reassessment on an issue not allowed in original assessment

[JB]

in the original assessment u/s 143(3), deduction u/s 80IB was denied in entirety on the ground of violation of one of the mandatory conditions. CIT(A) allowed the benefit of deduction u/s 80IB finding that there was no breach. The department filed appeal before ITAT. During the pendency of ITAT appeal, department reopened the assessment, on audit objection, on the ground that benefit of deduction u/s 80IB should not be allowed on DEPB. On merit, it seems to be in order due to Supreme Court judgment in case of Liberty India. However, we objected to the reassesment proceedings on the ground that there was no escapement of income as in the original assessment deduction u/s 80IB was denied in entirety. Proviso to section 147 is not applicable as reopening is within 4 years.

(1) Is our stand that there was no escapement of income when no deduction u/s 80IB was allowed in original assesment correct?

(2) Whether doctrine of merger will come into play? can it be said that the assessment order merged into CIT(A)'s order and since CIT(A)'s has allowed the benefit of section 80IB, there is escapement of income to the extent of deduction on DEPB?

(3) Can we say that department could not reopen such a case during pendencey of its appeal before ITAT and can take alternative plea before ITAT for DEPB?

The reassessment was completed disposing objections without discussing them with reasoning. At present, the ITAT has also dismissed department's appeal. Kindly share  your views in the matter.

[pawansingla]

Kindly read Nirma Chemical Ltd judgement of Gujarat High court. As the issue got merged with the order of CIT(A) , there is no power to reopen or 263.

[pawansingla]

Income-tax - When very issue on which assessment was sought to be reopened had been canvassed in appeal and had been determined in appellate proceedings by Commissioner (Appeals), in terms of second proviso to section 147, same issue could not lawfully form basis of notice for reopening assessment



[2011] 9 taxmann.com 237 (Bom.)

HIGH COURT OF BOMBAY

Prashant Projects Ltd.

v.

Assistant Commissioner of Income-tax*, 10(3), Mumbai

Dr. D.Y. CHANDRACHUD AND

J.P. DEVADHAR, JJ.

WP NO. 772 OF 2010

JUNE 25, 2010

Section 147, read with section 80HHC, of the Income-tax Act, 1961 - Income escaping assessment - Non-disclosure of primary facts - Assessment year 2002-03 - For relevant assessment year, assessee filed its return of income disclosing nil income after claiming deduction under section 80HHC as a trader exporter - Assessing Officer, however, allowed deduction under section 80HHC treating assessee as manufacturer exporter - On appeal, Commissioner (Appeals) accepted plea of assessee that it was trader exporter - Before arriving at that conclusion, he had called for remand report from Assessing Officer who, by his remand report, accepted that assessee was trader exporter - Effect was given to order passed by Commissioner (Appeals) on 28-1-2009 - Thereafter, assessment was sought to be reopened on 25-3-2009 on ground that assessee was manufacturer exporter and was not entitled to deduction under section 80HHC - Whether when during assessment proceedings assessee had furnished, together with its return, details of gross total income, claim for deduction under section 80HHC and details of profit and loss account pertaining to export and domestic turnover and Assessing Officer had obviously applied his mind to issue, condition precedent to exercise of jurisdiction to reopen assessment beyond four years from end of relevant assessment year had not been fulfilled in instant case - Held, yes - Whether even otherwise when very issue on which assessment was sought to be reopened had been canvassed in appeal and had been determined in appellate proceedings by Commissioner (Appeals), in terms of second proviso to section 147, same issue could not lawfully form basis of notice for reopening assessment - Held, yes

Facts

For the relevant assessment year, the assessee-company filed its return of income declaring a nil income after claiming a deduction under section 80HHC as a trader exporter. In the report in Form No. 10CCAC, it disclosed profit from the export of trading goods at Rs. 8.60 crores and reported a loss of Rs. 5.29 crores in its domestic operations. The Assessing Officer, however, held that the assessee was carrying on manufacturing activity during the course of the assessment year and, therefore, deduction under section 80HHC was recomputed treating the assessee as manufacturer exporter. On appeal, the Commissioner (Appeals) accepted the plea of assessee that it was not a manufacturer exporter but a trader exporter. Before arriving at that conclusion, the Commissioner (Appeals) had called for a remand report from the Assessing Officer who, by his remand report, accepted that the assessee was trader exporter within meaning of section 80HHC(3)(b). Effect was given to the order passed by the Commissioner (Appeals) on 28-1-2009. Thereafter, the assessment was sought to be reopened on 25-3-2009 on the ground that the assessee was a manufacturer and since as per Form No. 10CCA, the adjusted profit of the business was a loss to the extent of Rs. 5.29 crores, the assessee was not entitled to any deduction under section 80HHC.

On writ :

Held

The reopening of the assessment had taken place after a period of four years from the end of the relevant assessment year. The assessment in the instant case had taken place under section 143(3). The validity of the notice for reopening the assessment would depend upon whether within the meaning of the proviso to section 147, there was a failure on the part of the assessee to disclose fully and truly all material facts relating to the assessment for that assessment year. The record before the Court disclosed that the assessee had furnished, together with its return, details of the gross total income, the claim for the deduction under section 80HHC, details of the profit and loss account pertaining to the export and domestic turnover and relevant information in the report contained in Form 10CCAC. The information provided in Form 10CCAC was to the effect that profits from the export of trading goods were Rs. 8.60 crores while there was a loss from domestic operations amounting to Rs. 5.29 crores. The Assessing Officer, obviously applied his mind to the issue because when he passed an order of assessment, he specifically held that the assessee was carrying on manufacturing activity and having exported manufactured goods could claim a deduction under section 80HHC only as a manufacturer. During the course of the appellate proceedings before the Commissioner (Appeals), a remand report was called for and the Assessing Officer, after considering the material which was produced by the assessee, concluded that goods had been purchased by the assessee which were then exported; and that the case of the assessee fall within the purview of sub-section (3)(b) of section 80HHC. The Commissioner (Appeals) accepted the contention of the assessee. This showed that there was a full and true disclosure of the facts by the assessee; and that there was a due application of mind by the Assessing Officer. Hence, the condition precedent to the exercise of the jurisdiction to reopen the assessment beyond four years of the end of the relevant assessment year had not been fulfilled in the instant case. There was no failure on the part of the assessee to disclose fully and truly all material facts. The Assessing Officer could not have formed a reason to believe that income had escaped assessment. There was also merit in the contention that in terms of the second proviso to section 147, the assessment could not have been reopened. The second proviso to section 147 provides 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. In the instant case, the very issue on which the assessment was sought to be reopened was canvassed in appeal and was determined in the appellate proceedings by the Commissioner (Appeals). The same issue could not lawfully formed the basis of the notice for reopening the assessment. [Para 9]

Accordingly, the appeal was to be allowed by setting aside the notice issued by the Assessing Officer. [Para 10]

R. Murlidhar, Atul K. Jasani for the Petitioner. Ms. Suchitra Kamble for the Respondent.

Judgment

Dr. D.Y. Chandrachud, J. - Rule. With the consent of Counsel, rule is made returnable forthwith. By consent of Counsel for both the parties, the petition is taken up for hearing and final disposal.

2. In these proceedings under Article 226 of the Constitution, the challenge by the assessee is to the reopening of an assessment for assessment year 2002-03 in purported exercise of powers conferred by section 147 of the Income-tax Act, 1961. A notice under section 148 has been issued on 25-3-2009, beyond a period of four years of the end of the relevant assessment year. The issue that will fall for determination of the Court, as a result, is whether there was a failure on the part of the assessee to disclose fully and truly all the material facts necessary for his assessment for the assessment year in question.

3. The assessee filed a return of income on 29-10-2002 disclosing a nil total income. In the computation of its total income, the assessee disclosed a gross total income of Rs. 3.42 crores. A deduction was claimed under section 80HHC in the amount of Rs. 6.02 crores but the extent of the total deduction was restricted to the gross total income of Rs. 3.42 crores. The Petitioner furnished the details of its domestic turnover and export turnover. A net profit of Rs. 8.60 crores was claimed from the export turnover. In the report in Form 10CCAC, the assessee disclosed a profit from the export of trading goods of Rs. 8.60 crores and as against the adjusted profits of the business, reported a loss of Rs. 5.29 crores.

4. A notice was issued to the assessee on 16-8-2004 for reopening the assessment. The ground which was set out in the notice was that the assessee had in its return of income declared a nil total income after claiming a deduction under section 80HHC of Rs. 3.42 crores. According to the Assessing Officer, the assessee had shown as against the adjusted profit of the business, a loss of Rs. 5.29 crores. As the assessee had allegedly incurred a loss on the export business, the Assessing Officer held that it was not entitled to a deduction under section 80HHC. The assessee filed its objections to the reopening of the assessment on 27-9-2005 and contended that it qualified for a deduction under sub-section (3)(b) of section 80HHC for the export of trading goods. The profits of its business as a trading exporter were stated to be Rs. 8.60 crores whereas in its domestic operations, the assessee stated that it had incurred a loss of Rs. 5.29 crores. Consequently, the profit from the business, according to the books of account, was Rs. 3.31 crores. The gross total income under the Act was reported to be Rs. 3.23 crores.

5. The Assessing Officer passed an order under section 143(3) on 31-3-2006 and came to the conclusion that the assessee was carrying on manufacturing activity during the course of the assessment year. The deduction under section 80HHC was accordingly recomputed. The issue was carried in appeal by the assessee and by an order dated 20-3-2007, the Commissioner (Appeals) accepted the contention of the assessee that it was not a manufacturer exporter but a trader exporter. Before arriving at this conclusion, the Commissioner (Appeals) had called for a remand report from the Assessing Officer. By his remand report dated 8-2-2007, the Assessing Officer reiterated that the assessee was a trader exporter within the meaning of section 80HHC(3)(b). The conclusion that was arrived at by the Commissioner (Appeals) was as follows :

"..... After considering the entire facts and remand report, I am of the view that Assessing Officer was not justified in treating the appellant as a manufacturer exporter. The appellant has exported goods to Kenya for a project during the year under consideration. For this purpose, appellant purchased steel plates, angles, channels etc. from the market and exported the same to Kenya for the project. As per the evidences filed and examined by the Assessing Officer, no manufacturing work was done by the appellant and it has done simply trading export. The appellant had simply purchased the steel plates and exported the same either in the same condition or at the most after cutting to the size required by the purchaser. No new article or thing was brought into existence in this process. The appellant has submitted copies of drawings, purchase and sale invoices which have been examined by the Assessing Officer in remand proceedings. In view of these facts and remand report, I am of the view that Assessing Officer was not correct in treating the appellant as manufacturer and calculating the deduction under section 80HHC(3)(a) of the Act as against section 80HHC(3)(b) as claimed by the assessee. In view of the aforesaid detailed facts and various case laws relied by the appellant and the fact that on the similar fact in assessment year 2003-04, the Assessing Officer has treated the appellant as trader exporter, the Assessing Officer is directed to allow deduction under section 80HHC by treating the assessee as trader exporter as per section 80HHC(3)(b) of the Act."

6. Effect was given to the order passed by the Commissioner (Appeals) on 28-1-2009. It is thereafter that the assessment has been sought to be reopened on 25-3-2009. The reasons on the basis of which the assessment is sought to be reopened have been furnished to the assessee on 18-6-2009 and they read as follows :

"From the return of income, it is noticed that the assessee has claimed deduction under section 80HHC of Rs. 1,28,85,916. However, on perusal of the case records, it is seen that the assessee is engaged in design & construction of Oil Gas Petroleum Storage Terminals on turnkey basis and is, therefore, manufacturer. It is seen from the P & L Account that exports out of India were manufactured goods. It is noticed from the Form No. 10CCA that the adjusted profit of the business is a loss to the extent of Rs. 5 29,77,712 and the assessee is not entitled for any deduction under section 80HHC.

Thus, there is a failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment, for the said assessment year, I have reasons to believe that the income to the extent of Rs. 1,28,85,916 has been escaped the assessment."

7. The learned Counsel appearing on behalf of the assessee urged four submissions in support of the petition: (i) There was a full disclosure by the assessee of all the material facts in relation to the assessment and the assessee had specifically claimed a deduction as a trader exporter under section 80HHC(3)(b); (ii) There was a due application mind by the Assessing Officer. The Assessing Officer had initially rejected the contention of the assessee that he was a trader exporter and came to the conclusion that the assessee was a manufacturer exporter. On appeal, when a remand report was called by the Commissioner (Appeals), the Assessing Officer after considering the evidence produced by the assessee accepted that the assessee was a trader exporter. The Commissioner (Appeals) affirmed that the assessee was a trader exporter within the meaning of section 80HHC(3)(b); (iii) In the circumstances, the Assessing Officer could not have had reason to believe that income had escaped assessment or that the assessee was a manufacturer as distinguished from a trader in relation to the claim for deduction; (iv) In any event, in view of the second proviso to section 147, the Assessing Officer could not have had reason to believe that income had escaped assessment since the specific issue on the basis of which the assessment is sought to be reopened was governed by proceedings in appeal before the Commissioner (Appeals).

8. On the other hand, Counsel appearing on behalf of the revenue has supported the notice that was issued for reopening of the assessment on the grounds which are set out in the notice.

9. The reopening of the assessment has taken place after a period of four years of the end of the relevant assessment year. The assessment in the present case had taken place under section 143(3). The validity of the notice reopening the assessment would depend upon whether within the meaning of the proviso to section 147, there was a failure on the part of the assessee to disclose fully and truly all material facts relating to the assessment for that assessment year. Now the record before the Court discloses that the assessee had furnished, together with its return, details of the gross total income (Rs. 3.42 crores); the claim for the deduction under section 80HHC; retails of the profit and loss account pertaining to the export and domestic turnover and relevant information in the report contained in Form 10CCAC. The information provided in Form 10CCAC was to the effect that profits from the export of trading goods were Rs. 8.60 crores while there was a loss from domestic operations amounting to Rs. 5.29 crores. The Assessing Officer, obviously applied his mind to the issue because when he passed an order of assessment on 31 March, 2006, he specifically held that the assessee was carrying on manufacturing activity and having exported manufactured goods could claim a deduction under section 80HHC only as a manufacturer. During the course of the appellate proceedings before the Commissioner (Appeals), a remand report was called for and the Assessing Officer after considering the material which was produced by the assessee concluded that goods have been purchased by the assessee which were then exported and that the case of the assessee fell within the purview of sub-section (3)(b) of section 80HHC. The Commissioner (Appeals) accepted the contention of the assessee. This shows that there was both a full and true disclosure of the facts by the assessee and that there was a due application of mind by the Assessing Officer. Hence, the condition precedent to the exercise of the jurisdiction to reopen the assessment beyond four years of the end of the relevant assessment year has not been fulfilled in this case. There was no failure on the part of the assessee to disclose fully and truly all material facts. The Assessing Officer could not have formed a reason to believe that income has escaped assessment. That apart, there is merit in the contention that in terms of the second proviso to section 147, the assessment could not have been reopened. The second proviso to section 147 provides 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. The very issue on which the assessment is sought to be reopened was canvassed in appeal and was determined in the appellate proceedings by the Commissioner (Appeals). The same issue could not lawfully form the basis of the notice for reopening the assessment.

10. For all these reasons, the petition would have to be allowed and is accordingly allowed. Rule is made absolute by setting aside the notice issued by the first Respondent on 25-3-2009 purporting to reopen the assessment for assessment year 2002-03 under section 148. There shall be no order as to costs.

nn

[brett_lee38]

Kindly read section 147 care fully, particularly the explanations, as per my view if the assessment is reopened with in four years then there is no difficulty for department and if the same is beyond four years then there is problem for department

[JB]

Thank you for sharing the views. There are 2 different views from two experts. As i stated earlier, the re-opening is within 4 years.

In the reassessment proceedings, i mentioned the second proviso and mentioned that as per memorandum explaining the provisions of finance bill, the said proviso is clarificatory in nature. My confusion is that in the original assesment proceedings 80IB was denied in entirety on one ground. Whereas in reassessment proceedings, part of deduction u/s 80IB is denied on different ground. The second proviso uses the word "matters". Though issue is same i.e.deduction u/s 80IB, the matters are different. The matter on which the assessment is sought to be re-opened is different than the matter which was subject matter of appeal. Under the circumstances, will the proviso apply? In the judgment of Prashant Project, the matter appears to be same.  Under the second proviso, whether entire issue will get merged or only the matter will get merged?

[pawansingla]

SECTION 80-I/INCOME-TAX ACT
[2009] 182 TAXMAN 183 (GUJ.)
HIGH COURT OF GUJARAT
Commissioner of Income-tax
v.
Nirma Chemicals Works (P.) Ltd.*
D.A. MEHTA AND Z.K. SAIYED, JJ.
IT REFERENCE NO. 94 OF 1996
FEBRUARY 4, 2008

Section 80-I of the Income-tax Act, 1961 - Deductions - Profits and gains from industrial undertakings, etc., after certain dates - Assessment year 1985-86 - Whether section 80-I lays down a complete codified scheme in itself for deciding not only eligibility but also for computation of relief to which assessee is entitled and, therefore, it cannot be said that computation under section 80-I(1) is independent of eligibility under sub-section (2) of said section - Held, yes
Section 263, read with section 80-I, of the Income-tax Act, 1961 - Revision - Of orders prejudicial to interest of revenue - Assessment year 1985-86 - Assessee-company claimed relief under section 80-I - Assessing Officer allowed claim partially by reworking and reducing relief available - On appeal, Commissioner (Appeals) allowed assessee's claim in entirety - Thereafter, Commissioner passed an order under section 263 disallowing claim under section 80-I on ground that new industrial undertaking of assessee was formed by reconstruction/splitting up of old business - On appeal, assessee challenged jurisdiction of Commissioner to exercise powers under section 263 on ground that order of Assessing Officer having been merged with order of Commissioner (Appeals), it could not be revised under section 263 - Tribunal rejected assessee's contention holding that Commis- sioner (Appeals) had not considered issue regarding eligibility under section 80-I and, therefore, there was no merger of assessment order on that issue - Whether when deduction under section 80-I was granted by Assessing Officer after disallowing a part of claim which was carried in appeal before Commissioner (Appeals), requirement of fulfilment of conditions stipulated by sub-section (2) of section 80-I was very much subject-matter of appeal and, therefore, prohibition imposed by Explanation (c) to section 263 would be applicable to instant case - Held, yes - Whether even otherwise, when Assessing Officer after making due inquiries, had adopted one view and granted partial relief under section 80-I, merely because Commissioner took a different view of matter, it would not be sufficient to permit Commissioner to exercise powers under section 263 - Held, yes

I think the ratio of this judgement may help you.

[JB]

Yes. that looks fine. Both section 263 and section 147 use the word "matters" and therefore logically this judgment can be extended to section 147 also. I have just come to know about one Bombay HC judgment reported at 9 taxmann.com 237 which is on the same issue. Can you or any one please provide me full text thereof?

[rajul5234]

please see 37 D. T. R. 209 (Guj.) Vodafone case.

R. K. Patel, advocate

[pawansingla]

The jdugement you are quoting as already been posted by me.

[JB]

Sorry,  i read the judgment but did not notice the citation. The said judgment has been reported in DTR also at  42 DTR 257.  I have just read one recent Mumbai ITAT decision in case of Chika Overseas Pvt. Ltd. - 50 DTR 426. The same is relevant in taking the plea of applicability of second proviso adressing the issue being subject matter of appeal.