Kartikeya International vs Commissioner of Income Tax and Another

Rajes Kumar, J.—By means of the present writ petitions the Petitioner is challenging the validity of the notices u/s 148 of the Income Tax Act, 1961 (called the "Act" for short) for the assessment years 2005-06 and 2006-07, both dated February 9, 2010.

The Petitioner is a partnership firm and is carrying on the business of manufacturing and export of leather harness, saddlery and shoes. The factory is situated at Unnao (Uttar Pradesh). For the assessment years 2005-06 and 2006-07, the Petitioner has filed Income Tax returns. The assessing authority passed the assessment orders for both the assessment years u/s 143(1) of the Act, accepting the disclosed income. The assessment order, in the form of intimation, has been passed without any enquiry and scrutiny of the books of account. It appears that in the profit and loss account the Petitioner has claimed deduction of "duty drawback" u/s 80IB of the Act treating the receipt of the amount towards "duty drawback" as income derived by the industrial undertaking. The said deduction has been allowed without any scrutiny and enquiry by passing the assessment order/intimation u/s 143(1) of the Act.

Both for the assessment years 2005-06 and 2006-07, the assessing authority had issued the notices dated February 9, 2010 u/s 148 of the Act. The notices have been issued within four years from the date of expity of the assessment years. There is no dispute in this regard. On receipt of the notices u/s 148 of the Act, the Petitioner asked the assessing authority to let it know the reason for reopening of the assessment. Accordingly, the Petitioner was informed that the profit and loss account revealed that deduction at the rate of 25 per cent, u/s 80IB of the Act has been claimed on the "duty drawback" while such deduction is not allowable and, therefore, there is escaped assessment. On receipt of the reasons for reopening of the assessment, the Petitioner filed a letter dated May 7, 2010, with the Assistant Commissioner of Income Tax submitting therein that from the reasons recorded it is not clear as to on what basis the inferential opinion has been formed to the effect that deduction u/s 80IB is not allowable. It is also submitted that the above position may be clarified to enable the Petitioner to file objection to the notices in the light of the law laid down by the apex court in the case of GKN Drive shafts (India) Ltd. v. ITO 2003 259 ITR 19 . After filing the aforesaid letter, the Petitioner filed writ petitions challenging the validity of the initiation of proceeding u/s 148 read with Section 147 of the Act. The writ petitions have been disposed of, vide order dated May 20, 2010, with a direction to the assessing authority to give reply to the letter dated May 7, 2010 to enable the Petitioner to file reply. The assessing authority, vide order dated June 10, 2010, has disposed of the application dated May 7, 2010. In the letter dated June 18, 2010 the assessing authority submitted that the Supreme Court in Civil Appeal arising out of SLP (C) No. 5827 of 2007 in the case of Liberty India Vs. Commissioner of Income Tax, has held that the term "duty drawback" refers to duty of customs or excise repaid or repayable as a drawback to any person against the exports under the Customs and Central Excise Duties Drawback Rules, 1971 and the amount received under the said scheme cannot be said to be profit derived from the business of industrial undertaking eligible for deduction u/s 80IB of the Act. In this view of the matter it is informed that the opinion that "duty drawback" is not eligible for deduction u/s 80IB has been formed on the basis of the decision of the apex court, referred to hereinabove.

Heard Sri Manish Goyal, learned Counsel for the Petitioner and Sri Shambhu Chopra, learned standing counsel.

Learned Counsel for the Petitioner submitted that the case u/s 147 of the Act cannot be reopened on the basis of the subsequent decision of the apex court. In effect, he submitted that the decision of the Supreme Court does not constitute the material to form any belief that there is an escaped assessment. He submitted that prior to the decision of the apex court there was a decision of the Gujarat High Court in the case of Commissioner of Income Tax Vs. India Gelatine and Chemicals Ltd., and the decision of the Tribunal, Lucknow Bench, in I.T.A. No. 694 of 2001 (Deputy CIT v. Rotomac Pens Ltd.) in which it has been held that the "duty drawback" is eligible for deduction u/s 80IB of the Act and, therefore, in the assessment order u/s 143(1) of the Act the deduction of "duty drawback" has been rightly allowed u/s 80IB of the Act. He submitted that the provision of Section 147 is equivalent to the provision of Order 47, Rule 1 of the Code of Code of Civil Procedure, which provides review of the order under certain circumstances, viz., discovery of new and important matter or evidence, which, after exercise of due diligence was not within the knowledge or could not be produced by him at the time when the decree was passed or order made or on account of some mistake or error apparent on the face of record or for any other sufficient reason. It does not contemplate review of the order on the basis of the subsequent decision of the Supreme Court. On the aforesaid submission he submitted that on the basis of the subsequent decision of the apex court the assessing authority has no jurisdiction to review its earlier order u/s 147 of the Act. Reliance is placed on the decision of the Calcutta High Court in the case of Geo Miller and Co. Ltd. Vs. Deputy Commissioner of Income Tax and Others, CIT v. Ramachandra Hatcheries 2008 305 ITR 117 (Mad), The State of West Bengal and Others Vs. Kamal Sengupta and Another, Commissioner of Income Tax, New Delhi Vs. Rao Thakur Narayan Singh, and Jiyajeerao Cotton Mills Ltd. Vs. Income Tax Officer, "C" Ward and Others, .

Sri Shambhu Chopra, learned standing counsel, submitted that the Supreme Court declares the law. The Supreme Court only interprets the provision as it stood right from the beginning and it applies retrospectively. He further submitted that the decision of the Supreme Court in the case of Liberty India Vs. Commissioner of Income Tax, operates retrospectively and the law, as declared by the Supreme Court, is deemed to be the law for the relevant assessment year and, therefore, the decision of the Supreme Court constitutes the material to form the belief about the escaped income. In support of the aforesaid contention he submitted that the decision of the Supreme Court operates retrospectively unless it is specifically made prospectively by the court itself. Reliance is placed on the decisions of the Supreme Court in the case of Sarwan Kumar and Another Vs. Madan Lal Aggarwal, Ess Ess Kay Engineering Co. P. Ltd. Vs. Commissioner of Income Tax, and (2000) 243 ITR 1

We have heard the rival submissions of learned Counsel for the parties and perused the documents annexed along with the writ petition.

The fundamental question involved in the present writ petition for consideration is whether the subsequent decision of the Supreme Court constitutes material and the assessment can be reopened u/s 147 of the Act. Section 147 of the Act, as it stood during the relevant time, reads as follows:

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 148-153, 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 148-153 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 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 u/s 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:

Provided further that the Assessing Officer may assess or reassess such income, other than the income involving matters which are the subject-matter of any appeal, reference or revision, which is chargeable to tax and has escaped assessment.

Explanation 1.-Production before the Assessing Officer of account of 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.-For the purposes of the this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely:

(a) where no return of income has been furnished by the Assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to Income Tax;

(c) where an assessment has been made, but-

(i) income chargeable to tax has been underassessed; or

(ii) such income has been assessed at too low a rate; or

(iii) such income has been made the subject of excessive relief under this Act; or

(iv) excessive loss or depreciation allowance or any other allowance under this Act has been computed.

Explanation 3.-For the purpose of assessment or reassessment under this section, the Assessing Officer may assess or reassess the income in respect of any issue, which has escaped assessment, and such issue comes to his notice subsequently in the course of the proceedings under this section, notwithstanding that the reasons for such issue have not been included in the reasons recorded under Sub-section (2) of Section 148.

Section 147 of the Act came up for consideration before the apex court in the latest decision dated January 18, 2010 in Civil Appeal Nos. 2009-2011 of 2003 Commissioner of Income Tax, Delhi Vs. Kelvinator of India Limited, The apex court held as follows (page 564):

On going through the changes, quoted above, made to Section 147 of the Act, we find that, prior to the Direct Tax Laws (Amendment) Act, 1987, reopening could be done under the above two conditions and fulfilment of the said conditions alone conferred jurisdiction on the Assessing Officer to make a back assessment, but in Section 147 of the Act (with effect from 1st April, 1989), they are given a go-by and only one condition has remained, viz., that where the Assessing Officer has reason to believe that income has escaped assessment, confers jurisdiction to reopen the assessment. Therefore, post-1st April, 1989, power to reopen is much wider. However, one needs to give a schematic interpretation to the words ''reason to believe'' failing which, we are afraid, Section 147 would give arbitrary powers to the Assessing Officer to reopen assessments on the basis of ''mere change of opinion'', which cannot be per se reason to reopen. We must also keep in mind the conceptual difference between power to review and power to reassess. The Assessing Officer has no power to review; he has the power to reassess. But reassessment has to be based on fulfilment of certain pre-conditions and if the concept of ''change of opinion'' is removed, as contended on behalf of the Department, then, in the garb of reopening the assessment, review would take place. One must treat the concept of ''change of opinion'' as an in-built test to check abuse of power by the Assessing Officer. Hence, after 1st April, 1989, the Assessing Officer has power to reopen, provided there is ''tangible material'' to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief. Our view gets support from the changes made to Section 147 of the Act, as quoted hereinabove. Under the Direct Tax Laws (Amendment) Act, 1987, Parliament not only deleted the words ''reason to believe'' but also inserted the word ''opinion'' in Section 147 of the Act. However, on receipt of representations from the companies against omission of the words ''reason to believe'', Parliament reintroduced the said expression and deleted the word ''opinion'' on the ground that it would vest arbitrary powers in the Assessing Officer.

In the case of Sarwan Kumar and Another Vs. Madan Lal Aggarwal, the apex court held that the court declares the law as it stood right from the beginning. The interpretation of a provision relates back to the date of law itself and cannot be prospective of the judgment. The apex court further held that the doctrine of "prospective overruling" was initially made applicable to the matters arising under the Constitution but the same has since been made applicable to the matters arising under the statutes as well. Under the doctrine of "prospective overruling" the law declared by the court applies to the cases arising in future only and its applicability to the cases which have attained finality is saved because the repeal would otherwise work hardship on those who had trusted to its existence. Invocation of the doctrine of "prospective overruling" is left to the discretion of the court to mould with the justice of the cause or the matter before the court.

In the case of A.L.A. Firm Vs. Commissioner of Income Tax, Madras, the apex court has held that the decision of the High Court which has not been considered by the assessing authority and came to the knowledge subsequently constituted information and material to reopen the proceeding u/s 147 of the Act.

In the case of (2000) 243 ITR 1 the apex court held that the decision of the High Court would constitute information and the initiation of reassessment proceeding on the basis of the decision of the High Court has been held justified.

In the case of Ess Ess Kay Engineering Co. P. Ltd. Vs. Commissioner of Income Tax, the apex court held that the Income Tax Officer is not precluded from reopening of the assessment of an earlier year on the basis of his finding of fact made on the basis of the fresh materials in the course of assessment of the next assessment year.

In view of the above, we are of the view that the decision of the apex court which declares the law from the very beginning of the existence of the provision itself constitute material to reopen the proceeding u/s 147 of the Act. It constitutes material to form a belief that there is an escaped assessment.

In the case of Liberty India Vs. Commissioner of Income Tax, the apex court has considered the scheme of the duty drawback and it has been held that the duty drawback received from the Central Government under the scheme does not fall within the purview of the income derived from the business of the industrial undertaking so as to entitle the Assessee to deduction u/s 80IB of the Act. In this view of the matter the Petitioner was not entitled for the deduction on the duty drawback amount u/s 80IB of the Act and since it has been allowed in the assessment order passed u/s 143(1) of the Act, there was an escaped assessment. On these facts we are of the view that the initiation of proceedings u/s 148 read with Section 147 of the Act for the assessment years 2005-06 and 2006-07 are legal and in accordance with law.

Let us examine the various decisions cited by learned Counsel for the Petitioner. Order 47, Rule 1 of the Code of Code of CPC relates to the review of the order. It does not contemplate reopening of the proceeding in the case of escaped assessment. The Income Tax Act is a special Act. Section 147 of the Act does not contemplate review of the order, but it contemplates reopening and reassessment. Therefore, Order 47, Rule 1 of the Code of Code of CPC has no application to Section 147 of the Act.

The decision of the Calcutta High Court in the case of Geo Miller and Co. Ltd. Vs. Deputy Commissioner of Income Tax and Others, relates to the rectification of mistake apparent on the record u/s 154 of the Act and not reopening and reassessment u/s 147 of the Act and, therefore, it is not applicable.

In the case of CIT v. Ramachandra Hatcheries 2008 305 ITR 117 (Mad) an issue has been finally decided in appeal by the Commissioner (Appeals). The appellate order had become final and no appeal had been filed against the appellate order. On these facts the Madras High Court has held that on the basis of the subsequent decision of the Supreme Court on the same issue, which has been adjudicated and settled by the appellate authority, the case cannot be reopened u/s 147 of the Act. Therefore, this case is clearly distinguishable on the facts and is not applicable to the present case.

The decision of the apex court in the case of The State of West Bengal and Others Vs. Kamal Sengupta and Another, relates to Order 47, Rule 1 of the Code of Code of Civil Procedure, which contemplates review. Therefore, this decision is not applicable to the present case.

In the case of Commissioner of Income Tax, New Delhi Vs. Rao Thakur Narayan Singh, an issue with respect to the interest income has been decided by the Tribunal in favour of the Assessee. It had become final. Therefore, the initiation of reassessment proceeding to tax the interest income has been held invalid. This case is clearly distinguishable on the facts of the case and is not applicable.

The decision of the Calcutta High Court in the case of Jiyajeerao Cotton Mills Ltd. Vs. Income Tax Officer, "C" Ward and Others, relates to the" rectification of mistake and not reopening and reassessment and, therefore, is not applicable to the present case.

For the reasons stated above, we do not find any merit in the writ petitions. Both the writ petitions fail and are dismissed without any order as to costs.