INDIA GELATINE AND CHEMICALS LTD. V. ASSTT. COMMISSIONER OF INCOME TAX

SCA/954/2004

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India Gelatine and Chemicals Ltd. challenged a notice issued by the Assessing Officer to reopen their assessment for the year 1999-2000, claiming that income had escaped assessment. The notice was based on alleged underassessment due to unbacked exchange loss claims and depreciation on foreign currency loans for fixed assets. The company objected to the reopening, which was rejected by the Assessing Officer. The High Court of Gujarat found the reopening notice invalid as it was not based on reasons recorded before the notice was issued, emphasizing the need for adherence to procedural requirements under the Income Tax Act.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 754309 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 23-04-2014
• Assessment Year: misc
• Other Referred Cases: Assistant Commissioner of Income-tax v. Rajesh Jhaveri Stock Brokers P. Ltd, Inductotherm (India) P. Ltd. v. M. Gopalan, Deputy Commissioner of Income-tax, Woodward Governor India P. Ltd. v. Commissioner of Income Tax, Oil and Natural Gas Corporation Ltd. v. Commissioner of Income Tax
• Laws Referred To: Income Tax Act
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: MAUNA BHATT
• Assessee Lawyers: MANISH SHAH; J P SHAH
• Keywords: Assessment Reopening; Foreign exchange fluctuation; Income Tax; Underassessment
• Section: 147; 143(3); 143(1); 148(2)

Judgement Text

"C/SCA/954/2004 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION NO. 954 of 2004 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE AKIL KURESHI and HONOURABLE MS JUSTICE SONIA GOKANI ================================================================ 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, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ================================================================ INDIA GELATINE AND CHEMICALS LTD.....Petitioner(s) Versus ASSTT. COMMISSIONER OF INCOME TAX....Respondent(s) ================================================================ Appearance: MR MANISH J SHAH AND MR JP SHAH, ADVOCATE for the Petitioner(s) No. 1 MRS MAUNA M BHATT, ADVOCATE for the Respondent(s) No. 1 ================================================================ CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI and Page 1 of 7 C/SCA/954/2004 JUDGMENT HONOURABLE MS JUSTICE SONIA GOKANI Date : 23/04/2014 ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE AKIL KURESHI) 1.The petitioner has challenged a notice dated 27.1.2003 issued by the respondent Assessing Officer seeking to reopen the assessment of the petitioner for the assessment year 1999­2000. 2.The facts are as under : 2.1. The petitioner is a company registered under the Companies Act and is assessed to tax regularly. For the said assessment year, petitioner filed its return of income in due course declaring total income of Rs.2.76 crores( rounded off). Such return was accepted under section 143(1) of Act without any scrutiny. It is this return the Assessing Officer desired to reopen for which the impugned notice came to be issued. 2.2. At the request of the petitioner, he supplied the reasons recorded for issuing such notice. Such reasons are rather elaborate. We may however, note the concluding portion of the reasons which is the gist of Assessing Officer’s belief that the income chargeable to tax has escaped assessment. Such conclusions read as under : Page 2 of 7 C/SCA/954/2004 JUDGMENT “It can be seen that as per Schedule 19 of notes annexed and forming part of the accounts for the year ended 31 st March 1998­5(b) of Annual Report of 1998­ 99, India Gelatine and Chemicals Ltd. The term liability incurred in foreign currency for acquisition of fixed assets has been translated at the year and exchange rate and the resultant deficit amounting to Rs.84.84 lakh was charged to Revenue Account. As the expenditure of Rs.84.84 lakh debited to Revenue Account was not backed by the actual remittance and loss arisen due to fluctuation on the first and last day of accounting year the allowance of exchange loss as a deduction in the computation of the business income has resulted in underassessment. In view of the above I am of the firm belief that substantial income has escaped assessment within the meaning of Section 147, for which assessments need to be re­opened.” 2.3. The petitioner raised objections to the process of reopening under communication dated 7.8.2003. Such objections were rejected by the Assessing Officer by order dated 15.9.2003. Hence this petition. 3.We may also notice that on 31.3.2003, the Assessing Officer recorded further reasons titled as supplementary reasons which read as under : “It can also be seen that the assessee company has claimed depreciation on the portion of loan used for acquisition of fixed assets. The depreciation claimed on account of exchange fluctuation added to cost of fixed assets has also to be disallowed after due quantification during the assessment. The same has to be quantified as the assessee Page 3 of 7 C/SCA/954/2004 JUDGMENT has claimed depreciation on the term liability incurred in the foreign currency for the acquisition of the fixed assets at the year end exchange rate and the foreign exchange fluctuation amounting to Rs.100.66 lacs has been added to the actual cost to the assets as per the note 5(c) of the schedule 19 i.e. Notes annexed to & forming part of the accounts for the year ended 31 st March, 1999. The depreciation on the account of the addition such amount to the fixed assets in the earlier AY i.e. 1998­1999 has to be calculated and accordingly disallowed.” 4.We are conscious that in the present case the original assessment was not after scrutiny. In view of the decision of the Supreme Court in case of Assistant Commissioner of Income­tax v. Rajesh Jhaveri Stock Brokers P. ltd reported in (2007) 291 ITR 500(SC), the Revenue would therefore, have considerable latitude in reopening the assessment after issuing notice for such purpose. However, in our judgement in case of Inductotherm (India) P. Ltd. v. M. Gopalan, Deputy Commissioner of Income­tax reported in (2013) 356 ITR 481(Guj), it was held that even in case where a return which is accepted under section 143(3) of the Act without scrutiny, to reopen the same the basic requirement of section 147 of the Act that the Assessing Officer has reason to believe that income chargeable to tax has escaped assessment, is not done away with. It was observed as under : “13. Despite such difference in the scheme between a return which is accepted under section 143(1) of the Act as compared to a return of which scrutiny assessment under section 143(3) of the Act is framed, the basic requirement of section 147 of the Act that the Assessing Officer has reason to believe that income chargeable to tax has Page 4 of 7 C/SCA/954/2004 JUDGMENT escaped assessment is not done away with. Section 147 of the Act permits the Assessing Officer to assess, re­assess the income or re­compute the loss or depreciation if he has reason to believe that any income chargeable to tax has escaped assessment for any assessment year. This power to reopen assessment is available in either case, namely, while a return has been either accepted under section 143(1) of the Act or a scrutiny assessment has been framed under section 143(3) of the Act. A common requirement in both of cases is that the Assessing Officer should have reason to believe that any income chargeable to tax has escaped assessment.” 5.In this context, we may note that supplementary reasons were recorded on 31.3.2003 and, therefore, well after issuance of the notice. It is well settled that validity of notice for reopening must be judged on the basis of reasons recorded. Such reasons in terms of section 148(2) of the Act have to be recorded before issuance of the notice. The Assessing Officer therefore, would not be in a position to support the notice of reopening on the basis of any reasons recorded subsequent to notice itself. 6.In this light, we need to judge the validity of the Assessing Officer’s belief that income chargeable to tax has escaped assessment on the strength of the reasons recorded before issuance of the notice for reopening. In case of this very assessee in Special Civil Application No.12552 of 2002, this issue had come up for consideration. In a separate judgement passed today it was held as under : “6. On the first aspect, we notice that it is wrongly referred to in the reasons recorded as para 5(B) of the annual report of the company, the correct reference would be to para 5(C) where there Page 5 of 7 C/SCA/954/2004 JUDGMENT is a reference to a sum of Rs.116.86 lakhs which was charged by the assessee to the revenue account. In that context, the question is whether the Assessing Officer’s belief that the income chargeable to tax has escaped assessment, is valid. He formed such belief on the premise that the assessee had claimed deduction of such sum on mere fluctuation of the rate of foreign exchange and the loss computed was without actual remittances. In this context, the Supreme Court in case of Woodward Governor India P. Ltd.(supra) held that the loss suffered by the assessee on account of fluctuation in the rate of foreign exchange as on the date of the balance­sheet is an item of expenditure under section 37(1) of the Act and further that under the mercantile system of accounting, what is due is brought into credit before it is actually received. It also brings into debit an expenditure for which a legal liability has been incurred before it is actually disbursed. This decision was latter followed and reiterated in case of Oil and Natural Gas Corporation Ltd. (supra) by the Supreme Court as can be seen from the following discussion : “Opining that the amendment of Section 43A of the Act by the Finance Act, 2002 with effect from 1st April, 2003 is amendatory and not clarificatory and would thus, apply prospectively, the Court explained that under the unamended Section 43A, adjustment to the actual cost takes place on the happening of change in the rate of exchange, whereas under the amended Section 43A, the adjustment in the actual cost is made on cash basis. In other words, under the unamended Section 43A, “actual payment” was not a condition precedent for making necessary adjustment in the carrying cost of the fixed asset acquired in foreign currency but under the amended Section 43A, with effect from 1st April, 2003, such payment of the decreased/enhanced liability on account of fluctuation in foreign exchange rate has been made a condition precedent for making adjustment in the carrying amount of the fixed asset. We are of the opinion that the decision of this Court in Woodward’s case (supra) settles the second issue as well. We respectfully concur with the same and hold that all the assessment years in question being prior to the amendment in Section 43A of the Act with effect from 1st April, 2003 the Page 6 of 7 C/SCA/954/2004 JUDGMENT Assessee would be entitled to adjust the actual cost of the imported capital assets, acquired in foreign currency, on account of fluctuation in the rate of exchange at each of the relevant balance­sheet dates pending actual payment of the varied liability.” 7. In the result, impugned notice dated 27.1.2003 is quashed. The petition is allowed and disposed of. Rule made absolute. No costs. (AKIL KURESHI, J.) (MS SONIA GOKANI, J.) raghu Page 7 of 7 "