ICICI Bank Ltd. vs K.J. Rao, Deputy Commissioner of Income Tax and Another

J.P. Devadhar, J.—Rule, returnable forthwith. By the consent of the parties, both the petitions are taken up for final hearing.

In these two petitions, the ICICI Bank Ltd. has challenged the notices both dt. 17th Oct., 2002 (relating to the asst. yrs. 1996-97 and 1997-98) issued u/s 148 of the IT Act, 1961, by the IT authorities at Ahmedabad to Anagram Finance Ltd. The said Anagram Finance Ltd. was a company registered under the Companies Act, 1956, and was assessed to tax under the jurisdiction of the Asstt. CIT, Ahmedabad. With effect from 1st April, 1998, the said Anagram Finance Ltd. merged with ICICI Ltd. It is not in dispute that by a letter dt. 27th Nov., 2001, ICICI Ltd. had informed the IT authorities at Ahmedabad about the merger of Anagram Finance Ltd. with ICICI Ltd. and had requested to transfer all pending cases of the erstwhile Anagram Finance Ltd. to the Dy. CIT, Circle 3(1), Mumbai, under whose jurisdiction ICICI Ltd. was assessed. Thereafter, the ICICI Ltd. merged with ICICI Bank Ltd. w.e.f. 30th March, 2002. Thus, the fact that Anagram Finance Ltd. had ceased to exist w.e.f. 1st April, 1998 was made known to the IT authorities at Ahmedabad by ICICI Ltd. vide letter dt. 27th Nov., 2001.

In spite of the knowledge about the non-existence of Anagram Finance Ltd., the impugned notices, both dt. 17th Oct., 2002 have been issued u/s 148 of the IT Act, 1961 (''the IT Act'' for short), to Anagram Finance Ltd. for the purpose of reopening the assessment for the asst. yrs. 1996-97 and 1997-98. The validity of these notices are challenged in the present petitions by ICICI Bank Ltd. mainly on two grounds, Firstly, it is contended that the notices issued to a non-existing company namely, Anagram Finance Ltd. is in contravention of the conditions precedent required to be fulfilled before initiating proceedings u/s 148 of the IT Act and secondly, it is contended that even on merits, there is no failure on the part of the assessee to disclose fully and truly all material facts, and, therefore, the notices issued to the assessee beyond the period of 4 years from the end of the relevant assessment years are liable to be quashed and set aside.

The Revenue in its affidavit-in-reply to the petition stated that issuance of notices in the name of Anagram Finance Ltd., which had merged with ICICI Ltd. on 1st April, 1998 is at the highest a mere irregularity and not an illegality and as such the said irregularity is saved u/s 292B of the IT Act. It is further stated that the ICICI has in fact filed returns on 15th Nov., 2002 pursuant to the said notices dt. 17th Oct., 2002 and, therefore, it is not open to the petitioners to contend that the notices are invalid. As regards the merits of the case, it is stated that the assessments for asst. yrs. 1996-97. and 1997-98 have been reopened because it was noticed by the Asstt. CIT that depreciation on leased vehicles in the relevant assessment year were claimed by the assessee at. 40 per cent instead of 20 per cent, as a result whereof excess depreciation has been allowed to the assessee and, therefore, there is reason to believe that the assessee has failed to furnish fully and truly all material facts. Thus, according to the Revenue, the proceedings for reopening of the assessments have been initiated in consonance with the provisions of Sections 147 and 148 of the IT Act.

Ms. A. Vissanji, learned advocate, appearing on behalf of the petitioners, submitted before us that when the IT authorities at Ahmedabad were aware of the fact that Anagram Finance Ltd. had ceased to exist w.e.f. 1st April, 1998, notices u/s 148 of IT Act could not have been issued in the name of Anagram. Finance Ltd., a non-existent company. She submitted that issuance of notices to a non-existent company renders the initiation of proceedings u/s 148 of the IT Act ab initio void. She submitted that the provisions of Section 292B of the IT Act were enacted to save purely technical obligations without substantially coming in the way of the validity of the assessment proceedings. She submitted that issue of a valid notice is a condition precedent for initiating proceedings u/s 148 of the IT Act and if the notice is invalid or is not served on the proper person in accordance with law, then the assessment will be illegal and without jurisdiction. She, submitted that failure to issue notice or issuing notices in the name of a dead person is a fundamental infirmity and such a fundamental infirmity cannot be called as a technical infirmity or mere irregularity and such vital infirmity cannot be cured or obliterated by relying on Section 292B of the IT Act. In this connection, the learned counsel for the petitioners relied upon the judgment of the Kerala High Court in the case of P.N. Sasikumar and Others Vs. Commissioner of Income Tax, , decisions of the Allahabad High Court in the case of Commissioner of Income Tax Vs. Smt. Phoolmati Devi, , Modi Sugar Mills Ltd. Vs. Union of India (UOI), , decision of the Calcutta High Court in the case of Gajendra Kumar Banthia Vs. Union of India (UOI), and Shyam Sundar Bajaj Vs. Income Tax Officer, "A" Ward and Others, the decision of the Madhya Pradesh High Court in the case of SHAIKH ABDUL KADAR Vs. Income Tax OFFICER, SAGAR., and the decision of the apex Court in the case of Commissioner of Income Tax Andhra Pradesh Vs. K. Adinarayan Murty, .

Learned counsel for petitioners further submitted that merely because the petitioners pursuant to the impugned notices have filed their returns under protest does not mean that the petitioners have waived their objections to the validity of the notices issued u/s 148 of the IT Act. It was submitted that the notices which are otherwise invalid cannot be validated by consent of parties. In this connection, the learned counsel for the petitioners relied upon the decisions of the apex Court in the case of Supdt. of Taxes, Dhubri and Others Vs. Onkarmal Nathmal Trust and Others, and Y. Narayana Chetty and Another Vs. The Income Tax Officer, Nellore and Others, .

As regards the merits of the case, the learned counsel for the petitioners submitted that the assessee had disclosed in its return of income all material facts regarding the claim for depreciation. It was submitted that in the reasons recorded for reopening the assessment, nowhere it is stated that there is any failure on the part of the assessee to disclose fully and truly all material facts relevant for the purpose of assessment. It was submitted that the fact that the assessee was a financial company was disclosed in the return of income. In fact, the list of the parties to whom the vehicles were leased by the assessee were also before the AO at the time of assessment and from the said list it could be seen that depreciation at different rates were claimed by the assessee (see pp. 101 to 128 of the petition) for different categories and in the assessment order passed u/s 143(3) of the IT Act, the AO had extensively dealt with the claim for depreciation and after careful consideration has in fact disallowed the depreciation to the extent of Rs. 4,72,72,472. It was accordingly submitted that there was full and complete disclosure made by the assessee and by no stretch of imagination, the claim for higher rate of rebate can be said to be a failure on the part of the assessee to disclose fully and truly all materials facts. It was submitted that even assuming that on the leased vehicles, 40 per cent depreciation was wrongly claimed and wrongly allowed by the AO, then it may be a case of granting excess relief and not a case of any failure on the part of the assessee to disclose fully and truly all material facts. It was submitted that if there is no failure on the part of the assessee to disclose fully and truly all material facts, then the reassessment proceedings beyond the period of 4 years from the end of the relevant assessment year, cannot be initiated u/s 147/148 of the IT Act. In this connection, the learned counsel for the petitioners relied upon the decisions of this Court in the case of IPCA Laboratories Ltd. Vs. Gajanand Meena, Deputy Commissioner of Income Tax and Others (No. 2), and Bhor Industries v. Asstt. CIT.

Mr. Desai, learned senior advocate appearing on behalf of the respondents, on the other hand submitted that issuing notices u/s 148 of the IT Act to Anagram Finance Ltd. at the highest can be said to be a mere irregularity and not an illegality and such an irregularity is saved by the provisions of Section 292B of the IT Act. He submitted that though notices were issued to Anagram Finance Ltd., it was shown as "C/o. ICICI Bank Ltd." and in fact the notice has been received by the ICICI Bank Ltd. Therefore, the notices impugned in these petitions may not be held to be invalid as in substance and in effect the same are in conformity and in accordance to the intent and purpose of Sections 147 and 148 of the IT Act. He submitted that the notices addressed to Anagram Finance Ltd. C/o. ICICI Bank Ltd. may be treated as a clerical error which does not have any adverse effect, He submitted that pursuant to the notices dt. 17th Oct., 2002, the petitioners have filed the returns of income and, therefore, in the facts of the present case, issuance of notices in the name of Anagram Finance Ltd. should be treated as procedural irregularity curable u/s 292B of the IT Act. In this connection, he relied upon the judgment of this Court in the case of Commissioner of Income Tax (Central), Bombay Vs. Devidayal and Sons, , wherein it was held that the notice for reassessment of a dissolved firm in respect of pre-dissolution period issued in the name of the firm and served on one of the partners was held to be valid and proper and it was further held that the notice to the firm though not addressed to the partner will not render it invalid, if in fact, it is served on the partner and accepted by him and return of the firm has been submitted in pursuance thereof. He submitted that in the present case, notices for initiating reassessment proceedings in the case of Anagram Finance Ltd. were required to be served on ICICI Bank Ltd. and in fact the notices have been served upon the ICICI Bank Ltd. and, therefore, there being substantial compliance, it may be held that the notices issued are valid and proper. In support of the aforesaid submissions, he relied upon the decisions of the Allahabad High Court in the case of NAND KISHORE SITA RAM Vs. COMMISSIONER OF Income Tax, U. P., , decision of the apex Court in the case of First Additional Income Tax Officer, Kozhikode Vs. Susheela Sadanandan and Another, , decision of this Court in the case of Shewaram D. Bhatia Vs. Commissioner of Income Tax, Bombay City II, , decision of the Patna High Court in the case of Manilal Raghavji Kothari Vs. Commissioner of Income Tax, and the decision of Mansa Ram and Sons Vs. Commissioner of Income Tax, .

As regards the merits of the case, Mr. Desai submitted that for the assessment years in question, the assessee had claimed depreciation on leased vehicles at higher rate of 40 per cent as against the allowable depreciation at the rate of 20 per cent which resulted in allowing excess depreciation in the sum of Rs. 10,89,84,585. He submitted that the action of the assessee in claiming higher depreciation, though not eligible, amounts to failure on the part of the assessee to disclose fully and truly all material facts necessary for the purpose of assessment. On account of the failure on the part of the assessee to disclose fully and truly all material facts, income chargeable to tax has escaped assessment within the meaning of Section 147 of the IT Act for which notices have been rightly issued by the AO. Accordingly, it was submitted that there is no infirmity in the notices issued u/s 148 of the IT Act and there is no merit in the writ petitions filed to challenge the impugned notices.

We have heard counsel on both sides. Basically, two issues arise in these two petitions. Firstly, whether the notices both dt. 17th Oct., 2002 issued u/s 148 of the IT Act to Anagram Finance Ltd. a company which had ceased to exist w.e.f. 1st April, 1998, are valid in law. Secondly, assuming that the notices issued in the name of Anagram Finance Ltd. are valid, in the absence of any material on record to show that there was any failure on the part of the assessee to disclose fully and truly all material facts necessary for the purpose of assessment, whether the reopening of the assessments beyond the period of 4 years from the end of the relevant assessment years are valid?

Let us take the second issue for consideration first. From the reasons recorded for reopening the assessment, it is seen that the AO arrived at the conclusion that there is failure on the part of the assessee to disclose fully and truly all material facts solely on the ground that the assessee had claimed in its return of income depreciation at 40 per cent on leased vehicles instead of depreciation at 20 per cent. On perusal of the assessment orders passed u/s 143(3) of the IT Act, it is seen that the AO had taken note of the fact that the assessee is a finance company and the fact that the assessee had claimed depreciation at different rates for different vehicles, including depreciation on leased vehicles at 40 per cent. The AO after scrutinising the documents furnished by the assessee and on investigation found that the depreciation claimed on items at 40 per cent was proper and found that the depreciation on items claimed at 100 per cent was not proper. Thus, the grant of depreciation at 40 per cent on leased vehicles is a conscious decision taken by the AO at the time of final assessment. Therefore, on the same set of facts if another AO arrives at the conclusion that under the IT Act the depreciation on leased vehicles is allowable at 20 per cent and not at 40 per cent then it is only a change of opinion and it has nothing to do with the disclosure of material facts on the part of the assessee. Assuming that the depreciation allowable on leased vehicles was 20 per cent and there was excess relief granted, even then, it cannot be a case of failure on the part of the assessee to disclose fully and truly material facts. In such circumstances, if the proceedings were initiated within 4 years from the end of the relevant assessment years, then the case would have been altogether different. In the present case, admittedly, notices for reopening of the assessments u/s 148 of the IT Act have been issued beyond the period of 4 years from the end of the relevant assessment years.

u/s 147 of the IT Act, concluded assessments can be reopened beyond a period of 4 years from the end of the relevant assessment years only if there is failure on the part of the assessee to disclose fully and truly all material facts necessary for the purpose of assessment. Having furnished all material facts even if an assessee erroneously claims higher depreciation, it will not be a case of failure to disclose fully and truly all material facts. At what rate the depreciation is to be claimed is a matter of legal inference to be drawn from the material facts. If the legal inference drawn from the material facts is erroneous it cannot be said that there is failure on the part of the assessee to disclose material facts. In the present case, on the material facts disclosed, the assessee had claimed depreciation at 40 per cent and the same was allowed by the AO. It is not the case of the Revenue that the facts disclosed by the assessee were incorrect or that there were any other facts which were material for the assessment which have not been disclosed by the assessee. Under the circumstances, if there is no failure to disclose material facts, then, even if there is excess relief granted, the assessments cannot be reopened beyond the period of 4 years from the end of the relevant assessment years. This Court in the case of IPCA Laboratories Ltd. (supra) and in the case of Bhor Industries (supra) has held that notice for reopening of the assessment cannot be issued after a period of 4 years unless the escapement of income is on account of failure on the part of the assessee to disclose fully and truly all material facts. It has been further held that the Explanation to Section 147 of the IT Act has to be r/w Section 148 of the IT Act in its entirety. In the light of the aforesaid decisions, in the present case, there being no failure on the part of the assessee to disclose fully and truly all material facts, the impugned notices issued beyond the period of 4 years from the end of the relevant assessment years, are liable to be held to have been issued in contravention of the provision of the IT Act.

On behalf of the Revenue, reliance was placed on a recent decision of this Court in the case of Kotak Mahindra Finance Limited Vs. The Deputy Commissioner of Income Tax, Special Range 25, . In that case, it has been held that a finance company leasing vehicles to a customer does not constitute user for business of running them on hire and, therefore, not entitled to higher rate of depreciation. The ratio laid down therein is not relevant herein because the issue raised in that case was altogether different. The issue raised and considered in that case was whether a finance company leasing vehicles to its customers constitute the business of running the vehicles on hire, whereas, in the present case, the issue involved is whether there was any failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment, Therefore, the ratio laid down in the aforesaid decision does not support the contention of the Revenue in the present case.

In the light of our decision on the second issue it is not necessary for us to deal with the first issue namely, whether the notices issued in the name of a non-existent company are valid, or not.

In this view of the matter, we quash and set aside the impugned notices both dt. 17th Oct., 2002. Rule is made absolute in terms of prayer Clause (a) in both the petitions with no order as to costs.