Commissioner Of Income Tax vs The Simbhaoli Sugar Mills Limited
2011 Latest Caselaw 1365 Del

*             IN THE HIGH COURT OF DELHI AT NEW DELHI


+             ITA Nos.1391/2009, 1362/2009 & 1130/2009

%
                        Date of Decision: 09.03.2011

Commissioner of Income Tax                    .... APPELLANT
              Through: MS.Prem Lata Bansal, Sr. Advocate with
                       Mr.Deepak Anand, Advocates

                                     Versus

The Simbhaoli Sugar Mills Limited            .... RESPONDENT
               Through: Mr.Ajay Vohra, Advocate

CORAM:
HON'BLE MR. JUSTICE A.K. SIKRI
HON'BLE MR. JUSTICE M.L. MEHTA


1.    Whether reporters of Local papers be               Yes.
      allowed to see the judgment?
2.    To be referred to the reporter or not?             Yes.

3.    Whether the judgment                 should   be   Yes.
      reported in the Digest?


M.L. MEHTA, J. (ORAL)

*

1. The aforesaid three appeals are being disposed of by this

common order as these relate to same assessee, for the same

assessment year and have common questions of law.

2. The facts leading to filing of these appeals in brief are that for

the assessment year 1997-98, assessee filed return at a total

loss of about Rs.17.20 crores. This return was processed under

Section 143(1)(a) of the Income Tax Act (hereinafter referred to

as "the Act"). Subsequently, the case was selected for scrutiny

and assessment was completed under Section 143(3) of the Act

on 26th November, 1999 at a total loss of about Rs.5.28 crores

after making certain additions and unabsorbed losses and

depreciation. The assessee preferred appeal before the

Commissioner, Income Tax (Appellate) [hereinafter referred to as

"CIT(A)], who allowed certain reliefs to the assessee and after

giving effect to the appellate order, the assessment order for the

year under consideration was revised on a net loss of about

Rs.5.33 crores. Subsequently, after expiry of four years, on the

basis of information available with the Department primarily

based on the audit report, it surfaced that certain income

chargeable to tax has escaped assessment for the assessment

year under consideration and based on this, the Assessing

Officer issued a notice dated 31.03.2004 under Section 148 of

the Act followed by another notice under Section 143(2) read

with section 148 of the Act dated 20.10.2004. Accordingly, re-

assessment proceedings were completed on a total income of

Rs.56,23,890/-. Simultaneously, penalty proceedings were also

initiated against the assessee under Section 271(1)(c) of the Act

allegedly for furnishing inappropriate particulars of income and a

penalty of Rs.2.54 crore was imposed by the Assessing Officer.

The assessee preferred an appeal before the CIT(A), Ghaziabad,

who vide his order dated 19.10.2005 dismissed the appeal and

confirmed the additions made by the Assessing Officer. The two

main additions were - (i) excise duty payable on stock of finished

goods amounting to Rs.3,89,33,833/-, (ii) interest incurred on the

term loan to the tune of Rs.1,99,96,463/-. It was observed by

CIT(A) that as per note (V) and (9) of the Audit Report, the duty

which has already been paid on unsold stock forms part of the

closing stock and, therefore, amount of Rs.3,89,33,833/- should

have formed part of closing stock as liability to pay the same has

already arisen during the course of year though the same was

paid by the assessee before the filing of the return of the

assessment year under consideration. Based on this opinion,

the said amount was added to the income of the assessee.

Likewise, with regard to the deduction of Rs.1,99,96,463/-

claimed by the assessee as interest on term loan, the CIT(A)

upheld the view of the Assessing Officer that the assessee had

incurred the said expenditure for the acquisition of fixed assets,

which is directly attributable to the cost of the plant/fixed asset

and, hence, any interest payable thereof is of the nature of the

capital expenditure and not revenue expenditure. Consequently,

this was also added to the income of the assessee. The assessee

filed appeal against this order before the Income Tax Appellate

Tribunal (hereinafter referred to as "the Tribunal"), which

allowed the appeals holding as under:

"4. We have carefully considered the rival contentions and gone through the records. In our view, the proceedings for re-assessment u/s 148 cannot be sustained for more than one reason. First of all, the original assessments were completed u/s 143(3) of the Act on the basis of the return filed and the re-assessment proceedings are initiated beyond the expiry of 4 years from the end of the AY in question. In respect of each of the issues that were subject matter of re-assessment proceedings, the assessee has made full and complete disclosure and the AO framed opinion of those issues. Except for the audit objection, there appears to be no material whatsoever for issuance of the notice u/s 147 of the Act. So, in these circumstances, we accept the contention of the assessee that re-assessment proceedings are based on mere change of opinion and not on any valid material and it is now sell settled that an opinion of an internal audit party of the I.T. Deptt. on a point of law cannot be regarded as an information within the meaning u/s 147 of the Act. Having regard to these discussions, we cancel the re- assessment proceedings framed u/s 148 of the Act. As we have cancelled the reassessment on the point of jurisdiction, we do not find it necessary to go into the merits of the case. Accordingly, appeal is allowed."

3. Against this order, the Revenue has come in appeal in ITA

No.1391/2009.

4. In the appellate penalty proceedings, CIT(A) vide its order dated

15.12.2006 following the order of quantum proceedings

cancelled the penalty with reference to the first addition, viz.,

Rs.3,89,33,833/- in respect of excise duty but sustained the

penalty with reference to the second addition, namely,

Rs.1,99,96,463/- in respect of interest on capital borrowed for

acquiring assets for business purpose. The CIT(A) while

disposing of the two appeals, recorded as under:

"..... After considering all the facts and circumstances of the case, as discussed above, in this case there is no element of mensrea pertaining to either concealment or furnishing of inaccurate. It is only the consistent view of the Department pertaining to treatment of excise duty payable, it has been looked at differently in the assessment order. As such, penalty levied on the addition made of Rs.3,89,33,833/- on account of treatment of excise duty payable is cancelled."

"..... The facts on record establish that the appellant has furnished in accurate particulars to the extent of Rs.1,99,96,463/- by claiming the same as revenue expenditure. As such it is held that the AO was justified in levying penalty u/s 271(1)(c) on the addition of Rs.1,99,96,463/- by holding that the assessee has furnished in accurate particulars thereof. The penalty levied u/s 271(1)(c) on this account is confirmed."

5. Both Revenue and the assessee filed cross-appeals before the

Tribunal against the aforesaid order dated 15.12.2006 of the

CIT(A). Both the cross-appeals were disposed of vide second

impugned order also dated 07.11.2008 by the Tribunal. Vide

this impugned order, the appeal of the assessee was allowed,

i.e., the penalty in relation to Rs.1,99,96,463/- was also

cancelled. The appeal of the Revenue against the CIT(A)‟s order

relating to cancellation of penalty with reference to addition of

Rs. 3,89,33,833/- in respect of excise duty was dismissed. The

Tribunal held as under:-

"3. The issue with regard to the claim of interest on monies borrowed for acquiring the fixed assets for business purposes, although, the CIT(A) has upheld the penalty in respect of the addition, the same is subject matter of contest before the ITAT. The assessee has filed before us, the copy of the order of the Tribunal wherein the issue of allowability of the interest in respect of the assessee in the AY 2001-02 has been decided in favour of the assessee. This clearly shows that this is not an addition in respect of which a penalty can be validly levied u/s 271(1)(c) of the Act, on the charge of concealment. Therefore, in our considered opinion, penalty cannot be levied even in respect of the second addition u/s 271(1)(c). We, therefore, cancel the penalty sustained by the CIT(A)."

6. From the above chronological narration of facts and the findings

recorded by the authorities below, it is seen that the basis of

issue of notice under Section 148 for re-assessment for the

assessment year under consideration was nothing but the

internal audit report. In the Reasons to Believe as recorded by

the AO, he had mentioned about the objections as raised in the

audit report. Based on this audit report, a review was sought to

be made by the AO under the name of re-assessment alleging

escape of income in the assessment already concluded. With

regard to the aforesaid two entries, the particulars were already

available before the AO. The assessee had made complete

disclosure of the particulars before the AO in the proceedings of

assessment under Section 143(3).

7. Reopening of assessment after four years was apparently not

permissible. There is a catena of judgments with regard to the

proposition of law that assessment cannot be reopened under

Section 147 of the Act merely on the basis of change of opinion

beyond the period of four years when there was no fault on the

part of the assessee to disclose, truly and completely the

material particulars. Reference in this regard can be made to

some of the judgments of our own High Court and that of

Supreme Court. In Commissioner of Income Tax v. Goetze

(India) Ltd., (2010) 229 CTR 167, reliance was placed on the

judgment of CIT v. Kelvinator of India Ltd.,(2002) 174 CTR

(Del) 174, a judgment of our High Court wherein it was

specifically observed that when a regular order of assessment is

passed in terms of Section 143(3) a presumption can be raised

that such an order has been passed on application of mind. It

was also pointed out that a presumption could also be raised to

the same effect in terms of Clause (e) of Section 114 of the

Indian Evidence Act indicating that judicial and official acts had

been regularly performed. The Full Bench observed that if it were

to be held that an order that has been passed purportedly

without application of mind, would itself confer jurisdiction upon

the AO to re-open the proceedings without anything further, the

same would amount to giving premium to an authority exercising

a quasi-judicial function to take benefit of its own wrong. The Full

Bench decision also makes it clear that Section 147 of the Act

does not postulate conferment of power upon the AO to initiate

reassessment proceedings upon a mere change of opinion. It is

obvious that the Full Bench Decision holds the field.

8. It may also be noted that appeal arising out of the aforesaid Full

Bench decision of this Court has also been dismissed by the

Supreme Court in the case of Commissioner of Income Tax V.

Kelvinator of India Ltd., (2010) 228 CTR (SC) 488. The

Supreme Court, after observing the changes and amendments

brought about in Section 147, from time to time, held as under:

"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 AO 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 AO 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. One must treat the

concept of "change of opinion" as an inbuilt test to check abuse of power by the AO.

9. In another case of our High Court entitled Commissioner of

Income Tax v. Eicher Ltd., (2007) 294 ITR 310 (Delhi), after

making reference to different judgments of various High Courts,

it was observed that if the entire material had been placed by

the assessee before the Assessing Officer at the time when the

original assessment was made and the Assessing Officer applied

his mind to that material and accepted the view canvassed by

the assessee, then merely because he did not express this in the

assessment order, that by itself would not give him a ground to

conclude that income has escaped assessment and, therefore,

the assessment needed to be reopened. On the other hand, if the

Assessing Officer did not apply his mind and committed a lapse,

there is no reason why the assessee should be made to suffer

the consequences of that lapse.

10. In the case of Commissioner of Income Tax, Delhi-XI v.

Batra Bhatta Company, (2008) 174 Taxman 444 (Delhi),

another Division Bench of our High Court held as under:-

"7 . We feel that the observations of the Supreme Court in the aforesaid decision clearly apply to the case at hand. Merely because the Assessing Officer felt that the issue required „much deeper scrutiny, is not ground enough for invoking Section 147. It is not belief per se that is a pre-

condition for invoking Section 147 of the said Act but a belief founded on reasons. The expression used in Section 147 is - "If the Assessing Officer has reason to believe" and not - "If the Assessing Officer believes". There must be some basis upon which the belief can be built. It does not matter whether the belief is ultimately proved right or wrong, but, there must be some material upon which such a belief can be founded. In the present case, the Commissioner Income-tax (Appeals) as well as the Tribunal have found as a fact that there was no material upon which the Assessing Officer could have based his belief that income had escaped assessment."

11. There is also catena of judgments to the effect that initiation of

reassessment proceedings on the basis of audit report objections

is bad in law. A reference in this regard can be made to

judgment of our High Court titled Transworld International

Inc. v. Joint Commissioner of Income Tax, (2005) 273 ITR

242 and also judgments of Supreme Court in Indian and

Eastern Newspaper Society v. Commissioner of Income

Tax, New Delhi, (1979) 119 ITR 996 and Commissioner of

Income Tax v. Lucas T.V.S. Ltd., (2001) 249 ITR 306.

12. The sum and substance of discussion is that reassessment

proceedings under Section 147 read with 148 of the Act cannot

be initiated merely based on the audit report . An audit is

principally intended for the purpose of satisfying the auditor with

regard to sufficiency of rules and procedures prescribed for the

purpose of securing an effective check on the assessment,

collection and proper allocation of revenue. As per para (3) of

the circular issued by the Board on July 28, 1960, also an audit

department should not in any way substitute itself for the

revenue authorities in the performance of their statutory duties.

13. In view of our foregoing discussion, we are in complete

agreement with the conclusion arrived at by the Tribunal in the

impugned orders.

14. As we do not find any infirmity in the aforesaid impugned orders,

no substantial question of law arises. Consequently, all the

appeals are dismissed.

                                                     M.L.MEHTA
                                                      (JUDGE)



                                                      A.K. SIKRI
MARCH 09, 2011                                         (JUDGE)
„Dev‟