Fag Bearings India Ltd. vs Deputy Commissioner of Income Tax

Akil Kureshi, J.—The petitioner, a public limited company has challenged a notice dated December 27, 2002, issued by the respondent-Deputy Commissioner of income tax u/s 148 of the income tax Act, 1961 ("the Act" for short). The petitioner has also challenged the subsequent notice u/s 142(1) of the Act issued on November 7, 2003. For the assessment year 1996-97, the petitioner filed the return of income on November 30, 1996. Such return was initially accepted without scrutiny u/s 143(1) of the Act. Later on, however, a scrutiny assessment was undertaken. During such scrutiny assessment, wide range of issues were examined by the Assessing Officer. A series of queries were raised and replies were filed by the petitioner. Ultimately, the assessment was framed on March 9, 1999, making certain additions and disallowances in the return filed by the petitioner.

After such scrutiny assessment was completed, the Assessing Officer issued a letter dated August 19, 1999, and called upon the petitioner to explain the following points:

Excise duty relatable to closing stock of finished goods.

In para. D of schedule 16 if is written that excise duty on the closing stock of the finished goods has not been included in its value and the same has not been debited in the profit and loss account. Here it is to bring to your notice that excise is leviable on manufacturing of goods and since the finished goods have been manufactured, liability for excise has accrued. Moreover, in view of the hon''ble Supreme Court''s decision in the case of McDowell, it is held that excise is part of the turnover, therefore, since the excise duty has not been provided during the year, the same cannot be allowed u/s 43B, however, the value of the closing stock must include the component of excise duty.

Patterns and dies claimed as revenue expenses:

Accordingly to schedule 14 stores, spares and tools, consumed, amounting to Rs. 871.06 lakhs have been written off. Out of the above, tools, etc., closing below Rs. 750 amounting to Rs. 11.28 lakhs as per para. 10 of schedule 17 has been added back in the computation of income. It is not clear from the details of fixed assets including additions during the year whether there is a separate heads for patterns or dies and moulds which are used for manufacturing various types of bearings. Here it may be pointed out that expenses relating to patterns and dies, if any, cannot be debited to the profit and loss account, as they are in the nature of capital expenses. However, depreciation at 25 per cent, may be allowed on the same.

Deduction u/s 80-O:

A disallowance u/s 143(1)(a) was made towards the claim of deduction u/s 80-O. The same was allowed by the hon''ble Commissioner of income tax (Appeals) on the grounds that the same was a debatable issue. In his order the Commissioner of income tax (Appeals) had directed, to allow the deduction u/s 80-O on the relevant net income computed after deducting the expenses incurred for, earning such income in view of the conditions laid down by the Chief Commissioner of income tax in his approval.

You have furnished the details of the expenditure of Rs. 29.61 lakhs for your M.F. Division in which you have earned consultancy income. The said expenditure has been proportionately allocated as per annexure BP of the letter dated March 5, 1999.

It appears that direct expenses and indirect expenses have not been allocated proportionately for netting out qualifying receipts u/s 80-O. A few of such expenses are directors'' remuneration, auditors'' remuneration and other expenses of head office. You have allocated only Rs. 1,000 towards bank charges which appears to be improbable keeping in view of the huge receipts.

Deduction u/s 80HHC:

Vide your letter dated February 24, 1999, you have allocated Rs. 5,58,640 being indirect expenses, relatable to export trading activity. As in the matter of deduction u/s 80-O, it appears that all the head office expenses have not been proportionately allocated being indirect cost as per the provision of section 80HHC(3) Explanation (e) which reads as under:

"Indirect cost" means costs, not being direct costs allocated in the ratio of the export turnover in respect of trading goods to the total turnover.

There is no allocation out of the directors'' remuneration, auditors'' remuneration, legal and professional fees, bank charges, clearing expenses, etc. Entire head office expense has to be proportionately allocated before allowing deduction u/s 80HHC on profit of export trading activity.

You are requested to offer your explanation and clarification on the above issues and explain why remedial action should not be taken to revise the assessment order to bring to tax any income having escaped assessment in view of the above observation.

On March 30, 2001, the Assessing Officer issued a notice for reopening of the assessment. The reason recorded by the Assessing Officer contained only one ground, namely, "on verification of the assessment records it is noticed that the provision for retirement benefits of the employees included an amount of Rs. 41.83 lakhs pertaining to the earlier years. Since you are following the mercantile system of accounting the above amount is required to be disallowed for the year under consideration".

We are not concerned with this process of reopening, we may, however, notice that subsequently yet another notice for reopening came to be issued on December 27, 2002. Since the reasons for reopening recorded by the Assessing Officer were not supplied to the petitioner, the petitioner approached this court without such reasons. This court, therefore, directed the respondent to supply such reasons and permitted the petitioner to raise objections. The Assessing Officer, however, by his order dated October 29, 2004, rejected the objections of the petitioner.

From the said order, we find the reasons for reopening on the basis of which the impugned notice was issued. Such reasons read as under:

In the instant case, assessment u/s 143(3) was made on March 9, 1999, on a total income of Rs. 18,03,97,553 as against the total income declared by the assessee at Rs. 16,31,44,875. The total income of the assessee was revised at Rs. 16,20,66,693 in the order u/s 250, dated May 30,2002. In this case, it is also seen that the reassessment u/s 143(3) read with section 147 was made on March 26, 2002, on a total income of Rs. 16,62,46,580.

It is noticed from para. D of schedule 16 of the balance-sheet, it is written that excise duty on the finished goods has not been included in its value and the same has not been debited to the profit and loss account.

It is also noticed that the assessee has written off consumed stores, spares tools, etc., amounting to Rs. 871 lakhs. It is not clear whether patterns and dies required for manufacturing of bearings are included in the above expenses written off. Expenses relating to patterns and dies cannot be debited to the profit and loss account as they are in the nature of capital expenses.

While computing the allowable deduction u/s 80-O indirect expenses like director''s remuneration, auditors'' remuneration and other expenses of the head office should have been proportionately allocated.

While computing the deduction u/s 80HHC indirect expenses like the director''s remuneration, auditor''s remuneration, etc., should be proportionately allocated.

Having heard learned counsel for the parties, we find that, in the present case, notice for reopening was issued beyond a period of four years from the end of the relevant assessment year. Therefore, for the Assessing Officer to assume jurisdiction for reopening the assessment, both the conditions of his belief that income chargeable to tax has escaped assessment and the same was for the, reason of the assessee failing to disclose truly and fully all material facts, must be satisfied.

The petitioner has strongly urged that all the four questions were threadbare examined by the Assessing Officer during the course of the original assessment. There was no failure on the part of the assessee to disclose any of the material facts. It is also the case of the assessee that the Assessing Officer issued notice only at the behest of the audit party.

In the petition, the assessee has pointed out disclosures during the original assessment in the following manner:

Particularly with reference to four issues which are now sought to be raised by the respondent in the course of reassessment proceedings they were gone into in detail in the course of original assessment and considered by the respondent and a decision was taken thereon by him. Herein below is set out with reference to the said four items, the correspondence and the decision taken by the respondent in the course of original assessment.

I. Reg. inclusion of excise duty in the valuation of the closing stock:

In this regard, in the course of assessment, the petitioner by its letter dated February 24, 1999, stated in para. 5 of its letter as follows:

As regarding the excise duty payable on production, we have to state that as per the provision of the Excise Rules, the excise duty is payable only at the time of clearance of goods from the factory. Till that time the finished goods are to be stored in bonded stores and excise duty is not payable on such goods as long as the same is lying in the bonded premises.

The respondent accepted this explanation and, therefore, no addition was made to the value of the closing stock on account of excise duty as the same was not payable till the goods were cleared by the petitioner.

II Reg. Rs. 871.06 lakhs claimed as expenses on stores, spares and tools consumed:

With regard to this item the petitioner dealt with the issue under its letter dated February 18, 1999, in para. 22 thereof and by way of Ann. AU, the details of the said stores and spares consumed amounting to Rs. 8,71,06,200 were given. As some further details were required by the respondent, a list running into 30 pages was furnished containing item-wise details of the said stores and spares consumed. As the respondent was satisfied about the details, no additions were made in the assessment order in this regard.

III Reg. Deduction u/s 80-O of the Act:

With regard to this deduction, the petitioner dealt with the same by its letter dated December 10, 1998, at para. 6 thereof. Full details of the consultancy income received in foreign currency were enclosed. The claim was of 50 per cent, deduction on the income received by the petitioner in respect of consultancy fees in foreign currency. The assessee had claimed on gross receipts of Rs. 1,59,10,426 a deduction of 50 per cent., i.e., Rs. 79,55,213. The respondent in para. 15 of his assessment order took the view that from the gross receipts expenses had to be deducted while calculating the consultancy fees. Accordingly, he reduced the amount claimed by Rs. 3,55,000 resulting into relief given at 50 per cent. on the said amount being Rs. 77,77,712. The details of the expenses were furnished by the petitioner in the course of assessment.

IV Reg. Claim u/s 80HHC of the Act:

The working of the claim u/s 80HHC for export benefits was given by the petitioner along with the return accompanied by the report of the chartered accountant. The issue was dealt with by the petitioner in its letter dated January 22, 1999, in para. 2(b). Thereafter, another letter was given on February 24, 1999, whereby in para. 1 thereof, the petitioner supplied the revised working for deduction u/s 80HHC by annexure BA of the said revised working while passing the assessment order.

The petitioner says that the respondent in para. 5 deals with the relief u/s 80HHC and in para. 15 has dealt with the relief u/s 80-O. On other two points, as the explanation offered by the petitioner was accepted, no question of referring to the same in the assessment order arose.

Hereto annexed as exhibit A is the copy of the assessment order dated March 9, 1999, received on March 22, 1999.

In addition to such averments, the petitioner has also produced several documents in the form of correspondences between the petitioner and the Assessing Officer during the course of the original assessment. For example at page 84 of the paperbook, we have a letter dated January 22, 1999, written by the petitioner to the Assessing Officer justifying besides other claims, it claim for reduction u/s 80HHC of the Act. The details of such claims and justification was pointed out. At page 91 of the paperbook, we have yet another letter of the assessee dated February 18, 1999, in which further details as called for by the Assessing Officer with respect to various claims of the petitioner-assessee were explained. In yet another letter dated February 24, 1999, the petitioner wrote to the Assessing Officer that in continuation of the earlier letter dated February 22, 1999, following further details are supplied. In such letter the petitioner touched the aspect of the claim of section 80HHC and supplied the details as desired by the Assessing Officer. Full figures of such claims were filed.

From the above, it can be seen that quite apart from the reasons recorded not stating that the income chargeable to tax had escaped assessment for the failure on the part of the assessee to disclose truly and fully all material facts, even from the record, such essential condition is demonstrably not justified.

The assessee had made several claims in the return filed supported by documents. During the course of the scrutiny assessment, these claims which are the subject-matter of reasons recorded were examined by the Assessing Officer. The assessee pointedly brought to the notice of the Assessing Officer such claims made. It may be that in the ultimate order of assessment that the Assessing Officer passed, these specific issues were not recorded. However, this would be entirely different from suggesting that such issues escaped the notice of the Assessing Officer for the reason of the assessee failing to disclose truly and fully all material facts. Additionally in the petition itself the assessee has categorically averred that the Assessing Officer had issued notice dated August 19, 1999, at the behest of the audit party calling upon the explanation of the petitioner. It is further averred that the letter was issued under the audit objection only. It was also contended that the Assessing Officer was fully aware about all four issues and not only in the original assessment proceedings, but also during the first reassessment proceedings.

These averments have not been touched by the respondent though two affidavits have been filed before us. This would further led credence to the petitioner''s grievance that reopening notice has been issued at the behest of the audit party. Quite apart from the petitioner''s averment in this regard we are intrigued by the fact that though precisely on these four issues, the Assessing Officer called upon the petitioner''s explanation through a letter dated August 19, 1999, in the subsequent notice for reopening which the Assessing Officer issued on January 23, 2002 (not impugned in this petition), only one ground was taken as reason to reopen the assessment which was outside of the issues on which the explanation of the assessee was called for. This would further demonstrate that the Assessing Officer at that point of time was not inclined to reopen the assessment on the above-noted four grounds. The sum total of the above discussion is that impugned notice lacks validity with consequential effect. The same is, therefore, quashed. The petition is disposed of. Rule made absolute.