that the issue of delayed remittance of employee’s contribution to Employees Provident Fund has been decided by the Apex Court in Checkmate Services (P) Limited v. Commissioner of where the Apex Court has held that the employee's contribution belatedly deposited by the employer-assessee should be treated as assessee’s income and cannot be allowed as deduction under Section 36(1)(va) of the Act. Though this is the law as laid down by the Apex Court, there is no failure to truly and fully disclose material facts. The delayed payment of employee's contribution to Employees' Provident Fund, had been disclosed admittedly by the assessee inasmuch as reason to believe itself records “subsequently, on perusal of the records, it was observed that the assessee had debited certain expenditure which was not allowable as per different provisions under the Income Tax Act......Form 3CD (Annexure V) showed delayed remittance of Employees contribution to Employees Provident Fund on one occasion……." Therefore, this certainly cannot form a reason to believe escapement of income in view of the 1 [2022] 143 taxmann.com 178 (SC) proviso to Section 147 of the Act.

7. It should also be noted that during the course of the original assessment proceedings, two notices dated 21st September 2018 and 27th November 2018 under Section 142(1) of the Act were issued calling upon Petitioner to furnish complete set of copy of the return of income, computation of income, audited P&L Account, balancesheet, tax audit report, Form 3CEB, details of professional/technical fees, commission on sales, etc. in the prescribed format, details of all statutory liability covered by Section 43(b) together with proof of payment and explanation as to how these were paid, details regarding finance cost, working of disallowance under Section 14A of the Act read with Rule 8D, etc. Petitioner was also called upon to show cause as to why the disallowance under Section 14A of the Act, disallowance of penalty expenses and mismatch in Section 26AS be added to Petitioner’s income. Petitioner admittedly gave detailed reply vide its letter dated 6th December 2018 and an assessment order dated 25th December 2018 came to be passed. In the assessment order, there was a disallowance of Rs.37 lakhs under Section 14A of the Act and the same was added to the total income of Petitioner under the normal provision as well as under Section 115JB of the Act. Therefore, as correctly submitted by Mr. Pardiwala, the points raised in the reasons recorded for reopening were also the subject of consideration during the assessment proceedings.

8. Further and admittedly, the reopening has been made based on audit objections. Petitioner was informed about the audit objections and Petitioner, vide its letter dated 10th July 2019, explained why there was no escapement of income as regards delayed remittance of employees contribution to Employees Provident Fund, consultancy charges of Rs.65 Lakhs and Registrar and Share Transfer Agent fees of Rs.11,08,024/- and disallowance of interest of Rs.9,68,15,386/under Section 36(1)(iii). In the affidavit in reply filed through one Dr. Deepak Shukla affirmed on 10th February 2022, it is admitted that based on the objections raised by the Audit Party, the reasons for reopening of assessment were recorded and belief was formed that income to that extent has escaped assessment. It is settled law as laid down in Indian & Eastern Newspaper Society v. CIT 2 that in every case, the Income Tax Officer must determine for himself what is the effect and consequence of the law mentioned in the audit note and whether in consequence of the law which has come to his notice, he can reasonably believe that income has escaped assessment. The basis of his belief must be the law of which he has now become aware. The opinion rendered by the audit party in regard to the law cannot, for the purpose of such belief, add to or colour the significance of such law. Therefore, the true evaluation of the law in its bearing on the assessment must be made directly and solely by the Income Tax Officer. Therefore, the Assessing Officer (“AO”) cannot reopen the 2 [1979] 2 Taxman 197 assessment relying on audit objections.

9. In affidavit in reply, it is also stated that there was no discussion on the issue raised in the reasons in the assessment order dated 25th December 2018 and, therefore, though primary details were filed by the assessee on the issue, no finding either positive or negative can be said to have been arrived at during the course of original assessment, hence, there is no question of change of opinion. One thing is quite clear that in the affidavit also, it is admitted primary details were filed by assessee. Therefore, the reopening of assessment is not permissible in view of the proviso to Section 147 of the Act. As held in Calcutta Discount Company Limited v. ITO[3], the duty of an assessee does not extend beyond the full and truthful disclosure of all primary facts. Once all the primary facts are before the assessing authority, he requires no further assistance by way of disclosure. It is for him to decide what inferences of facts can be reasonably drawn and what legal inferences have ultimately to be drawn. The Court held that while the duty of assessee is to disclose fully and truly all primary relevant facts, it does not extend beyond that.

10. A Division Bench of this Court in Aroni Commercials Limited v. Deputy Commissioner of Income-tax - 2(1)4 has held that once a query is raised during the assessment proceedings and the assessee 3 ITO [1961] 41 ITR 191 4 [2014] 44 taxmann.com 304 (Bombay) has replied to it, it follows that the query raised was a subject of consideration of the Assessing Officer while completing the assessment. It is not necessary that an assessment order should contain reference and/or discussion to disclose its satisfaction in respect of the query raised. The Court held that only requirement is that AO ought to have considered the objections now raised in the grounds for issuing notice under Section 148 of the Act during the original assessment proceedings. If that has been done, it would follow that the reopening of assessment by impugned notice will merely be on the basis of change of opinion of the AO from that held earlier during the course of assessment proceedings and that change of opinion does not constitute justification and/or reasons to believe that income chargeable to tax has escaped assessment.

11. It will be useful to re-produce paragraph 5 of the DIL Ltd. v. Assistant Commissioner of Income Tax, Circle 6(2) 5, which reads as under:

5 [2012] 18 taxmann.com 290 (Bom) Explanation (1) was introduced to include the amount or amounts set aside as provision for diminution in the value of investment. In view of the retrospective amendment of law by Parliament, the Assessing Officer may have reason to believe that income has escaped assessment. But that in itself is not sufficient for reopening an assessment beyond the period of four years. Beyond the period of four years when an assessment is sought to be reopened, there must be a failure on the part of the assessee to fully and truly disclose all material facts necessary for assessment. In fact, the retrospective amendment of law by Parliament would negate the inference which is sought to be drawn of the failure to disclose material facts. In so far as the business development expenditure of Rs. 10.79 lakhs is concerned, here again it is evident from the order of assessment that the claim of the assessee was disallowed by the Assessing Officer and the amount was added back to the income. Similarly, in regard to the gratuity and superannuation as well, there is merit in the contention of Learned Counsel that there is ex facie no failure on the part of the assessee to disclose the material facts. The reasons disclosed to the assessee on 11 July 2011, in fact, merely indicate a reason to believe that income has escaped assessment. There is no reference whatsoever to the formation of an opinion that there was a failure on the part of the assessee to fully and truly disclose all material facts. In these circumstances, the basis on which the reopening is sought to be effected is contrary to law. Rule is accordingly made absolute by quashing and setting aside the impugned notice dated 8 March 2011. There shall be no order as to costs." (emphasis supplied)

12. In the circumstances, Rule made absolute. Petition is allowed in terms of prayer clause (a), which reads as under: "(a) that this Hon'ble Court may be pleased to issue a Writ of Certiorari or a Writ in the nature of Certiorari or any other appropriate Writ, Order or direction and after going into the legality and propriety thereof, to quash and set aside the said notice ("Exhibit-H") and the order ("Exhibit-L"));"

13. No costs. (DR.NEELA GOKHALE, J.) (K. R. SHRIRAM, J.)