Bombay High Court
Everest Kanto Cylinder Ltd vs Union Of India And 3 Ors on 29 January, 2024
Author: K.R.Shriram
Bench: K. R. Shriram, Neela Gokhale
Digitally
2024:BHC-OS:1712-DB
signed by
SHAMBHAVI
SHAMBHAVI NILESH 1/10 412-oswp-243-2022.doc
NILESH SHIVGAN
SHIVGAN Date:
2024.01.31
19:45:30
+0530 IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
WRIT PETITION NO.243 OF 2022
Everest Kanto Cylinder Ltd.
A Public Limited Company, incorporated
under the provisions of The Companies Act,
2013 (erstwhile 1956),
Having its registered office at
204, Raheja Centre, 214, Free Press Journal
Marg, Nariman Point,
Mumbai 400 021, Maharashtra
PAN No.AAACE0836F ...Petitioners
Versus
1. Union of India
Ministry of law,
Ayakar Bhavan, M.K.Road,
Mumbai-400 020.
2. Deputy/Assistant Commissioner of Income
Tax-3(4), Mumbai
World Trade Centre-1, Cuffe Parade,
Mumbai, Maharashtra-400005
Email: [email protected]
3. Assistant Commissioner of Income Tax,
LTU Circle-1, Mumbai
Having his office at Maharishi Karve Road,
Churchgate, Mumbai, Maharashtra-400020
Email: [email protected]
4. Assistant Commissioner of Income Tax,
LTU Circle-2, Mumbai
Having his office at World Trade Centre-1,
Cuffe Parade, Mumbai,
Maharashtra 400005.
Email: [email protected] ..Respondents
Mr. P. J. Pardiwalla, Senior Advocate, with Ms. Aarti Sathe, i/b Ms.
Aasavari Kadam, for Petitioner.
Mr. Suresh Kumar, for Respondents-Revenue.
CORAM: K. R. SHRIRAM &
DR.NEELA GOKHALE, JJ.
DATED: 29th January 2024
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Oral Judgment:- (Per K.R.Shriram, J.)
1. Rule. Rule made returnable forthwith. By consent, taken up for
final hearing.
2. Petitioner has impugned notice dated 27 th 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 30 th 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 17 th 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
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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
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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
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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
Income Tax-11 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)
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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 21 st 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, balance-
sheet, 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.
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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 10 th 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
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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)
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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. Admittedly the position is that the reopening in the
present case, by a notice dated 8 March 2011 for Assessment
Year 2004-05 is beyond the period of four years from the end
of the assessment year. The reasons for reopening contain
absolutely no reference to there being any failure on the part
of the assessee to fully and truly disclose all material facts
necessary for assessment. We, therefore, find merit in the
contention of Counsel appearing on behalf of the Assessee
that the primary requirement set out in the proviso to Section
147 has not been fulfilled. That apart, it is evident that in so
far as the diminution in the value of investment of Rs. 1.28
crores is concerned, Explanation (1)(i) was inserted into the
provisions of Section 115JB by the Finance (No. 2) Act, 2009
with retrospective effect from 1 April 2001. Clause (i) of
5 [2012] 18 taxmann.com 290 (Bom)
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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.)
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