THE HIGH COURT OF DELHI AT NEW DELHI
% Judgment delivered on: 23.05.2013
+ W.P.(C) 284/2013
M/S MICROSOFT CORPORATION (I) PVT. LTD ..... Petitioner
versus
DEPUTY COMMISSIONER OF INCOME TAX
AND ANR ..... Respondents
Advocates who appeared in this case:
For the Appellant : Mr Nageswar Rao, Mr Sandeep S. Karhail
and Ms Sayaree Basu Mallik
For the Respondent : Mr N.P. Sahni, with Mr Ruchesh Sinha
CORAM:-
HON'BLE MR JUSTICE BADAR DURREZ AHMED
HON'BLE MR JUSTICE VIBHU BAKHRU
JUDGMENT
BADAR DURREZ AHMED, J (ORAL)
1. The petitioner has challenged the reopening of assessment in respect of
the assessment year 2005-06, which was initiated by virtue of a notice under
Section 148 of the Income-tax Act, 1961 (hereinafter referred to as "the Act") on
26.03.2012. The point of challenge raised by the petitioner is that the reopening
of assessment was sought to be done after a period of four years, therefore, the
conditions stipulated in the proviso to Section 147 of the Act would have to be
complied with. One of the conditions was that a reopening could not be done
until and unless there was failure on the part of the assessee to make a full and
true disclosure of all material facts which were necessary for the assessment. It
was contended by the learned counsel for the petitioner that in the present case,
W.P.(C) No.284/2013 Page 1 of 31
this pre-condition was not satisfied inasmuch as (a) there is no mention or
allegation that there was no full and true disclosure on the part of the assessee in
the purported reasons behind the reopening of the assessment in respect of
assessment year 2005-06; and (b) in fact there was a full and true disclosure on
the part of the assessee and even no inference could be drawn from the purported
reasons that there was no such full and true disclosure. It was also contended by
the learned counsel for the petitioner that this was also a case of a mere change of
opinion and, therefore, in view of the settled principles of law, the attempt at
reopening the assessment which had been completed under Section 143(3) of the
Act on 24.12.2008, was not supported by law.
2. The learned counsel for the petitioner drew our attention to the purported
reasons which had been recorded prior to the issuance of the notice under Section
148 of the Act. The said recorded reasons read as under:-
"Reasons recorded u/s 147 of the I.T. Act, 1961
1. Section 37 of the Income Tax Act, 1961 provides that any
expenditure, not being in the nature of capital expenditure, laid out
wholly or exclusively for the purpose of business, is allowable as
deduction in computation of the income chargeable under the head
`profits and gains of business or profession'.
i. The assessment of M/s Microsoft Corporation (India) Pvt.
Ltd. for the assessee year 2005-06 was completed u/s 143(3) of the
Income Tax Act in December 2008 determining Rs. 57,65,41,440/-
as taxable income. It is found that the assessee had claimed and was
allowed a deduction of Rs. 1,49,11,728/- on campaign expenditure
for the launch of new product. Since this expenditure gave an
enduring benefit to the assessee, it was required to be capitalized
and added back to the income of the assessee. The omission resulted
in allowance of inadmissible expenditure of Rs. 1,49,11,728/-
involving short levy of income tax of Rs. 79,12,032/-including
interest u/s 234B.
W.P.(C) No.284/2013 Page 2 of 31
2. Under section 43B of the Income Tax Act, any sum payable
to an employee as bonus or commission for services rendered are
deductible on actual payment basis. Section 145 of the Income Tax
Act, 1961, provides that income under the head "profits and gain of
business or profession" is computed in accordance with the method of
accounting regularly employed by the assessee. Where the assessee
follows mercantile system of accounting, the annual profits are
worked out on due or accrual basis i.e. after providing for all expenses
for which a legal liability has arisen and taking credit for all receipts
that have become due regardless of their actual receipt or payment.
Only such expenses are allowable as deduction from a previous year's
income as are relevant to that year.
i. It is found that the assessee pre-existing liability of Rs.
3,69,83,105/- in respect of Bonus payable [Annexure VIII of the Tax
Audit (3CD) report] against which the assessee had paid Rs.
6,34,63,086/- during the year. Thus, the assessee had made payment
of Rs. 2,64,79,981/- relating to prior period, which was in excess of
the pre-existing liability allowable under section 43B. Therefore, the
payment of business in excess of pre-existing liability was required to
be added back to the taxable income of the assessee. The omission in
taking into account the inadmissible expenditure resulted in
allowance of prior period expenditure of Rs. 2,64,79,981/- in respect
of pre-existing liability involving short levy of income tax of Rs.
1,40,50,046/- including interest u/s 234B.
3. Section 40A(7) of the Income Tax Act provides that no
deduction is allowed in computing business income in respect of a
mere provision made by the assessee in his books of account for the
payment of gratuity to his employees. The provision made for the
purpose of payment of sums by way of contribution towards the
approved gratuity fund that has become payable during the previous
year or for the purpose of making any payment on account of gratuity
that has become payable during the previous years is, however eligible
for deduction.
i. It is that the assessee was allowed a deduction of Rs.
76,35,763/- towards provision for payment of gratuity. However this
payment has been depicted as inadmissible expenditure in column
17(i) of the Tax Audit (3CD) report submitted by the assessee.
Therefore, this expenditure is required to be added back to the taxable
W.P.(C) No.284/2013 Page 3 of 31
income of the assessee. The omission in taking into account the
inadmissible expenditure resulted in allowance of excess deduction of
Rs. 76,35,763/- involving short levy of income tax of Rs. 40,51,469/-
including interest u/s 234B.
4. Section 143(3) of the Income Tax Act, 1961 provides that
in a scrutiny assessment, the Assessing Officer is required to make
a correct assessment of total income or loss of the assessee and
determine the correct sum payable by him or refundable to him on
the basis of such assessment.
i. It is found that the Assessing Officer had disallowed the claim
of the assessee for depreciation on ITG Networking equipments
@60% and depreciation @25% was allowed to the assessee.
However, the allowable depreciation was incorrectly computed in the
para 4.3 of the assessment order. Due to this omission, the excess
depreciation Rs. 42,38,742/- was added back to the income of the
assessee instead of actual figure of Rs. 56,58,417/-. The mistake
resulted in under assessment of income by Rs. 14,19,945/- involving
short levy of tax of Rs. 7,53,410/- including interest u/s 234B.
5. Section 37 of the Income Tax Act, 1961 provides that any
expenditure, not being in the nature of capital expenditure, laid out
wholly or exclusively for the purpose of business, is allowable as
deduction in computation of the income chargeable under the head
`profits and gains of business or profession'.
i. It is found that the assessee claimed and was allowed 100%
revenue expenditure on the following computer / software related
expenditure - (i) deduction of Rs. 3,37,81,547/- on 'translation of
courseware / software in local language', and (ii) deduction of Rs.
88,49,138/- on design content and maintenance of website. Since this
expenditure gave an enduring benefit to the assessee, it was required to
be capitalized and the assessee was eligible for depreciation @60% on
these capital expenditure. The omission resulted in underassessment of
income by Rs. 1,70,52,274/- involving short levy of tax of Rs.
90,47,787/- including interest u/s 234B.
6. Section 37 of the Income Tax Act, 1961 provides that any
expenditure, not being in the nature of capital expenditure, laid out
wholly or exclusively for the purpose of business, is allowable as
W.P.(C) No.284/2013 Page 4 of 31
deduction in computation of the income chargeable under the head
`profits and gains of business or profession'.
i. It is found that the assessee claimed and was allowed
deduction of Rs. 88,50,8411- for expenditure on 'consultancy for
development of marketing strategy' and Rs. 4,54,41,136/- (Rs.
3,61,60,538/- + Rs. 92,80,598/-) on 'market research'. Since the
expenditure on marketing intangibles gave an enduring benefit to the
assessee, it was required to be capitalized and added back to the total
income of the assessee. The omission resulted in underassessment of
income by Rs. 5,42,91,977/- involving levy of tax of Rs. 3336.69 lacs
including interest u/s 234B.
I, therefore, have reasons to believe that the income of Rs.
12,17,91,668/- has escaped assessment within the meaning of section
147 of the I.T. Act, 1961, due to omission on the part of the assessee
to include this sum into its income for the relevant previous year."
3. The petitioner filed its objections to the said reasons on 10.05.2012,
whereby, the petitioner took the specific plea that since there was no allegation
that the petitioner had not made a full and true disclosure of all the material facts
necessary for its assessment, the invocation of the provisions of Section 147 of
the Act was itself not valid. The petitioner also raised the objection that the issues
sought to be raised in the recorded reasons had been considered by the Assessing
Officer at the time of the original assessment completed under Section 143(3) of
the Act on 24.12.2008 and the present attempt at reopening the assessment is
nothing but one in furtherance of a mere change of opinion, which is
impermissible in law. It was also contended by the learned counsel for the
petitioner that from the recorded reasons, it could not even inferred that there was
no full and true disclosure on the part of the petitioner/assessee.
4. The learned counsel for the petitioner then drew our attention to the order
dated 12.11.2012 passed by the Assessing Officer disposing of the said
W.P.(C) No.284/2013 Page 5 of 31
objections. He contended that the said order dated 12.11.2012, which is also the
subject matter of challenge in the present petition, was not a reasoned order at all.
Referring to the said order, he submitted that paragraphs 1, 2 & 3, thereof merely
reproduced the reasons recorded and fact that a notice had been served and that
objections had been received from the petitioner and the nature of the objections.
In paragraph 3, the provisions of Section 147 of the Act have also been quoted.
The objections have only been dealt with, by the Assessing Officer, in paragraph
4 of the said order dated 12.11.2012, which reads as under:-
"4. The objections raised by the assessee company and the case
laws cited by it have been considered viz a viz the Explanation 1
to Section 147 which has been reproduced above. In view of the
unambiguous meaning of Explanation 1, and the facts and
circumstances of the case under which the reasons were recorded,
the objections of the assessee are not acceptable and are therefore
rejected."
5. According to the learned counsel for the petitioner, this manner of dealing
with the objections is highly unsatisfactory and is not in accord with the decision
of the Supreme Court in the case of GKN Driveshafts (India) Ltd. v. Income Tax
Officer and Ors.: (2003) 259 ITR 19 (SC). In that decision the Supreme Court
gave the following directions:-
"5. We see no justifiable reason to interfere with the order under
challenge. However, we clarify that when a notice under Section 148
of the Income Tax Act is issued, the proper course of action for the
noticee is to file return and if he so desires, to seek reasons for
issuing notices. The Assessing Officer is bound to furnish reasons
within a reasonable time. On receipt of reasons, the noticee is
entitled to file objections to issuance of notice and the Assessing
Officer is bound to dispose of the same by passing a speaking order.
In the instant case, as the reasons have been disclosed in these
proceedings, the Assessing Officer has to dispose of the objections,
W.P.(C) No.284/2013 Page 6 of 31
if filed, by passing a speaking order, before proceeding with the
assessment in respect of the abovesaid five assessment years."
6. The learned counsel for the petitioner submitted that the Assessing Officer
was bound to dispose of the objections by passing a speaking order. According to
him, the order dated 12.11.2012 could not be considered as a speaking order at
all, as none of the objections raised by the petitioner have been specifically dealt
with by the Assessing Officer. The learned counsel for the petitioner placed
reliance on the decision of this court in Rose Serviced Apartments Pvt Ltd v. Dy.
Commissioner of Income Tax: (2012) 348 ITR 452 (Del.) as also on another
decision of this court in the case of Haryana Acrylic Manufacturing Company
v. The Commissioner of Income Tax IV and Anr.: (2009) 208 ITR 38 (Del),
which was also relied upon in Rose Serviced Apartments (supra). The learned
counsel for the petitioner also placed reliance on the decision of the Bombay
High Court in Hindustan Lever Ltd. v. R.B. Wadkar, Asst. Commissioner of
Income Tax and Ors.: (2004) 268 ITR 339 (Bom).
7. It was also pointed out by the learned counsel for the petitioner that in the
course of the original assessment proceedings, a questionnaire had been furnished
to the petitioner for its reply. The said questionnaire required the petitioner to
give details on various aspects of the assessment, which, according to the learned
counsel for the petitioner, also included those aspects which were sought to be
covered under the recorded reasons. The said questionnaire reads as under:-
"In connection with the pending proceedings as referred
above, you are required to furnish the following
information/evidence or documents:-
1. Give details of Travelling & Conveyance exceeding one
lakh
2. Give details of Legal & Professional exceeding one lakh
W.P.(C) No.284/2013 Page 7 of 31
3. Give details of Purchased Services exceeding one lakh
4. Details of claim of doubtful debt of Rs.3624334 claimed in
computation of income
5. Claim of leave encashment expenses of computation.
6. Details of Admn Services, its nature and expenses details.
7. Exhibition expenses exceeding one lakh
8. Advertisement expenses exceeding one lakh give separate
details of expenses in foreign currency.
9. During the year in the fixed asset schedule there are sales
of assets which includes sale of vehicle and furniture please
give details of persons to whom sales have been made and
also inform if these purchasers are related to company.
10. Any impact on claim of depreciation in new of notes to A/c
items.
11. During the year company has made various expenses in
foreign currency as per details in notes to A/c give details
& its purpose.
12. Details of assets written off as per item No.14 of Tax Audit
Report and item No.17.
13. Considering disclaimer in Co1.17(f) of Tax Audit Report,
explain how your accounts can be examined for compliance
of provisions of section 40(9)
14. During the year vehicles were purchased give details of
evidence of put to use of vehicles purchased in the month
of March 2005.
15. Explain nature of foreign exchange fluctuation claimed in
depreciation chart.
16. Details of contract with M.S. Decorators (P) Ltd. & it's A/c .
17. Explain purchase of furniture repair in new space occupied
by assessee and its availability.
18. Refer to Annexure V of Tax Audit Report where these
amounts have been debited in P&L account.
W.P.(C) No.284/2013 Page 8 of 31
19. Please explain why amounts in annexure VIII,IX,X & XI
are not disallowed as per section 43B
Why prior period expenses as per Tax Audit Report be not
disallowed.
This letter may, please be treated as a part of notice
u/s 142(1) of the I.T. Act, 1961. It may please be noted
that failure to comply with this notice will invite penal
provisions u/s 271(1)(b) of the I.T. Act, 1961."
8. The learned counsel for the petitioner submitted that in item nos. 12, 13,
18 & 19 of the questionnaire, there is specific reference to the Tax Audit Report
(Form 3 CD). He submitted that these issues had been considered and the
petitioner had furnished replies in respect thereof at the time of the original
assessment proceedings. The very same issues are sought to be raised by the
Assessing Officer in the recorded reasons. Therefore, according to the learned
counsel for the petitioner, this reflected nothing but a mere change in opinion
which is impermissible in law. The learned counsel for the petitioner also
referred to item no. 8 of the questionnaire, wherein, the Assessing Officer had
specifically requested for details of advertisement expenses exceeding ` 1 lac and
separate details of expenses in foreign currency. He submitted that these very
details formed the subject matter of the recorded reasons and, therefore, this was
also a case of mere change in opinion.
9. For all these reasons, the learned counsel for the petitioner submitted that
invocation of the provisions of Section 147 of the Act for reopening the
assessment in respect of the assessment year 2005-06 was bad in law.
Consequently, it was prayed that the impugned notice dated 26.03.2012 under
Section 148 of the Act and all proceedings pursuant thereto including the order
dated 12.11.2012 be quashed or set aside.
W.P.(C) No.284/2013 Page 9 of 31
10. Mr Sahni appearing on behalf of the revenue contended that the reopening
of assessment in the facts of the present case was clearly within the four corners
of law. He submitted that this was a case where the petitioner had claimed
expenditure under wrong heads and, therefore, this amounted to the assessee not
having made a full and true disclosure of material facts which were necessary for
its assessment. The learned counsel made detailed submissions with regard to
each of the point nos. 1, 3, 4 & 5 of the recorded reasons to which we shall allude
to below. He placed reliance on the decision of this court in the case of Dalmia
Pvt Ltd v. Commissioner of Income Tax and Anr : (2012) 348 ITR 469 (Del.).
He also placed reliance on the decision of the Supreme Court in the case of M/s
Phool Chand Bajrang Lal and Anr v. Income Tax Officer and Anr : (1993) 203
ITR 456 (SC) and Raymond Woollen Mills Ltd. v. Income Tax Officer and Ors
: (1999) 236 ITR 34 (SC).
11. Mr Sahni placed particular emphasis on the provisions of Section 147 of
the Act and, in particular, on Explanation 1 thereunder. The said provisions, to
the extent relevant, are set out hereinbelow:-
"147. Income Escaping Assessment If the Assessing Officer
has reason to believe that any income chargeable to tax has escaped
assessment for any assessment year, he may, subject to the
provisions of sections 148 to 153, assess or reassess such income
and also any other income chargeable to tax which has escaped
assessment and which comes to his notice subsequently in the
course of the proceedings under this section, or recompute the loss
or the depreciation allowance or any other allowance, as the case
may be, for the assessment year concerned (hereafter in this section
and in sections 148 to 153 referred to as the relevant assessment
year):
Provided that where an assessment under sub-section (3) of section
143 or this section has been made for the relevant assessment year,
no action shall be taken under this section after the expiry of four
W.P.(C) No.284/2013 Page 10 of 31
years from the end of the relevant assessment year, unless any
income chargeable to tax has escaped assessment for such
assessment year by reason of the failure on the part of the assessee
to make a return under section 139 or in response to a notice issued
under sub-section (1) of section 142 or section 148 or to disclose
fully and truly all material facts necessary for his assessment, for
that assessment year:
Explanation 1.--Production before the Assessing Officer of
account books or other evidence from which material evidence
could with due diligence have been discovered by the Assessing
Officer will not necessarily amount to disclosure within the
meaning of the foregoing proviso.
Explanation 2. - xxxxx xxxxx xxxxx xxxxx"
12. In the context of Explanation 1 set out above, Mr Sahni submitted that the
mere fact that the Tax Audit Report was available with the Assessing Officer did
not mean that there was disclosure within the meaning of the proviso to Section
147 of the Act. He submitted that even if the Assessing Officer could have, with
due diligence, discovered material from the Tax Audit Report, it does not
necessarily mean that the petitioner had made a full and true disclosure of
material facts. Therefore, just because the items mentioned in the recorded
reasons have been mentioned in the Tax Audit Report would not necessarily
amount to disclosure in the context of the proviso to Section 147 of the Act. He
also submitted that in the first round when the original assessment took place,
there was no examination of the issues sought to be raised in the recorded
reasons. Therefore, the present case was not a case of mere change of opinion
inasmuch as, according to him, in the first round, no opinion had been formed by
the Assessing Officer.
13. If we examine the recorded reasons, we find that item nos. 1, 5 & 6 of the
recorded reasons essentially deal with the issue as to whether the expenses were
W.P.(C) No.284/2013 Page 11 of 31
in the nature of revenue expenses or capital expenses. It is apparent that insofar
as item no. 1 is concerned, it deals with campaign expenditure to the extent of `
1,49,11,728/-. As per the recorded reasons, this expenditure was required to be
capitalised and, therefore, ought to have been added back to the income of the
assessee. Consequently, according to the recorded reasons, the omission resulted
in allowance of inadmissible expenditure involving short levy of income-tax of `
79,12,032/- including interest under Section 234B of the Act. Insofar as this item
is concerned, the learned counsel for the petitioner, had already drawn our
attention to the questionnaire which we have reproduced above. Item no. 8 of
that questionnaire specifically dealt with advertisement expenses exceeding ` 1
lac. Referring to the details furnished by the petitioner, the learned counsel for
the petitioner had drawn our attention to the reply to the questionnaire which was
submitted by the petitioner on 13.10.2008. The reply inter alia reads as under:-
"4. Details of Advertisement expenses exceeding Rs 1 lakhs
During the subject year, MCIPL had incurred Advertisement
expenses amounting to Rs 902,649,399. Detail of the
Advertisement expenses exceeding Rs 1 lakhs has been
enclosed as Annexure 4 and detail of advertisement expenses
incurred in foreign currency exceeding Rs 1 lakhs has been
enclosed as Annexure 4A."
14. Annexure 4 referred to above, contained details of advertising expenses
exceeding ` 1 lac incurred during the assessment year 2005-06. One of the items
mentioned there was campaign expenditure for launch of new products to the
extent of ` 1,49,11,728/- which is the very same item mentioned in item no. 1 of
the recorded reasons. At this juncture, we may also refer to the expenses for
consultancy for the development of marketing strategy which were also given as
details of advertising expenses. The said item was for an amount of ` 88,50,841/-
which is the same as referred to in item no. 6 of the recorded reasons. Under the
W.P.(C) No.284/2013 Page 12 of 31
same details, market research expenses to the extent of ` 3,61,60,538/- have also
been shown which is also the subject matter of item no. 6 of the recorded reasons.
Furthermore, the said details also mention expenses towards design cost of
website/prototype (` 8,49,138/-) and design content & maintenance of
website/prototype (` 80,00,000/-) which, together total ` 88,49,138/-. This forms
part of the recorded reason no. 5. Finally, the expenditure of translation of
courseware/software in local language to the extent of ` 3,37,81,547/- has also
been shown in the said Annexure-4 and this forms part of item no. 5 of the
recorded reasons.
15. In other words, the details pertaining to the recorded reason nos. 1, 5 & 6
had been sought by the Assessing Officer and had been provided by the
petitioner/assessee in the course of the original assessment proceedings. The
only issue pertaining to these items (i.e., item nos. 1, 5 & 6 of the recorded
reasons) is that they should not have been treated as revenue expenditure but,
ought to have been treated as capital expenditure and, therefore, the said
expenditure ought to have been added back to the income of the assessee.
Whenever the issue of whether an expenditure is of a revenue or a capital nature
arises, it almost always lends itself to debate. Therefore, the details having been
sought in the original assessment proceeding and having been supplied by the
assessee and the Assessing Officer having thereafter allowed the expenses as
revenue expenses as claimed by the assessee, to take the view in the recorded
reasons that the expenses were capital in nature, would clearly amount to a
change of opinion.
16. Insofar as the disclosure part is concerned, it is evident that the concept of
full and true disclosure applies not only to the stage of filing of the return but to
the entire process of assessment under Section 143(3). This is also clear from the
W.P.(C) No.284/2013 Page 13 of 31
decision of this court in the case of Honda Siel Power Products v. Dy. CIT :
(2012) 340 ITR 53 (Del.) wherein this court held that "the term `failure' on the
part of the assessee" is not restricted to the income-tax return and the columns of
the income-tax return or the tax audit report. The court held that the expression
"failure to fully and truly disclose material facts" also relates to the stage of the
assessment proceedings and that there can be omission and failure on the part of
the assessee to disclose material facts fully and truly during the course of the
assessment proceedings. Therefore, when the assessee furnishes details during
the assessment proceedings, it cannot, at the subsequent stage of reopening be
said that there was failure on the part of the assessee to disclose fully and truly all
material facts necessary for his assessment. If there is a full and true disclosure
in the course of the assessment proceedings, that will have to be regarded as a
disclosure for the purpose of the proviso to Section 147 of the said Act.
Therefore, insofar as item nos. 1, 5 & 6 of the recorded reasons are concerned,
we find that there was no failure to disclose full and true material facts necessary
for the assessment. Moreover, it is also a case of a mere change in opinion.
17. Insofar as recorded reason no. 3 is concerned, it pertains to the provision
made for payment of gratuity to the extent of ` 76,35,763/-. It is noted in the
recorded reasons that this payment had been depicted as inadmissible expenditure
in column 17(i) of the Tax Audit Report (3CD) submitted by the petitioner.
Therefore, according to the belief of the Assessing Officer, the expenditure was
required to be added to the taxable income of the assessee and that the omission
in taking into account the inadmissible expenditure had resulted in allowance of
excess deduction of ` 76,35,763/- involving a short levy of income tax of `
40,51,469/- including interest under Section 234B of the Act. In this context, it
may be relevant to note that the recorded reasons themselves point out that the
said item had been shown in column no. 17(i) of the Tax Audit Report which was
W.P.(C) No.284/2013 Page 14 of 31
furnished by the assessee in the course of the assessment proceedings. We have
also examined a copy of the said report and we find that item 17(i) of the said
report falls on the same page as item no. 17(f) of the report. It falls on the next
page to item no. 17(a) of the report. Item no. 17(a) deals with expenditure of a
capital nature and, particularly, with the assets written off by the petitioner. Item
No. 17(f) deals with amounts inadmissible under Section 40(a). The point of
mentioning these items is that the Assessing Officer had examined the Tax Audit
Report in detail and had asked for details and information which according to
him were necessary for framing the assessment. This is not a case where
Explanation 1 to section 147 of the Act can be pressed into service. It is not that
the Assessing Officer, if he was diligent enough, could have discovered material
evidence. Here, the Assessing Officer was diligent. He closely examined the
Tax Audit Report and raised questions and sought information on aspects where
he needed greater clarity.
18. Now, coming back to the Tax Audit Report and the question of
admissibility of the provision made for gratuity, we find that Assessing Officer,
in the questionnaire issued by him, specifically asked the petitioner to explain as
to why the amounts mentioned in, inter alia, annexure (ix) should not be
disallowed as per section 43B of the Act. This question would only have been
raised if the Assessing Officer was satisfied that the provision for payment of
gratuity was admissible on account of the fact that the gratuity fund was an
approved fund. Upon such satisfaction, the next logical question for the
Assessing Officer would be as to whether the payment had been made within the
stipulated time as prescribed under Section 43B of the Act and, that is exactly
what the Assessing Officer did. Therefore, we feel that insofar as the question of
provision of payment for gratuity is concerned, the issue had been specifically
examined by the Assessing Officer and, therefore, the recorded reasons attempted
W.P.(C) No.284/2013 Page 15 of 31
to bring about a mere change in opinion. Apart from this, we also hold that there
was full and true disclosure on the part of the petitioner inasmuch as this item had
been specifically mentioned in the Tax Audit Report as item no. 17(i) and in
annexure (ix) as also in the details furnished by the petitioner subsequent to the
questionnaire.
19. This leaves us with the consideration of recorded reason no. 4 which
pertains to depreciation on ITG networking equipment. It is contended in the
recorded reasons that though the assessee had claimed depreciation on the said
equipments @ 60%, the Assessing Officer had allowed depreciation at only @
25%. However, while doing so, the Assessing Officer made a computational error
and due to that excess depreciation to the extent of ` 14,19,945/- involving a
short levy of tax of ` 7,53,410/- including interest under Section 234B of the Act
had resulted. In other words, insofar as this item is concerned, it was merely a
computational error on the part of the Assessing Officer. We feel that such
computational error could have easily been corrected by the Assessing Officer
under Section 154 of the Act. In fact, the Assessing Officer had initiated
proceedings under Section 154. However, it appears that the Assessing Officer
had ultimately dropped the same. Mr Sahni confirms the fact that Section 154
proceedings were not pursued further. In these circumstances, we feel that
Assessing Officer would not be entitled to reopen the assessment. It is he who
had made a computational error. The assessee, on his part, had fully and truly
disclosed all the material facts with regard to the claim of depreciation at the time
of the assessment. It is another matter that the Assessing Officer did not allow
the claim of 60% depreciation but only allowed depreciation @ 25% and, while
doing so, the Assessing Officer made an error in computing that amount.
W.P.(C) No.284/2013 Page 16 of 31
20. We may also point out that we do not agree with the contention of Mr
Sahni that the recorded reasons expressly indicate that there was failure on the
part of the assessee to make a full and true disclosure of the material facts
necessary for its assessment. Mr Sahni had placed reliance on the last sentence of
the recorded reasons which reads as under:-
"I therefore have reasons to believe that the income of Rs.
12,17,91,668/- have escaped assessment within the meaning of
Section 147 of the IT Act, 1961, due to omission on the part of
the assessee to include this sum into its income for the relevant
previous years".
What is to be seen is that the expression used by the Assessing Officer is "due to
omission on the part of the assessee to include this sum into its income". The
allegation is not that there was no disclosure on the part of the assessee but that
the assessee had not included the said amount as part of its income. This
expression needs to be read in the context of the earlier part of the recorded
reasons where the reasons essentially recorded that expenses should have been
shown as capital expenditure and not as revenue expenditure and that the
provision for payment of gratuity was inadmissible etc. It is not a statement that
the petitioner had failed to disclose fully and truly any particular piece of
information which was necessary for the purpose of assessment. Furthermore,
we also cannot infer any such belief on the part of the Assessing Officer that
there was a failure to make a full and true disclosure of material facts on the part
of the assessee.
21. For the sake of completeness, we shall now consider the decisions
cited at the bar. We shall first take up those decisions which were relied
upon by the learned counsel for the petitioner. In Hindustan Lever Ltd
(supra), a Division Bench of the Bombay High Court, while considering
W.P.(C) No.284/2013 Page 17 of 31
the argument that, even if the words "failure to disclose fully and truly all
material facts relevant for assessment for the assessment year" were absent
in the reasons recorded, still such reasons could be inferred from the text of
the reasons recorded, observed as under:-
"The reasons recorded by the Assessing Officer
nowhere state that there was failure on the part of the assessee
to disclose fully and truly all material facts necessary for the
assessment of that assessment year. It is needless to mention
that the reasons are required to be read as they were recorded
by the Assessing Officer. No substitution or deletion is
permissible. No additions can be made to those reasons. No
inference can be allowed to be drawn based on reasons not
recorded. It is for the Assessing Officer to disclose and open
his mind through reasons recorded by him. He has to speak
through his reasons. It is for the Assessing Officer to reach the
conclusion as to whether there was failure on the part of the
assessee to disclose fully and truly all material facts necessary
for his assessment for the concerned assessment year. It is for
the Assessing Officer to form his opinion. It is for him to put
his opinion on record in black and white. The reasons recorded
should be clear and unambiguous and should not suffer from
any vagueness. The reasons recorded must disclose his mind.
The reasons are the manifestation of the mind of the Assessing
Officer. The reasons recorded should be self-explanatory and
should not keep the assessee guessing for the reasons. Reasons
provide the link between conclusion and evidence. The reasons
recorded must be based on evidence. The Assessing Officer, in
the event of challenge to the reasons, must be able to justify
the same based on material available on record. He must
disclose in the reasons as to which fact or material was not
disclosed by the assessee fully and truly necessary for
assessment of that assessment year, so as to establish the vital
link between the reasons and evidence. That vital link is the
safeguard against arbitrary reopening of the concluded
assessment. The reasons recorded by the Assessing Officer
cannot be supplemented by filing an affidavit or making an
W.P.(C) No.284/2013 Page 18 of 31
oral submission, otherwise, the reasons which were lacking in
the material particulars would get supplemented, by the time
the matter reaches the court, on the strength of the affidavit or
oral submissions advanced.
Having recorded our finding that the impugned notice
itself is beyond the period of four years from the end of the
assessment year 1996-97 and does not comply with the
requirements of the proviso to Section 147 of the Act, the
Assessing Officer had no jurisdiction to reopen the assessment
proceedings which were concluded on the basis of assessment
under Section 143(3) of the Act. On this short count alone the
impugned notice is liable to be quashed and set aside."
22. A Division Bench of this court, in the case of Haryana Acrylic
(supra), observed as under:-
"Viewed in this light, the proviso to Section 147 of the said
Act, carves out an exception from the main provisions of
Section 147. If a case were to fall within the proviso, whether
or not it was covered under the main provisions of Section 147
of the said Act would not be material. Once the exception
carved out by the proviso came into play, the case would fall
outside the ambit of Section 147.
Examining the proviso [set out above], we find that no action
can be taken under Section 147 after the expiry of four years
from the end of the relevant assessment year if the following
conditions are satisfied:
(a) an assessment under Sub-section (3) of Section 143 or
this section has been made for the relevant assessment year;
and
(b) unless any income chargeable to tax has escaped
assessment for such assessment year by reason of the failure
on the part of the assessee:
W.P.(C) No.284/2013 Page 19 of 31
(i) to make a return under Section 139 or in response to a
notice issued under Sub-section (1) of Section 142 or Section
148; or
(ii) to disclose fully and truly all material facts necessary for
his assessment for that assessment year.
Condition (a) is admittedly satisfied inasmuch as the original
assessment was completed under Section 143(3) of the said
Act. Condition (b) deals with a special kind of escapement of
income chargeable to tax. The escapement must arise out of
the failure on the part of the assessee to make a return under
Section 139 or in response to a notice issued under Sub-section
(1) of Section 142 or Section 148. This is clearly not the case
here because the petitioner did file the return. Since there was
no failure to make the return, the escapement of income cannot
be attributed to such failure. This leaves us with the
escapement of income chargeable to tax which arises out of
the failure on the part of the assessee to disclose fully and truly
all material facts necessary for his assessment for that
assessment year. If it is also found that the petitioner had
disclosed fully and truly all material facts necessary for its
assessment, then no action under Section 147 could have been
taken after the four year period indicated above. So, the key
question is whether or not the petitioner had made a full and
true disclosure of all material facts.
In the reasons supplied to the petitioner, there is no whisper,
what to speak of any allegation, that the petitioner had failed to
disclose fully and truly all material facts necessary for
assessment and that because of this failure there has been an
escapement of income chargeable to tax. Merely having a
reason to believe that income had escaped assessment, is not
sufficient to reopen assessments beyond the four year period
indicated above. The escapement of income from assessment
must also be occasioned by the failure on the part of the
assessee to disclose material facts, fully and truly. This is a
necessary condition for overcoming the bar set up by the
proviso to Section 147. If this condition is not satisfied, the bar
W.P.(C) No.284/2013 Page 20 of 31
would operate and no action under Section 147 could be
taken."
From the above, it is evident that merely having a reason to believe that
income had escaped assessment is not sufficient for reopening the
assessment beyond the four year period referred to above. It is essential
that the escapement of income from assessment must be occasioned by the
failure on the part of the assessee to, inter alia, disclose material facts, fully
and truly. If this condition is not satisfied, there would be a bar to taking
any action under Section 147 of the said Act.
23. The above decision in Haryana Acrylic (supra) was relied upon by
another Division Bench of this court in Rose Serviced Apartments (supra).
Referring to Explanation I to Section 147 of the said Act, this court, in the
latter decision, observed as under:-
"17. Reading of the explanation 1 of the proviso
makes it clear that mere production of books of accounts or
other material from which the Assessing Officer could,
with due diligence, have discovered escapement of income,
does not bar reassessment proceedings. Yet at the same
time if the proviso applies and the assessee has fully and
truly disclosed all the material facts necessary for
assessment for that assessment year, reassessment
proceedings cannot be initiated."
24. In the context of this decision, we may point out that, in the present
case, the said Explanation 1 would not come in the aid of the respondents
inasmuch as the Assessing Officer was diligent and had closely examined
the Tax Audit Report and raised questions and sought information on the
aspects where he needed greater clarity. Furthermore, and, in any event, as
W.P.(C) No.284/2013 Page 21 of 31
observed in Rose Serviced Apartments (supra), where the assessee has
fully and truly disclosed all the material facts necessary for assessments, re-
assessment proceedings cannot be initiated.
25. Recently, this Bench in the case of CIT v. Suren International Pvt.
Ltd. (ITA 289/2012) decided on 07.05.2013 had occasion to examine the
provisions of Section 147 of the said Act. While doing so, this court
referred to and relied upon Wel Intertrade Pvt. Ltd and Another v. ITO:
(2009) 300 ITR 22 (Del) as also Haryana Acrylic (supra). It was observed
that it is well-settled that in order to invoke the provisions of Section 147 of
the said Act, after a period of four years from the end of the relevant
assessment year, in addition to the Assessing Officer having reason to
believe that any income has escaped assessment, it must also be established
that the income had escaped assessment on account of the assessee failing
to make a return under, inter alia, Section 139 or on account of failure on
the part of the assessee to disclose fully and truly the necessary material
facts. The court further observed as under:-
"16. In the reasons as furnished by the Assessing Officer, we
find that there is neither any allegation that the assessee had
failed to truly disclose any material facts at the time of
assessment, nor can we readily infer the same in view of the
fact that a detailed enquiry had been conducted by the
Assessing Officer with regard to the identity and
creditworthiness of the share-applicants and genuineness of the
transactions in relation to the share application money received
by the assessee. Further the mere statement that the DRI has
seized certain goods of the assessee and levied a penalty also
cannot be stated to be a reason for reopening of assessment of
the assessee as the said statement made is neither followed by
W.P.(C) No.284/2013 Page 22 of 31
the recording of a belief that the income escaped on that count
or that the assessee has failed to disclose all relevant material,
fully and truly, at the stage of the first assessment."
26. On the aspect of "mere change of opinion", this court had recently
considered the Full Bench decision in CIT v. Usha International Limited:
348 ITR 485 (FB) (Del) and, in particular, point No.(3) of the observations
contained in paragraph 13 of the said decision, which, inter alia, reads as
under:-
"13. It is, therefore, clear from the aforesaid position that:
(1) Reassessment proceedings can be validly initiated in case
return of income is processed under Section 143(1) and
no scrutiny assessment is undertaken. In such cases there
is no change of opinion;
(2) Reassessment proceedings will be invalid in case the
assessment order itself records that the issue was raised
and is decided in favour of the assessee. Reassessment
proceedings in the said cases will be hit by principle of
"change of opinion".
(3) Reassessment proceedings will be invalid in case an issue
or query is raised and answered by the assessee in
original assessment proceedings but thereafter the
Assessing Officer does not make any addition in the
assessment order. In such situations it should be accepted
that the issue was examined but the Assessing Officer did
not find any ground or reason to make addition or reject
the stand of the assessee. He forms an opinion. The
reassessment will be invalid because the Assessing
Officer had formed an opinion in the original assessment,
though he had not recorded his reasons.
(underlining added)"
W.P.(C) No.284/2013 Page 23 of 31
Para 39 of the Full Bench decision in Usha International Limited (supra)
was also considered. The same was to the following effect:-
"39. In view of the above observations we must add one
caveat. There may be cases where the Assessing Officer does
not and may not raise any written query but still the Assessing
Officer in the first round/ original proceedings may have
examined the subject-matter, claim, etc., because the aspect or
question may be too apparent and obvious. To hold that the
assessing officer in the first round did not examine the question
or subject-matter and form an opinion, would be contrary and
opposed to normal human conduct. Such cases have to be
examined individually."
In the context of the above para 39, this court, in Maruti Suzuki India
Limited (supra), observed as under:-
"It is apparent from the above extract that even in cases where
no query is raised by the assessing officer in the course of the
original assessment proceedings it may yet be held that the
assessing officer had examined the subject matter. This is so
because the aspect or question in issue may be too apparent and
obvious. However, the Full Bench cautioned by stating that
such cases would have to be examined individually. It is,
therefore, clear that even where no query is raised by the
assessing officer and there is no discussion in the assessment
order, it may yet be a case where the assessing officer would be
considered to have examined the issue. However, we are not
concerned with those type of cases inasmuch as in the present
case the assessing officer had clearly raised a specific query
with regard to bad debts/ advances written off and the
petitioner/assessee had given details in respect thereof. It is
obvious that since no such addition was made on that count, the
assessing officer had considered and examined the position and
held in favour of the petitioner/assessee. Therefore, we can
safely conclude that, in the facts and circumstances of the
present case, the assessing officer had, indeed, examined the
issue at the time of the original assessment proceedings and had
W.P.(C) No.284/2013 Page 24 of 31
formed an opinion by not making any addition in respect
thereof. Thus, the reopening of the assessment which had been
concluded on 13.03.2006, would be nothing but a mere change
of opinion."
27. We have already expressed our opinion that the present case would
also be a case of change of opinion inasmuch as specific queries had been
raised by the Assessing Officer in the questionnaire and which had been
addressed by the petitioner during the course of the original assessment
proceedings. All the above decisions fortify the conclusions that we have
arrived at earlier.
28. It is now time to consider the decisions referred to by the learned
counsel for the respondents. The decision of the Supreme Court in Phool
Chand Bajrang Lal (supra) is the earliest in point of time. The learned
counsel for the respondents had placed reliance on the following
observations of the Supreme Court:-
"From a combined review of the judgments of this Court, it
follows that an Income-tax Officer acquires jurisdiction to
reopen assessment under Section 147(a) read with
Section 148 of the Income Tax 1961 only if on the basis of
specific, reliable and relevant information coming to his
possession subsequently, he has reasons which he must record,
to believe that by reason of omission or failure on the part of
the assessee to make a true and full disclosure of all material
facts necessary for his assessment during the concluded
assessment proceedings, any part of his income, profit or gains
chargeable to income tax has escaped assessment. He may start
reassessment proceedings either because some fresh facts come
to light which where not previously disclosed or some
information with regard to the facts previously disclosed comes
into his possession which tends to expose the untruthfulness of
those facts. In such situations, it is not a case of mere change of
W.P.(C) No.284/2013 Page 25 of 31
opinion or the drawing of a different inference from the same
facts as were earlier available but acting on fresh information.
Since, the belief is that of the Income-tax Officer, the
sufficiency of reasons for forming the belief, is not for the
Court to judge but it is open to an assessee to establish that
there in fact existed no belief or that the belief was not at all a
bona fide one or was based on vague, irrelevant and non-
specific information. To that limited extent, the Court may look
into the conclusion arrived at by the Income-tax Officer and
examine whether there was any material available on the record
from which the requisite belief could be formed by the Income-
tax Officer and further whether that material had any rational
connection or a live link for the formation of the requisite
belief. It would be immaterial whether the Income-tax Officer
at the time of making the original assessment could or, could
not have found by further enquiry or investigation, whether the
transaction was genuine or not, if one the basis of subsequent
information, the Income-tax Officer arrives at a conclusion,
after satisfying the twin conditions prescribed in
Section 147(a) of the Act, that the assessee had not made a full
and true disclosure of the material facts at the time of original
assessment and therefore income chargeable to tax had escaped
assessment. The High Courts which have interpreted Burlop
Dealer's case (Supra) as laying down law to the contrary fell in
error and did not appreciate the import of that judgment
correctly.
We are not persuaded to accept the argument of Mr.
Sharma that the question regarding truthfulness or falsehood of
the transactions reflected in the return can only be examined
during the original assessment proceedings and not at any stage
subsequent thereto. The argument is too broad and general in
nature and does violence to the plain phraseology of
Sections 147(a) and 148 of the Act and is against the settled law
by this Court. We have to look to the purpose and intent of the
provisions. One of the purposes of Section 147, appears to us to
be, to ensure that a party cannot get away by wilfully making a
false or untrue statement at the time of original assessment and
W.P.(C) No.284/2013 Page 26 of 31
when that falsity comes to notice, to turn around and say "you
accepted my lie, now your hands are tied and you can do
nothing". It would be travesty of justice to allow the assessee
that latitude."
29. The said decision does not detract from the conclusions arrived at by
us. On facts, we have held that the petitioner had not made a false or an
untrue statement at the time of the original assessment. Therefore, the
question of reopening the assessment on the ground that the same was
being done when the falsity came to notice does not at all arise in the
present case. We fail to see as to how the said decision comes to the aid of
the respondents, particularly when, in the present case, on facts we have
held that the petitioner had made a full and true disclosure of the material
facts at the time of the original assessment. The next decision which was
relied upon by the learned counsel for the petitioner is that of the Supreme
Court in the case of Raymond Woollen Mills (supra) wherein the Supreme
Court observed as under:-
"In this case, we do not have to give a final decision as to
whether there is suppression of material facts by the assessee or
not. We have only to see whether there was prima facie some
material on the basis of which the Department could reopen the
case. The sufficiency or correctness of the material is not a
thing to be considered at this stage. We are of the view that the
court cannot strike down the reopening of the case in the facts
of this case. It will be open to the assessee to prove that the
assumption of facts made in the notice was erroneous. The
assessee may also prove that no new facts came to the
knowledge of the Income-tax Officer after completion of the
assessment proceeding."
W.P.(C) No.284/2013 Page 27 of 31
30. The said decision also, does not come to the aid of the respondents.
This is because we are of the view that there was no prima facie material on
the basis of which, in the present case, the Assessing Officer could reopen
the case. The sufficiency or correctness of the material is not in issue at the
present stage. We have expressed our view that there was no material on
the basis of which the department could reopen the case inasmuch as the
present case was one of mere change of opinion as also where there was no
failure on the part of the petitioner to disclose fully and truly all the
material facts necessary for its assessment. Therefore, the said decision of
the Supreme Court in Raymond Woolen Mills Limited (supra) would also
be of no assistance to the respondents' case.
31. Finally, the learned counsel for the respondents had placed reliance
on a Division Bench of this court in Dalmia Pvt. Limited (supra). In that
decision, two points were considered. One was with regard to change of
opinion and the other that the petitioner had not made a full and true
disclosure. While addressing the first issue of change of opinion, the court
held that the case before it was not one of change of opinion because a
change of opinion would only arise when an Assessing Officer formed an
opinion and decided not to make an addition and held that the assessee was
correct. In that case, the Assessing Officer had asked specific and pointed
queries with regard to the sundry creditors and had asked for confirmations,
names, addresses and details of services rendered. In the original
assessment order, there was no discussion, ground or reason why an
addition was not made in spite of failure on the part of the assessee to
furnish the confirmations and details. In that context, the court rejected the
W.P.(C) No.284/2013 Page 28 of 31
contention of the assessee that there was a change of opinion. Insofar as
the aspect of change of opinion is concerned, the observations of the
Division Bench in Dalmia Pvt. Ltd (supra) have been rendered in an
entirely different and distinct factual matrix. It is apparent that the
Assessing Officer had asked for specific information and confirmations and
that the same had not been supplied by the assessee therein at the time of
assessment. In the present case, the petitioner had furnished all the
information which was sought by the Assessing Officer in the questionnaire
and, therefore, the fact situation in the present case is entirely different from
that which obtained in Dalmia Pvt. Ltd (supra).
As regards the second question with regard to full and true disclosure
of material facts, the Division Bench in Dalmia Pvt. Ltd (supra), inter alia,
observed as under:-
"The second question which arises for consideration is whether
the Assessee had made full and true disclosure of material facts.
We have already reproduced above the contention of the
Assessee in this regard in the objections. We have also referred
to the two letters written by the Assessing Officer asking for
details of sundry creditors being letters dated 14th September,
2005 and 14th October, 2005. The Petitioner was called upon
and asked to furnish names and addresses of the sundry
creditors and since when the amount was outstanding. The
Petitioner was also asked to explain details of each creditor.
There is nothing on record and it is not even the stand of the
Petitioner that those details in respect of all parties were
furnished. If there is No. disclosure and details were not
furnished, there cannot be full and true disclosure. In W.P.(C)
No. 9036/2007, Honda Siel Power Products Ltd. v. The Deputy
Commissioner of Income Tax and Anr., decision dated 14th
February, 2011, we had held: (page 59):
W.P.(C) No.284/2013 Page 29 of 31
`The term "failure" on the part of the Assessee is
not restricted only to the income-tax return and the
columns of the income-tax return or the tax audit
report. This is the first stage. The said expression
"failure to fully and truly disclose material facts"
also relate to the stage of the assessment
proceedings, the second stage. There can be
omission and failure on the part of the Assessee to
disclose fully and truly material facts during the
course of the assessment proceedings. This can
happen when the Assessee does not disclose or
furnish to the Assessing Officer complete and
correct information and details it is required and
under an obligation to disclose. Burden is on the
Assessee to make full and true disclosure.'
In such circumstances, it cannot be held that there was full and
true disclosure by the Petitioner-Assessee. The second
contention of the petitioner fails."
The above observations would also not enable us to detract from the
conclusions arrived at by us in the present case. As pointed out above, the
decision in Dalmia Pvt. Ltd (supra) is clearly distinguishable as that was a
case where the assessee had not furnished the details despite a request
having been made by the Assessing Officer. It is in that context that the
court observed that if there was no disclosure and details were not
furnished, there cannot be full and true disclosure. In the present case, the
situation is just the opposite. The information sought by the Assessing
Officer had been supplied and furnished by the petitioner and it has already
been held on facts by us that there was a full and true disclosure on the part
of the petitioner. Therefore, the said decision in Dalmia Pvt. Ltd (supra)
would also not come to the aid of the respondents.
W.P.(C) No.284/2013 Page 30 of 31
32. In view of the foregoing discussion, the petitioner is entitled to succeed.
The impugned notice dated 26.03.2012 and all proceedings pursuant thereto
including the order dated 12.11.2012 are set aside.
33. The writ petition is allowed as above. There shall be no order as to costs.
BADAR DURREZ AHMED, J
VIBHU BAKHRU, J
MAY 23, 2013
RK
W.P.(C) No.284/2013 Page 31 of 31
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