National Dairy Development Board vs Deputy Commissioner of Income Tax

Akil Kureshi, J.—Heard learned counsel for the parties for final disposal of the petition. The petitioner, National Dairy Development Board (hereinafter referred to as "the NDDB") has, in the present petition, challenged the notice dated March 15, 2012, issued by the Assistant Commissioner of income tax u/s 148 of the income tax Act, 1961 (hereinafter referred to as "the Act"). Through such notice, he proposes to reopen an assessment of the petitioner for the assessment year 2005-06, which was originally framed after scrutiny.

The brief facts are as under:

Prior to the assessment year 2003-04, the petitioner was, by virtue of section 44 of the National Dairy Development Board Act, 1987, not liable to pay any income tax or other taxes in respect of its income, profits or gains. However, with effect from the assessment year 2003-04, such exemption was withdrawn. In other words, the petitioner was liable to pay regular taxes on its income for the previous year relevant to the assessment year 2003-04.

For the assessment year 2005-06, the petitioner filed its return of income on October 28, 2005, declaring a loss of Rs. 14.91 crores (rounded off). Such assessment was taken in scrutiny. The Assessing Officer passed the order of assessment on December 31, 2007, u/s 143(3) of the Act, determining the total income at Rs. 27.34 crores (rounded off). It is this assessment which the respondent seeks to reopen for which impugned notice came to be issued.

At the request of the petitioner, the respondent supplied the reasons recorded by him for issuing such a notice. Such reasons read as under:

The assessee-company is engaged in the business of promoting, financing, constructing, sponsoring, researching, facilitating training, collecting data and such other initiatives for the development of dairy and other agricultural based industries through co-operative initiatives. The return of income was filed on October 28, 2005, declaring loss of Rs. 14,91,86,946. The assessment was completed u/s 143(3) of the income tax Act on December 31, 2007 determining total income at Rs. 27,34,06,560.

On verification of the case records, it was found that in the statement of the total taxable income of this assessment year, the assessee has claimed deduction of Rs. 52,22,57,307 on account of provision written back being write back of excess provisions for doubtful debts as per the RBI norms and provision for contingencies made in the earlier years claiming that the provision written back is not in the nature of income and not liable to tax u/s 41(1) of the income tax Act and, hence, it has been excluded while computing the total income.

The NDDB was not liable to income tax up to the assessment year 2002-03. The above provisions were made in the years in which NDDB was not required to compute its income as per the income tax Act. The provision is a charge to the profit and loss account. The provision denotes amount set out of profits and other surpluses to meet specific requirements of the amount which can be estimated closely and specific commitments, non-contingencies and diminution in the value of asset existing as on the date of balance-sheet where the amount involved cannot be determined with substantial accuracy. Therefore, the provision is created for some specific object and it reduces the net profit or increases the net loss. In other words, any provision made in the earlier years was charged to the profit and loss account and it has reduced the net profit or increased the net loss. The provision made in those years is not appropriation of profit. Therefore, the write back of the provision in the subsequent years is the reversal of the provision made in the earlier years which were allowed as it was charged to the profit and loss account. Since the creation of the provision is a charge on the profit and loss account, there is no doubts that write back of the provision of Rs. 52,22,57,307 is an income of the assessee of the assessment year under consideration in which the provision is reversed. The write back of any provision is deductible provided the same is added back while computing taxable income of the year in which it was created which was not done in the case of the assessee during the course of assessment proceedings. The assessee has wrongly claimed the above deduction. Thus, there was failure or omission on the part of the assessee to disclose fully and truly all material facts necessary for his assessment within the meaning of provisions of section 147 of the Act.

The provisions created earlier have already been charged to the profit and loss account from assessment year 1990-91 up to the financial year 2002-03 and thereby the assessee has already claimed the deduction in the respective financial years. Now, by claiming again the deduction of Rs. 52,22,57,307 by way of excess provision written back of earlier years, the assessee is claiming double deduction which cannot be allowed at all as per the provisions of the Act.

In view of the above facts and circumstances, I have reason to believe that the income chargeable to tax has escaped assessment to the extent of Rs. 52,22,57,307 within the meaning of section 147 of the income tax Act, 1961. I, therefore, issue notice u/s 148 of the income tax Act, 1961, for the assessment year 2005-06 to the assessee after obtaining necessary approval of the higher authority.

Issued notice u/s 148 of the Act accordingly.

Under a communication dated March 19, 2012, the petitioner raised objections to reopening of the assessment. Such objections were, however, rejected by an order dated December 31, 2012. Hence, this petition.

From the reasons recorded by the Assessing Officer and noted above, it emerges that the assessment is sought to be reopened on only one ground. Such ground is that till the assessment year 2002-03, the petitioner was not liable to any income tax. The petitioner had during such period when it did not have any income tax liability, created a provision and charged the same to its profit and loss account. The Assessing Officer believed that such provision would reduce the net profit or increase the net loss. Therefore, the provision made in the earlier years when written back in the subsequent years, is a reversal of such provision and, therefore, the writing back of such provision (in the present case of Rs. 52.22 crores approximately) would be the income of the assessee of the assessment year when the same was written back, in other words, for the assessment year 2005-06 under consideration.

Counsel for the petitioner raised the following contentions in support of his case:

(i) That there was no failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. The reopening beyond the period of four years from the end of relevant assessment year was not permissible. In this respect, he drew our attention to the return filed by the petitioner in which the provision written back of Rs. 52.22 crores was reflected. Such provision was explained in the notes forming part of the income tax return as under:

Provision written back of Rs. 52,22,57,307 being write back of excess provision for doubtful debts as per the RBI Prudential Norms and provision for contingencies made in the earlier year, which are not in the nature of income and not liable to tax u/s 41(1) of the Act and, hence, have been excluded while computing the total income.

(ii) Counsel contended that under the identical circumstances, this court in the case of the present petitioner had quashed such a notice of reopening for the earlier assessment year 2003-04 by the judgment dated March 24, 2011, passed in Special Civil Application No. 14449 of 2010 (since reported in National Dairy Development Board Vs. Dy. CIT, .

(iii) That in any case, the belief of the Assessing Officer that the income chargeable to tax had escaped the assessment had no basis. He submitted that provision was made at the time when the petitioner was not liable to pay any income tax. Any reversal of such a provision even during the previous year relevant to the current assessment year, would not be covered u/s 41(1) of the Act.

On the other hand, learned counsel Mr. Parikh for the respondent opposed the petition contending:

(i) For the period prior to the assessment year 2002-03, the petitioner was not subject to any tax and, therefore, had no liability to file the return. The accounts of the petitioner, therefore, would not be available to the Assessing Officer. Under what circumstances the provision was made in the earlier years was, therefore, not a part of the assessment proceedings for the assessment year 2005-06 when the scrutiny assessment was framed.

(ii) The petitioner did not give full details of the provision made and for what purpose the same was reversed. He pointed out that in the original assessment such a claim was not scrutinised.

(iii) Lastly, the counsel contended that the issues before this court in the judgment dated March 24, 2011, in the case of this very assessee were different.

Having thus heard the learned counsel for the parties and having perused the documents on record, we are of the opinion that the impugned notice lacks legal validity. Our reasons for saying so are as follows: (i) In view of the fact that such notice was issued beyond the period of four years from the end of relevant assessment year, to reopen an assessment which is framed after scrutiny, there had to be failure on the part of the assessee to disclose fully and truly all material facts. Though there has been such a narration in the reasons recorded by the Assessing Officer, we find that such assertion had not been backed by the material on record. Firstly, the reasons recorded that On verification of the case records, it is found that.... Thus, the conclusion of the Assessing Officer, which was recorded in the reasons, was borne out from the verification of the case record. Further, as pointed out by the counsel for the petitioner, in the return filed by the petitioner for the assessment year 2005-06 clearly the statement of total taxable income included the deduction of the provision of written back of Rs. 52.22 crores. Such provision was explained in the notes forming part of the income tax return, in which it was clarified that such amount was being written back of excess provision for doubtful debts as per the RBI Prudential Norms and the provision for contingencies made in the earlier years, which are not in the nature of income and not liable to tax u/s 41(1) of the Act.

(ii) For the previous year, we are not judging the validity of such an assertion. We only conclude that there was sufficient disclosure in the return filed by the petitioner to enable the Assessing Officer if he so desired to scrutinise such a claim. In that context, therefore, the contention of the learned counsel for the Revenue that the original assessment order did not examine this claim and further that the details pertaining to the provision made for the assessment years, during the period when the NDDB was not subject to income tax scrutiny, must fail. Had this been a case of notice for reopening issued within a period of four years, non-examination of claim in the original assessment would bear some relevance. When such a notice is issued beyond the period of four years, the crucial question would be whether the income chargeable to tax can be stated to have escaped the assessment for the reason of the assessee failing to disclose fully and truly all material facts. If the Assessing Officer did not have the accounts for the earlier year, surely during the course of assessment, he could have called for such details. Having chosen not to do so, his attempt to reopen the just assessment after a period of four years from the end of relevant assessment year, must fail.

(iii) Equally, we are convinced that under very similar, if not identical circumstances, this court had in the case of this very assessee by judgment dated March 24, 2011, quashed one such notice for reopening the assessment for the year 2003-04. The court held and observed as under (page 542 of 353 ITR):

A perusal of the reasons recorded indicates that the Assessing Officer has reopened the assessment on two grounds. Firstly, on the ground that while computing the taxable income, from the net profit and income and expenditure account, the petitioner had deducted under the head ''Provision written back of Rs. 47,40,43,904'' (as per audit note No. 10) of notes forming the part of the income tax return for the assessment year 2003-04. According to the Assessing Officer, the provision written back of Rs. 47,40,43,904 includes write back of excess provision for the debts detailed therein as per the RBI prudential norms, provision for contingency, etc., made in the earlier year which are not in the nature of income and not liable to tax u/s 41(1) of the Act and, hence, excluded while computing the total income, therefore, the written back provision of Rs. 47,40,43,904 is the income of the assessee for the year under consideration, which has escaped assessment. As is apparent from the reasons recorded, the aforesaid satisfaction is based upon verification of the return of the petitioner company. In other words, the said ground of reopening is based upon material disclosed by the petitioner. In so far as the second ground is concerned, which relates the claim of depreciation of Rs. 33,75,40,636, the said ground is based on the fact that in view of the introduction of Explanation 6(b) to section 43 of the Act by the Finance Act, 2008, which has been made retrospectively effective from April 1, 2003, the assessee''s claim requires to be restricted to Rs. 12,42,38,986. The Assessing Officer was of the view that in the light of the amendment brought in by the Finance Act, 2008, the petitioner has been allowed excessive depreciation.

Thus, in so far as the first ground is concerned, the satisfaction of the Assessing Officer is based upon the material placed on record by the petitioner.

(iv) In view of our above conclusions, we do not find it necessary to examine the third argument of the petitioner that in any case, the Assessing Officer believed that the income chargeable had escaped assessment lacks validity, need not be examined. Therefore, without giving any final opinion on such contention, the impugned notice is quashed.

For the reasons recorded above, the petition stands disposed of in the above terms.