Kimplas Trenton Fittings Ltd vs Circle - 10(3
2011 Latest Caselaw 89 Bom

                                    1                     WP 2140.11.sxw

    JPP




                                                                     
          IN THE HIGH COURT OF JUDICATURE AT BOMBAY
             ORDINARY ORIGINAL CIVIL JURISDICTION




                                             
                 WRIT PETITION NO. 2140 OF 2011

    Kimplas Trenton Fittings Ltd.
    B-29, MIDC, Ambad, Nasik.                  ... Petitioner.




                                            
          V/s.

    Asstt. Commissioner of Income-tax




                                       
    Circle - 10(3), Mumbai & Ors.              ... Respondents.
                       
    Mr. Jamshed D. Mistry, Senior Counsel with Mr. Sameer G.
    Dalal and Mr. Kunal U. Gokhale for the Petitioner.
    Mr. Tejveer Singh for the Respondents.
                      
                         CORAM : DR. D.Y. CHANDRACHUD &
                                     A.A. SAYED, JJ.

22 NOVEMBER 2011.

ORAL JUDGMENT (Per Dr. D.Y. Chandrachud,J.) :-

Rule, by consent returnable forthwith. With the consent

of Counsel and at their request the Petition is taken up for

hearing and final disposal.

2. The Petitioner has challenged a notice dated 25 March

2011 by which an assessment for Assessment Year 2004-05 is

sought to be reopened by the Assessing Officer.

2 WP 2140.11.sxw

3. The Petitioner filed its return of income for Assessment

Year 2004-05 on 31 October 2004. As the book profits under

Section 115 JB were higher than the tax on the total income,

the total income was computed under Section 115JB and a tax

of Rs.10.12 lakhs was paid. On 7 January 2005, a revised

return of income was filed by which an amount of Rs.1.10

crores representing a loan which was remitted by an Overseas

Lender was reduced from the total income declared by the

Petitioner.

4. The Petitioner had in 2001 obtained a loan of Swiss Franc

one million from a Company based in Switzerland, George

Fischer A.G. The loan was availed of for the purpose of

financing the acquisition of plant and machinery. The

Petitioner entered into an agreement for early repayment of

the loan during the previous year relevant to the Assessment

Year under which the Petitioner was to make a repayment of a

lesser amount against the outstanding principal amount in full

and final settlement of the dues. The balance representing

320,000 Swiss Francs equivalent to Rs.1.10 crores was

waived.

3 WP 2140.11.sxw

5. The case of the Petitioner was selected for scrutiny and a

notice was issued by the Assessing Officer under Section

142(1) and 143(2) on 6 September 2005. In the course of the

assessment proceedings, the Assessing Officer called upon

the Petitioner to submit details, inter-alia in respect of the loan

write back in the amount of Rs.1.10 crores. At that stage, in

response to a query, the Petitioner made the following

disclosure in a letter addressed by its Chartered Accountant

on 14 September 2006 :-

"During the previous year ending 31 March

2004, the assessee has entered into memorandum of understanding with Mrs. George Fischer AG Switzerland to settle outstanding balance of their

loan account to 4,80,000 Swiss Franc as against

the outstanding balance of 8,00,000 Swiss Franc. Thereby the assessee has written back 3,20,000 Swiss Frank equivalent to Rs.1,10,40,000 as the

loan not payable.

The writing back of a loan doesn't amount

the income under provisions of Income Tax Act 1961. The assessee has relied on the decision of Gujarat High Court in the case of CIT v/s. Chetan Chemicals Pvt. Ltd. 267 ITR page 770. The copy of the said decision is enclosed herewith."

4 WP 2140.11.sxw

6. Apart from this disclosure, in the revised computation of

income, the Petitioner had shown an amount of Rs.1.10 crores

as Sundry Credit Balances written back to the Profit and Loss

Account and not considered as income. A note appended to

the computation of income was as follows :-

" Sundry Credit Balance being Loan - the

remission of Liability Written Back Not Considered

as income - Relied on the decision of Gujarat High Court in the case of CIT v/s. Chetan Chemicals Pvt. Ltd. 267 ITR Page No.770."

7. The Assessing Officer passed an order of assessment on

29 September 2006, accepting the computation of income. A

notice under Section 148 was issued to the Petitioner on 25

March 2011 proposing to re-open the assessment for

Assessment Year 2004-05. In response to a request for the

disclosure of reasons, the following reasons have been

disclosed to the Petitioner by a communication dated 18

August 2011 :

" In the instant case, order u/s. 143(3) of the Act was passed on 29.09.2006 assessing NIL income after set-off of b/f losses to the extent of Rs.

5 WP 2140.11.sxw

1,19,97,158. Subsequently, it has come to the notice that the assessee had entered into MOA with

George Fischer, Switzerland for settlement of outstanding loan of Rs.1,10,40,000. However, the

said amount was not offered to tax by the assessee.

Therefore, I have reason to believe that income of Rs.1,10,40,000 has escaped assessment within the meaning of the provisions of Section 147

of the Act by reason of failure on the part of the assessee to disclose fully and truly all material

facts necessary for the assessment."

8. The petitioner lodged its objections to the re-opening on

29 August 2011 which have been disposed of by an order

dated 9 September 2011. The Assessing Officer has noted

that the Petitioner was required to make a full and true

disclosure of material facts and by virtue of Explanation 1 to

Section 147, the mere production of Books of Account or other

evidence from which material evidence could with due

diligence have been discovered by the Assessing Officer

would not necessarily amount to a disclosure within the

meaning of the proviso of Section 147. The Assessing Officer

has held that the claim of the Petitioner that there was no

6 WP 2140.11.sxw

failure to disclose fully and truly all the facts material to the

assessment is not correct.

9. Counsel appearing on behalf of the Petitioner submitted

that (i) The reopening of the assessment in the present case is

beyond a period of four years of the end of the relevant

Assessment Year; (ii) The jurisdictional condition for reopening

an assessment in such a case is that there must be a failure

on the part of the assessee to disclose fully and truly all

material facts

necessary for his assessment for that

Assessment Year; (iii) Both in the computation of income as

well as during the course of the assessment proceedings by a

letter dated 14 September 2006, the assessee had made a

disclosure of all primary facts viz. amount of the loan, the

agreement under which the loan liability was settled at a

lesser amount and the contention that the writing back of the

loan amount did not constitute income under the Income Tax

Act, 1961; (iv) The Assessing Officer in his order under Section

143(3) accepted the computation of income. Hence, on a

mere change of opinion, it is not open to the Assessing Officer

to reopen the assessment.

7 WP 2140.11.sxw

10. On the other hand, Counsel appearing on behalf of the

Revenue submitted that (i) The assessee had not made a full

and true disclosure of the material facts; (ii) The assessee

ought to have disclosed whether the loan represented a

capital liability; (iii) The loan was taken for the purchase of

plant and machinery. It is not clear as to whether the asset

was reflected in the balance-sheet of the assessee. The

learned Counsel for the Revenue has states before the Court

that the Revenue does not intend to file a reply to the Petition,

and submissions would be urged on the record before the

Court.

11. In the present case, admittedly, the reopening of the

assessment is beyond a period of four years of the end of the

relevant Assessment Year. The jurisdictional condition under

Section 147 in such a case is that there must be a failure on

the part of the assessee to disclose fully and truly all material

facts necessary for the assessment for that Assessment Year.

As noted earlier, in the narration of facts, there was a

disclosure by the assessee during the course of the

assessment proceedings of the fact that (i) During the

previous year ending 31 March 2004, a Memorandum of

8 WP 2140.11.sxw

Understanding (MOU) was entered into with a Swiss Company;

(ii) Under the MOU, the outstanding balance of the loan was

settled at Swiss Francs 480,000 as against the outstanding

balance of 800,000 Swiss francs; (iii) The assessee has

written back an amount equivalent to Swiss Francs 320,000

equivalent to Rs.1.10 crores as a loan not payable. The

assessee relied upon a decision of the Gujarat High Court in

CIT v/s. Chetan Chemicals Pvt. Ltd.1 in support of the

income.

submission that the writing back of a loan did not constitute

Whether the assessee is right in making this

submission would assume significance if the jurisdictional

requirement is met. The reopening of the assessment is not

within a period of four years. Where the re-opening is beyond

four years, the escapement of income is not sufficient in itself

to validate the reopening. The jurisdictional requirement

where an assessment is opened beyond four years is a failure

to disclose all material facts necessary for the assessment.

Unless that condition is fulfilled, the re-opening cannot be

sustained. All material facts were within the knowledge of

the Assessing Officer and were placed on the record by the

assessee. The reasons which have been recorded by the

1 267 ITR 770

9 WP 2140.11.sxw

Assessing Officer for reopening the assessment purport to

state that subsequently, that is to say after the order of

assessment under Section 143(3) was passed on 29

September 2006, it has come to notice that the assessee had

entered into an MOU with the Swiss Company for settlement

of the outstanding loan which was however not offered to tax.

Ex-facie, this reason is contrary to the record. This is not a

fact which has subsequently come to notice but is something

which was within the knowledge of the Assessing Officer. The

Revenue has not either by filing an affidavit or in the

submissions of Counsel disputed that a disclosure was made

in the assessee's letter dated 14 September 2006.

Explanation 1 to Section 147 which is sought to be relied upon

by the Assessing Officer has no application. This is not a case

where an assessee has merely produced account books and

other evidence from which material evidence could have with

due diligence been gathered by the Assessing Officer. The

assessee had both in a note appended to the computation of

income and in its letter dated 14 September 2006 brought the

attention of the Assessing Officer to bear on the primary facts.

Hence for this case, the correctness of the claim of the

10 WP 2140.11.sxw

assessee, as granted upon the acceptance of the computation

in the original order of assessment, does not fall for

determination here. All primary facts for making the claim

were disclosed to the Assessing Officer. Even assuming that

there was an error on the part of the Assessing Officer, that

cannot legitimately be the basis for re-opening assessment

beyond four years unless a failure of the assessee to disclose

truly all material facts for the assessment caused it. That is

not the case here.

12. In the circumstances, on the basis of the record, as it

stands, it is not possible to come to the conclusion that there

was a failure on the part of the assessee to disclose fully and

truly all the material facts necessary for the assessment. The

Petitioner is, therefore, entitled to succeed. Rule is made

absolute by setting aside the notice under Section 148 dated

25 March 2011, purporting to reopen the assessment for

Assessment Year 2004-05. There shall be no order as to costs.

(Dr. D.Y. Chandrachud, J.)

(A.A. Sayed, J.)