CHAMUNDA PHARMA MACHINERY PVT. LT.D V. ASST. COMMISSIONER OF INCOME TAX, CIRCLE 1(1)(2)

SCA/16139/2018

AI Insights

The case involves Chamunda Pharma Machinery Pvt. Ltd., which challenged a notice issued by the Assistant Commissioner of Income Tax for reopening its assessment for the Assessment Year 2013-2014. The notice was based on the grounds that the company had written off bad debts from a foreign party without obtaining prior permission from the Reserve Bank of India (RBI), as required by a circular dated 12.3.2013. The company argued that this issue was already scrutinized during the original assessment, and no new material had emerged to justify a reopening. The court found that the reassessment was based on a mere change of opinion by the tax authorities and not on any new evidence, leading to the quashing of the notice.

• Counselvise Citation: [2019] 140 COUNSELVISE.COM (IT) 750705 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 30-04-2019
• Assessment Year: misc
• Other Referred Cases: CIT v Kelvinator of India
• Laws Referred To: Income-tax Act 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: MAUNA BHATT
• Assessee Lawyers: VAIBHAVI PARIKH
• Keywords: Audit objection; Bad debts; Income escaping assessment; RBI Permission; Reopening of assessment
• Section: 148; 143(3); 142(1); 143(1); 36(1)(vii)

Judgement Text

"C/SCA/16139/2018 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/SPECIAL CIVIL APPLICATION NO. 16139 of 2018 FOR APPROVAL AND SIGNATURE: HONOURABLE MS.JUSTICE HARSHA DEVANI and HONOURABLE MR. JUSTICE BHARGAV D. KARIA ========================================================== 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India or any order made thereunder ? ========================================================== CHAMUNDA PHARMA MACHINERY PVT. LT.D Versus ASST. COMMISSIONER OF INCOME TAX, CIRCLE 1(1)(2) ========================================================== Appearance: MS VAIBHAVI K PARIKH(3238) for the Petitioner(s) No. 1 MRS MAUNA M BHATT(174) for the Respondent(s) No. 1 ========================================================== CORAM: HONOURABLE MS.JUSTICE HARSHA DEVANI and HONOURABLE MR. JUSTICE BHARGAV D. KARIA Date : 30/04/2019 ORAL JUDGMENT Page 1 of 13 C/SCA/16139/2018 JUDGMENT (PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA) 1. Rule. Mrs. Mauna Bhatt, learned senior standing counsel waives service of notice of rule on behalf of the respondent. 2. Having regard to the controversy involved in the present case which lies in a very narrow compass, with the consent of the learned advocates for the respective parties, the matter is taken up for final hearing. 3. The petitioner has challenged the notice dated 28.03.2018 issued by respondent under section 148 of the Income­tax Act 1961 (“the Act” for short) seeking to reopen assessment of the petitioner for Assessment Year (for short “A.Y.”) 2013­2014. 4. Brief facts of the case are as under: 4.1 The petitioner company is engaged in the business of manufacturing pharmaceutical machineries. It filed original return of income for A.Y. 2013­2014 on 28.9.2013 declaring total income of Rs. (­) 2,06,48,540/­ which was initially processed under section 143(1) of the Act. During the year under consideration, the petitioner had written off bad debts aggregating to Rs.3,47,24,110/­ which also included a sum of Rs.3,00,73,657/­ recoverable from a foreign party namely, “Govt. Pharmaceutical Organization, Thailand”. This fact was stated by “Note No. 23­ Exceptional items” forming part of the audited annual accounts. The said note also contained disclosure that with regard to Page 2 of 13 C/SCA/16139/2018 JUDGMENT Rs.3,00,73,657/­ written off which is due from a foreign customer, approval of Reserve Bank of India is awaited. 4.2 The case of the petitioner was selected for scrutiny assessment and various details and information were called for. The petitioner by letter dated 16.9.2014 furnished the information such as, acknowledgment of income tax return along with computation of return of income, audited annual accounts and tax audit report. 4.3 The Assessing Officer issued notice dated 3.8.2015 under section 142(1) of the Act and called upon the petitioner to furnish various details including ledgers of persons whose bad debts were written off. The petitioner by letter dated 15.9.2015 furnished the details called for including the list of bad debts written off as on 31.3.2013 along with copies of relevant ledger accounts. 4.4 The Assessing Officer thereafter, issued another notice dated 14.10.2015 under section 142(1) of the Act calling upon the petitioner to furnish various details including the ledgers of person whose bad debts were written off during the year under consideration with narration of transactions and permission of Reserve Bank Of India ( for short “RBI”) for writing off bad debts against dues arising on account of foreign transactions. The petitioner vide letter dated 21.10.2015 furnished the details called Page 3 of 13 C/SCA/16139/2018 JUDGMENT for along with ledgers of persons whose bad debts were written off and the communications made with the authorised dealer (Karur Vysya Bank) and with the Reserve Bank of India for writing off the dues outstanding in foreign currency as bad debts. 4.5 The Assessing Officer thereafter, called upon the petitioner to furnish the communication made with Export Credit Guarantee Corporation of India (here­ in­after referred to as “ECGC”) in connection with the bad debts written off during the year under consideration. The petitioner vide letter dated 18.10.2015 submitted copies of various communications with ECGC and GCCI and clarified that the insurance cover with ECGC was against any economic or political risks or commercial risks like bankruptcy or insolvency etc. and not against non recovery of export dues under normal circumstances. The petitioner submitted that the petitioner would not be able to recover anything from ECGC in connection with dues recoverable from foreign party which has been written off as bad debts. 4.6 The Assessing Officer thereafter, called upon the petitioner to furnish certain additional details/information pertaining to bad debts of Rs. 3,00,73,657/­ written off against export transactions with “The Government Pharmaceutical Organization, (Thailand)” out of total bad debts of Rs. 3,47,24,109/­ written off by the petitioner. The petitioner by letter dated 24.11.2015 submitted that Page 4 of 13 C/SCA/16139/2018 JUDGMENT it had exported various components/ parts of the machineries to “The Government Pharmaceutical Organization (Thailand)” and details in respect of the same, including the amount written off as bad debts, were furnished. The petitioner also submitted that bank advices, retails, invoices (original and revised), packing list in respect of each invoice and shipping bills for export with respect to such exports in order to prove the genuineness of such transactions. 4.7 The Assessing Officer passed the assessment order dated 30.11.2015 under section 143(3) of the Act after considering the details furnished and averments made by the petitioner and did not disturb the claim of bad debts written off during the year under consideration. 4.8 Thereafter, the respondent issued the impugned notice dated 28.3.2018 under section 148 of the Act seeking to reopen the assessment of the petitioner for A.Y. 2013­2014. In response thereof, the petitioner furnished return of income on 21.4.2018 and vide letter dated 10.5.2018, the respondent supplied the copies of reasons recorded for reopening. 4.9 On perusal of the reasons for reopening, it is revealed that reopening is made as the petitioner did not obtain permission of RBI for writing off of foreign receivables as bad debts as claim of such bad debts cannot be allowed without permission of RBI to write it off as per circular No.88 dated 12.3.2013 issued Page 5 of 13 C/SCA/16139/2018 JUDGMENT by RBI. The respondent has therefore, formed a reason to believe that income chargeable to tax has been under­assessed by an amount of Rs.3,00,73,657/­ since the petitioner did not have permission from RBI to write off debts from the export receivable. 4.10 The petitioner thereafter filed objections for reopening of assessment on 31.5.2018 which were rejected by the respondent by order dated 4.9.2018. The petitioner has therefore, filed captioned petition challenging the impugned notice issued under section 148 of the Act. 5. Mr. Tushar Hemani, learned advocate with Ms. Vaibhavi Parikh, learned advocate for the petitioner submitted that all details pertaining to bad debts written off, amounting to Rs.3,00,73,657/­ from export receivable have been scrutinised by the Assessing Officer at the time of passing the assessment order under section 143(3) of the Act. He referred to the details submitted during the course of regular assessment as stated here­in­above and submitted that the Assessing Officer after verifying all the details and after due application of mind allowed the claim of the petitioner while passing the assessment order. It was submitted that the issue of bad debts was thoroughly scrutinised and discussed with the Assessing Officer by the petitioner at the time of original assessment proceedings, therefore, reopening of assessment on the basis of information already available on records and thoroughly examined during the course of assessment proceedings, is Page 6 of 13 C/SCA/16139/2018 JUDGMENT nothing but a mere change of opinion. 6. It was further submitted that on perusal of reasons recorded , it is evident that the respondent has not referred to any new tangible material brought on record, on the basis of which he could have any reason to believe regarding escapement of income. It was submitted that it is apparent from the reasons recorded that notice under section 148 of the Act is issued merely on review of the material and facts which already formed part of the assessment record at the time of completion of the original assessment. It was therefore, submitted that reopening of the completed assessment based on a change of opinion on a review of the same material resulting cannot be permitted, more particularly in absence of any live link or close connection between the materials before the Assessing Officer and the belief he has formed regarding the escapement of income. It was submitted that such belief must lead to a conclusion that income has escaped assessment. Learned advocate for the petitioner after referring to the details submitted during the course of regular assessment contended that the Assessing Officer at the time of original assessment after minutely examining the claim of bad debts written off during the year under consideration consciously, chose not to disturb the claim of bad debts written off by the petitioner while framing the assessment under section 143(3) of the Act. 7. Learned advocate for the petitioner submitted that there is no new information or fresh evidence which has come into possession of the respondent which was not there when Page 7 of 13 C/SCA/16139/2018 JUDGMENT original assessment was framed inasmuch as the respondent has merely relied upon the contents of the financials of the petitioner for the purpose of reopening and as such reopening is based on re­appreciation of evidence which was already furnished at the time of original assessment proceedings. It was therefore, submitted that the respondent cannot take any action under section 147 of the Act, merely because he happens to have different opinion from that of his predecessor on the same set of facts. 8. It was submitted that on perusal of the reasons recorded, it is apparent that there is nothing to indicate that the respondent, in consequence of any information in his possession which came subsequent to framing of the original assessment, had reason to believe that income had escaped assessment. It was submitted that during the course of original assessment proceedings, the Assessing Officer having considered the details submitted by the petitioner consciously, built an opinion and did not call for any further information and clarifications while allowing deduction of bad debts claimed by the petitioner and as such it is not now open to the respondent to change such opinion and take a different stand based on the very same set of facts and information. It was further submitted that even on merits, there is no escapement of income chargeable to tax as claim of bad debts written off in books of account is allowable inasmuch as under section 36(1) (vii) of the Act, the requirement for the purpose of claiming deduction in respect of bad debts is that the underlying amount must be written off as bad debts. The petitioner Page 8 of 13 C/SCA/16139/2018 JUDGMENT was therefore, eligible for claim of deduction of bad debts written off and such deduction could not have been denied on the ground that the petitioner has failed to obtain permission of RBI for writing off such bad debts. It was further submitted that as there is no new tangible material on record after framing of assessment, it transpires that the case of the petitioner has been reopened on the basis of audit objection raised by the audit party. It was therefore submitted that it is a settled law that the assessment cannot be reopened based on audit objection. 9. On the other hand, Mrs. Mauna Bhatt, learned senior standing counsel for the respondent submitted that there is a mandatory requirement of the permission from RBI for writing off foreign debt as per Circular No.88 and admittedly, the petitioner had not obtained such permission before claiming bad debts and therefore, the same is not allowable resulting into escapement of income and, therefore, the impugned notice under section 148 is legal and valid notice. It was further submitted that the income has escaped on account of the assessee not making full and true disclosures as it is clear that the petitioner has not fulfilled the requirement of furnishing necessary permission of RBI for bad debts written off of foreign export receivable. It was submitted that as mandated by Reserve Bank of India under circular No.88, necessary permission upon fulfilling certain conditions is absent in the present case. Moreover, though the Assessing Officer under notice dated 14.10.2015 had requested the assessee to furnish various details including details of ledger of person against whom bad debts were written off and the Page 9 of 13 C/SCA/16139/2018 JUDGMENT permission for writing off the bad debts from RBI, the petitioner failed to provide such permission. It was therefore, submitted that the impugned notice was issued after following due procedure as there was reasonable belief that income has escaped assessment inasmuch as at this stage, sufficiency of reasons is not required to be gone into. It was therefore, submitted that the petition be dismissed as the impugned notice is legal and a valid notice. 10. The petitioner has challenged the notice for reopening for A.Y. 2013­2014 within a period of four years from the end of relevant assessment year. On perusal of the reasons recorded by the respondent, it is revealed that the reason to believe has been formed as income chargeable to tax has been under­assessed by an amount of Rs.3,00,73,657/­ since the petitioner did not have permission from the RBI to write off the same as bad debt from the export receivable. During the original assessment proceedings, the Assessing Officer considered the claim of the petitioner in detail. The petitioner submitted all the required details called upon by the Assessing Officer in respect of the claim of bad debts written off including the bad debts written off pertaining to export receivables. With respect to foreign debts, the petitioner was called upon to furnish RBI permission. The petitioner replied vide communication dated 21.10.2015 pointing out that the application for permission to write off the bad debts is already made to the Reserve Bank of India. The Assessing Officer accepted the contention of the petitioner that upon application of RBI pending final approval, debts could be written off and the Page 10 of 13 C/SCA/16139/2018 JUDGMENT amount of bad debts written off was allowed and the Assessing Officer did not make any addition on this ground in the original assessment. 11. In view of the aforesaid undisputed facts emerging from the record, the respondent could not have formed a belief that the income chargeable to tax has been under­ assessed. With regard to writing off of bad debts from export receivables resulting into income escaping assessment within the meaning of section 147 of the Act, the reassessment proceedings have been initiated merely on reviewing the same subject matter of original assessment proceedings amounting to assessing the same set of facts already available with the department which is mere change of opinion on part of the respondent. The Assessing Officer during the course of original assessment has formed an opinion that the bad debts from export receivables can be written off during the pendency of the application for approval from Reserve Bank of India and as such, the respondent could not have formed a different opinion that income has escaped assessment as the petitioner did not have permission from the Reserve Bank of India to write off the bad debts from the export receivables. 12. The Apex Court in case of CIT v Kelvinator of India reported in (2010) 187 Taxman 312 (SC) affirming the decision of CIT vs. Kelvinator of India Ltd. reported in 256 ITR 1 (Delhi)(FB) held thus : “ ….Therefore, post 1­4­1989, power to re­open is much wider. However, one needs to give a schematic Page 11 of 13 C/SCA/16139/2018 JUDGMENT interpretation to the words “reason to believe” falling which 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. One 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 the reassessment has to be based on fulfillment of certain pre­conditions 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 in­built test to check abuse of power by the Assessing Officer. Hence after 1­4­ 1989, the Assessing Officer has power to reopen, provided there is tangible material to come to conclusion that there is escapement of income from assessment.” 13. In the facts of this case, the respondent has formed a second opinion on the same material and has issued the impugned notice merely on the ground that on second thought a different view is possible. Such facts do not authorise him to reopen the assessment under section 147/148 of the Act. Therefore, if the Assessing Officer while passing the original assessment order chose not to give any findings in respect of any issue which is properly replied by the assessee company, that cannot give him or his successor in office to reopen the completed assessment or to contend that because the facts were not considered in the assessment order, full disclosure was not made as the entire material has been placed by the petitioner before the Assessing Officer at the time when the original assessment was made and on due application of mind to the materials before him, the Assessing Officer accepted the view canvassed by the assessee. Merely because he did not express the same in the assessment order that by itself Page 12 of 13 C/SCA/16139/2018 JUDGMENT would not give the respondent a ground to conclude that the income has escaped assessment for issuance of notice of reopening. Therefore, in facts of the present case, impugned notice under section 148 of the Act is without jurisdiction and authority of law as the respondent has reopened the proceedings merely on the ground that from the material once a view earlier adopted was erroneous one, such facts cannot be a ground for reassessment. 14. For the foregoing reasons, initiation of the reassessment proceedings under section 147 of the Act by issuing notice under section 148 of the Act is based upon the change of opinion on the same facts and circumstances which were already in the knowledge of the Assessing Officer during the original assessment proceedings and cannot be sustained. 15. The petition therefore, succeeds and is hereby allowed. The impugned notice dated 28.3.2018 issued by the respondent under section 148 of the Act is hereby quashed and set aside. Rule is made absolute accordingly with no order as to costs. (HARSHA DEVANI, J) (BHARGAV D. KARIA, J) RAGHUNATH R NAIR Page 13 of 13 "