M/S. INNOVATIVE FOODS LIMITED V. UNION OF INDIA

WP(C)/5061/2013

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Innovative Foods Limited, engaged in manufacturing and marketing frozen food products, challenged an order for re-assessment of their income tax for the assessment year 2007-08. The company had undergone a merger and was under new management during the relevant period. The re-assessment notice was issued under Section 147 of the Income Tax Act, citing under-assessment and incorrect allowances in the original assessment. The petitioner argued that the re-assessment was based on a change of opinion and was not supported by new material facts. The respondents contended that the re-assessment was justified as the issues were not previously considered. The court upheld the re-assessment, emphasizing that the reasons for re-assessment were not mere changes of opinion but were based on valid grounds that income had escaped assessment.

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 737096 (HC-KERALA)
• Appeal Type: Others
• Pronouncement Date: 12-04-2013
• Assessment Year: misc
• Other Referred Cases: GKN Driveshafts (India) Ltd. vs. ITO, Commissioner of Income-Tax vs. Kelvinator of India Ltd, Assistant Commissioner of Income Tax vs. Rajesh Jhaveri Stock Brokers P. Ltd., Commissioner of Income Tax vs. Popular Vehicles & Services Ltd., Commissioner of Income-tax Cochin vs. National Tyres & Rubber Co. of India Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: HIGH COURT
• Department Lawyers: JOSE JOSEPH
• Assessee Lawyers: KURYAN THOMAS
• Keywords: Change of opinion; Income escaping assessment; Re-assessment; Reason to believe
• Section: 147; 148; 143(3); 143(2); 154

Judgement Text

"IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR.JUSTICE P.R.RAMACHANDRA MENON FRIDAY, THE 12TH DAY OF APRIL 2013/22ND CHAITHRA 1935 WP(C).No. 5061 of 2013 (G) ------------------------------------- - PETITIONER(S): -------------------------- INNOVATIVE FOODS LIMITED CHAKOLAS HABITAT, A BLOCK - 1C, THEVARA FERRY ROAD ERNAKULAM-682 013, REPRESENTED BY ITS DIRECTOR MR.P.MANOJ KUMAR. BY ADVS.SRI.M.GOPIKRISHNAN NAMBIAR SRI.P.GOPINATH SRI.P.BENNY THOMAS SRI.K.JOHN MATHAI SRI.KURYAN THOMAS RESPONDENT(S): ---------------------------- 1. THE UNION OF INDIA REPRESENTED BY THE SECRETARY MINISTRY OF FINANCE (DEPARTMENT OF REVENUE) NORTH BLOCK, NEW DELHI-110 001. 2. THE COMMISSIONER OF INCOME TAX CENTRAL REVENUE BUILDING, I.S.PRESS ROAD KOCHI-682 018. 3. THE ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE1 (2 CENTRAL REVENUE BUILDING, I.S.PRESS ROAD KOCHI-682 018. R1 -R 3 BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX THIS WRIT PETITION (CIVIL) HAVING COME UP FOR ADMISSION ON 05/03/2013, THE COURT ON 12/04/2013 DELIVERED THE FOLLOWING: tss W.P.(C) 5061/2013 APPENDIX PETITIONER(S) EXHIBITS P1- TRUE COPY OF THE WRITTEN SUBMISSION DATED 08.12.2009 FILED BY THE PETITIONER BEFORE THE 3RD RESPONDENT IN THE 143(2) PROCEEDINGS. P2- TRUE COPY OF THE ASSESSMENT ORDER UNDER SECTION 143(3) DATED 31.12.2009 PASSED BY THE 3RD RESPONDENT. P3- TRUE COPY OF THE ORDER IN RECTIFICATION DATED 09.04.2010 PASSED BY THE 3RD RESPONDENT. P4- TRUE COPY OF THE APPELLATE ORDER DATED 06.08.2012 PASSED BY THE COMMISSIONER IN COME TAX (APPEALS). P5- TRUE COPY OF THE APPEAL DATED 25.01.2010 FILED BY THE PETITIONER CHALLENGING EXT.P2 ORDER OF ASSESSMENT. P6- TRUE COPY OF THE NOTICE DATED 06.03.2012 ISSUED BY THE 3RD RESPONDENT UNDER SECTION 148 OF THE IT ACT. P7- TRUE COPY OF THE LETTER DATED 10.10.2012 SENT BY THE PETITIONER. P8- TRUE COPY OF ORDER SHEET DATED NIL ISSUED TO THE PETITIONER BY THE 3RD RESPONDENT. P9- TRUE COPY OF THE OBJECTION DATED 29.10.2012 FILED BY THE PETITIONER BEFORE THE 3RD RESPONDENT. P10- TRUE COPY OF THE LETTER DATED 19.12.2012 RECEIVED BY THE PETITIONER FROM THE 3RD RESPONDENT. P11- TRUE COPY OF THE LETTER DATED 10.01.2013 SUBMITTED BY THE PETITIONER BEFORE THE 3RD RESPONDENT. P12- TRUE COPY OF THE ORDER DATED 11.02.2013 ISSUED TO THE PETITIONER BYTHE 3RD RESPONDENT. P13- TRUE COPY OF THE LETTER DATED 18.02.2013 FILED BY THE PETITIONER BEFORE THE 3RD RESPONDENT. RESPONDENTS' EXHIBITS NIL //TRUE COPY// P.S. TO JUDGE tss P.R. RAMACHANDRA MENON, J. .............................................................................. W.P. © No. 5061 OF 2013 ......................................................................... Dated this the 12th April, 2013 J U D G M E N T Ext. P12 order passed by the third respondent disposing the objections to re-open the assessment under Section 147 of the Income Tax Act, 1961 is the subject matter of challenge in this Writ Petition. 2. The petitioner Company is engaged in the manufacturing and marketing of Frozen Value Added Food products and is an assessee on the files of the 3rd respondent under the Income Tax Act. In the year 2007-08, another Company engaged in similar line of business viz. M/s. Amalgum Foods and Beverages Ltd., was merged with the petitioner Company in tune with the approved scheme of the Board for Industrial and Financial Reconstruction (BIFR). In the same assessment year, the petitioner also selected another Company, M/s. Residency Foods and Beverages Ltd., as a strategic investor and it is stated that the said Company had acquired the management and control of the petitioner Company with 67.93% share holding in the petitioner Company. In W.P. © No. 5061 OF 2013 2 respect of the assessment year 2007-08, the petitioner filed return of income on 30.10.2007, showing a business loss of Rs.4,28,00,960/-. In response to the notice issued under Section 143 (2) of the Income Tax Act, the petitioner submitted Ext.P1 written statement dated 08.12.2009 explaining the facts and figures. After considering the same, the assessment was finalised under Section 143(3) of the Income Tax Act as borne by Ext.P2 assessment order dated 31.12.2009. 3. According to the petitioner, there were some mistakes in Ext.P2 order and in the said circumstance, an application was preferred before the third respondent under Section 154 of the Income Tax Act to rectify the mistakes, which was considered and Ext. P3 order came to be passed on 09.04.2010. But, since some vital aspects were not considered, the petitioner filed an appeal on the issue of non-consideration of unabsorbed business loss and after considering the said appeal, the Appellate Authority passed Ext. P4 order dated 06.08.2012, granting the relief to the extent as specified. In respect of the other aspects contained in Ext.P2 Assessment order, the petitioner has already W.P. © No. 5061 OF 2013 3 filed a statutory appeal, as borne by Ext.P5 dated 25.01.2010, which is pending consideration before the second respondent/Appellate Authority. While so, the petitioner was served with Ext. P6 notice dated 06.03.2012, seeking to re-open the assessment under Section 147 of the Income Tax Act . The petitioner pointed out that, by virtue of the law declared by the Apex Court in GKN Driveshafts (India) Ltd. vs. ITO [(2003) 259 ITR 19(SC)], reason for re-opening the assessment was liable to be given in writing for contesting the matter effectively. According to the petitioner, Ext.P7 request was made and after considering the same, Ext.P8 order/proceeding was issued by the third respondent revealing the reasons. On receipt of Ext.P8, Ext. P9 statement of objections was filed by the petitioner and sought to pass a speaking order, particularly on the question of jurisdiction. However, before passing any such order, the petitioner was required to furnish some documents as per Ext.P10, when the petitioner reminded the third respondent as to the necessity to pass a speaking order vide Ext.P11. After considering the matter, Ext.P12 speaking order came to be W.P. © No. 5061 OF 2013 4 passed on 11.02.2013, overruling the objections and deciding to proceed with the merits of the case. The petitioner filed Ext.P13 representation dated 18.02.2013 seeking for extension of time to submit the version on merits and has approached this Court by filing the present writ petition. 4. The case of the petitioner, as projected by Mr. Anil D. Nair, the learned Counsel for the petitioner, is that Ext.P12 order passed by the third respondent is not an appealable order and hence the challenge in the writ petition. It is stated that the present course of proceedings, sought to be pursued by the third respondent, is only by virtue of a 'change of opinion', which shall not be a ground for re-opening the assessment under Section 147 of the Income Tax Act, as made clear by the Apex Court in Commissioner of Income-Tax vs. (1) Kelvinator of India Ltd [(2010) 320 ITR 561(SC)]. It is pointed out that all the vital aspects which are now sought to be relied on for proceeding under Section 147 of the Act were dealt with by the petitioner, as pointed out in Ext. P1 written statement. These aspects were considered by the assessing authority earlier and some aspects W.P. © No. 5061 OF 2013 5 were found as not acceptable, some were accepted and some were left out. Having taken such a conscious decision, it is not a matter which is liable to be re-worked by resorting to the course and proceedings under Section 147 and hence the challenge. The learned Counsel also submits that the very purpose of passing a speaking order when re-assessment is proposed under Section 147, in the light of the ruling rendered by the Apex Court in GKN Driveshafts(India) Ltd. vs. ITO [(2003) 259 ITR 19 (SC)] is to enable the assessee to substantiate the position to the effect that there is no tenable 'reason to believe' that income was escaped so as to to re-open the assessment and if it goes wrong, to have it challenged by way of Article 226 of the Constitution of India instead of undergoing the ordeal of re-assessment and the necessity to pursue the statutory remedy therefrom. 5. The learned Counsel also submits that there was full and true disclosure of income from the part of the assessee, as borne by Ext.P1 and as such, the impugned proceedings are liable to be intercepted in view of the law declared by the various High W.P. © No. 5061 OF 2013 6 Courts including that of the High Court of Gujarat in (2011) 239 CTR Reports 101 (Mihir Textiles Ltd. vs. Joint Commissioner of Income Tax), [(2012) 343 ITR 388 (Bom.)] (Sanand Properties P. Ltd. vs. Joint Commissioner of Income Tax and others ), (2004) 268 ITR 48 (Gujarat) (Garden Finance Ltd. vs. Assistant Commissioner of Income Tax). 6. Mr. Jose Joseph, the learned Standing Counsel for the respondents vehemently opposed the reliefs sought for, pointing out that there is absolutely no merit or bonafides in the writ petition. It is stated that there is no violation of any of the relevant provisions of law or the mandate given by the various binding judicial precedents. It was in conformity with the law declared by the Apex Court in GKN's case that Ext.P8 reasons for re-opening the assessment was given, followed by a speaking order, as borne by Ext.P12. The learned Counsel also submits that it is not a case of 'change of opinion' as contended by the petitioner, for the reason that the aspects which form the basis for re-opening the assessment were never considered by the assessing authority earlier, when Ext.P2 order was passed and W.P. © No. 5061 OF 2013 7 no opinion was formed in respect of these issues. In the absence of any opinion, there is no question of any change of opinion. It is also pointed out that the citations sought to be relied on from the part of the petitioner do not come to the rescue of the petitioner in any manner, but on the other hand, the true mandate of the law has been explained by the Apex Court in (2007) 291 ITR 500 (SC) ( Assistant Commissioner of Income Tax vs. Rajesh Jhaveri Stock Brokers P. Ltd. ) and also a Division Bench of this Court in [(2010) 191 Taxman 333 (Ker.) (Commissioner of Income Tax vs. Popular Vehicles & Services Ltd. ) and also as reported in [(2011 )202 Taxman 625/15 taxman.com 3(Ker.)(Commissioner of Income tax ,Cochin vs. National Tyres & Rubber Co. of India Ltd.) 7. The primary question to be considered is whether there is any infringement of the law declared by the Apex Court in GKN's case. Admittedly, after considering the assessment vide Ext.P2, Ext.P6 notice was issued to the petitioner under Section 148 of the Income Tax Act, proposing re-assessment under Section 147. On seeking for reasons vide Ext. P7, the same was W.P. © No. 5061 OF 2013 8 supplied as per Ext.P8 , which reads as follows: “As per the records it is verified that the prior period depreciation Rs. 28,86,370/- debited to the current P & L account has not been disallowed and thus resulted in under assessment. The “Prepayment premium on IDFC Term Loan” amounting to Rs. 15,00,000/- debited to the P & L account, being an expenditure directly in relation to the capital base of the company, is a capital expenditure but has not been disallowed in computing the total income. The depreciation on Plant & Machinery was allowed in excess by Rs. 8,75,240/-. Excess depreciation amounting to Rs.25,41,250/- was allowed on the intangible asset “Brand Name” by wrongly adopting WDV as on the first day of the year of amalgamation of the company instead of adopting the WDV as on the last day of the year of amalgamation. Hence I have reason to believe that assessee's income has escaped assessment with in the meaning of Section 147 of the I.T Act 1961. 8. It was in response to the said proceedings, that the petitioner filed Ext.P9 statement of objection finally leading to Ext.P12 order. On going through the pleadings and proceedings, this Court finds that the steps taken by the respondents are in W.P. © No. 5061 OF 2013 9 conformity with the statutory requirements and in tune with the law declared by the Apex Court in GKN's case . 9. The next question to be considered is whether the reasons given by the third respondent vide Ext.P8 are germane so as to have the re-assessment reopened under Section 147 of the Act or whether it merely amounts to 'change of opinion' to be intercepted in view of the law declared by the Apex Court in Kelvinator's case. 10. The main reasons for re-opening the assessment, as understood and extracted by the petitioner in Ext.P9 statement of objections are as given below: • “Prior period depreciation amounting to Rs. 2,886,370/- had been debited to Profits and Loss Account (P&L Account) during the AY 2007- 08. However the same had not been disallowed in the tax computation. • Prepayment premium on IDFC Term Loan amounting to Rs. 1,500,000 debited to P & L Account, being expenditure directly in relation to the capital base of the Company, is a capital expenditure but has not been disallowed in computing the total income. • Excess depreciation amounting to Rs. 875,240 W.P. © No. 5061 OF 2013 10 had been claimed by the Company on Plant and Machinery. However, the same had not been disallowed in the tax computation. • Excess depreciation amounting to Rs. 2,541,250 had been allowed on the intangible asset “Brand Name” by wrongly adopting the WDV as on the first day of the year of amalgamation of the Company instead of adopting the WDV as on the last day of the year of amalgamation. 11. The crux of the objection raised by the petitioner vide Ext.P9 are as given below: “1. No new material on record - Reassessment in the absence of any fresh facts or information is invalid. 2. Absence of discussion in the original assessment order does not imply non-application of mind by the Assessing Officer . 3. Change of opinion does not constitute 'Reason to believe'. 4. Assessing Officer is not authorised to review orders in the pretext of reassessment . 12. The scope of re-assessment under Section 147 of the Income Tax Act as it exists now has to be considered in the backdrop of what it was earlier before the amendment in 1989 W.P. © No. 5061 OF 2013 11 and what does it stand for, after the amendment. Section 147 as it stood earlier reads as follows: \"147. Income escaping assessment. If (a) the Assessing Officer has reason to believe that, by reason of the omission or failure on the part of an assessee to make a return under section 139 for any assessment year to the Assessing Officer or to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year, or (b) notwithstanding that there has been no omission or failure as mentioned in clause (a) on the part of the assessee, the Assessing Officer has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income or recompute the loss or the depreciation allowance, as the case may be, for the assessment year concerned (hereafter in sections 148 to 153 referred to as the relevant assessment year). Explanation 1. For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely: (a) Where income chargeable to tax has been W.P. © No. 5061 OF 2013 12 underassessed ; or (b) where such income has been assessed at too low rate ; or (c) where such income has been made the subject of excessive relief under this Act or under the Indian Income-tax Act, 1922 (11 of 1922); or (d) where excessive loss or depreciation allowance has been computed. Explanation 2. Production before the Assessing Officer of account 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 this section.” After the Amending Act 1989, Section 147 reads as under: 147. \"Income escaping assessment” If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assesssment year, he may, subject to the provisions of ections 148 to 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 W.P. © No. 5061 OF 2013 13 assessment year concerned (hereafter in this section and in sections 148 to 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 under section 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. Explanation 1. Production before the Assessing Officer of account 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 this section, the following shall also be deemed to be cases where income chargeable to tax has W.P. © No. 5061 OF 2013 14 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; (b) where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return; (c) where an assessment has been made, but (i) income chargeable to tax has been under- assessed ; or (ii) such income has been assessed at too low 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. 13. After the amendment, as above, only one condition is required to be satisfied, i.e. existence of “reason to believe” that W.P. © No. 5061 OF 2013 15 income has escaped assessment, which in turn has to be recorded in writing. This aspect has been considered by the Apex Court in Kelvinator's case itself. But what will constitute “reason to believe” so as to invoke the power and procedure under Section 147 of the Act, was also considered by the Apex Court in Kelvinator's case holding that a mere “change of opinion” was not enough, which was ordered to be taken as an in-built test to check the abuse of power by the assessing officer. 14. In [(2007) 291 ITR 500 (SC)] (Assistant Commissioner of Income Tax vs. Rajesh Jhaveri Stock Brokers P. Ltd.), the Apex Court observed that the expression “reason to believe' in Section 147 of the Act would mean “cause or justification to know” and if the assessing officer has cause or justification to know or suppose that income has escaped assessment, he can be said to have reason to believe that income has escaped assessment. It is added that the expression cannot be read to mean that the Assessing Officer should have finally ascertained the fact by legal evidence or conclusion and W.P. © No. 5061 OF 2013 16 What is required is 'reason to believe' but not the established fact of escapement of income; and at the stage of issuance of notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief. 15. The scope of the provision as it stood before the amendment and the position after the amendment has been discussed further in paragraph 17 of Rajesh Jhaveri's case in the following terms : “17. The scope and effect of Section 147 as substituted with effect from April 1, 1989, as also Sections 148 to 152 are substantially different from the provisions as they stood prior to such substitution. Under the old provisions of Section 147, separate clauses (a) and (b) laid down the circumstances under which income escaping assessment for the past assessment years could be assessed or reassessed. To confer jurisdiction under Section 147(a) two conditions were required to be satisfied firstly the Assessing Officer must have reason to believe that income, profits or gains chargeable to income tax W.P. © No. 5061 OF 2013 17 have escaped assessment, and secondly he must also have reason to believe that such escapement has occurred by reason of either omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for his assessment of that year. Both these conditions were conditions precedent to be satisfied before the Assessing Officer could have jurisdiction to issue notice under Section 148 read with Section 147(a). But under the substituted Section 147 existence of only the first condition suffices. In other words if the Assessing Officer for whatever reason has reason to believe that income has escaped assessment it confers jurisdiction to reopen the assessment. It is however to be noted that both the conditions must be fulfilled if the case falls within the ambit of the proviso to Section 147. The case at hand is covered by the main provision and not the proviso.” The issue came to be considered by a Division Bench of this Court as well in Commissioner of Income Tax vs. Popular Vehicles & Services Ltd. [ (2010)191 Taxman 333 (Ker. ) holding that the only requirement to be satisfied is whether W.P. © No. 5061 OF 2013 18 existence of a reason to believe that chargeable income has escaped assessment. Same is the view expressed in another case as well, as reported in [(2011) 202 Taxman 625 (Ker.) (Commissioner of Income-tax Cochin vs. National Tyres & Rubber Co. of India Ltd.), wherein it has been held that re- assessment can be made under Section 147, if the assessing officer himself has committed a mistake or omission in the assessment completed by him; and what the statute visualises, is reconsideration and revision of regular assessment by the Assessing Officer himself , if he finds that for any reason there is escapement of income chargeable to tax in the original assessment. Referring to the law declared by the Apex Court on the point, the Bench observed that the amended provisions of Section 147 is sufficiently elastic to cover all cases of non- assessment or under assessment of income chargeable to tax and the only condition for reopening or initiating an assessment under Section 147 is reasonable belief of the Assessing Officer on escapement of income chargeable to tax. 16. From the above, it is explicitly clear that the reasons W.P. © No. 5061 OF 2013 19 given in Ext.P8 for effecting re-assessment were not the matters considered by the Assessing Authority while passing Ext.P2 assessment order and no opinion was formed in this regard . This being the position, the version of the petitioner that no new materials have been brought to light to invoke the power and proceedings under Section 147 or that it is proposed by way of “change of opinion”, does not contain any pith or substance. This Court finds that the idea and understanding of the petitioner in respect of the challenge against Ext.P12 is wrong and misconceived. There is absolutely no merit in the writ petition and it is dismissed accordingly. P.R.RAMACHANDRA MENON JUDGE lk The name of counsel for the petitioner “Mr. Anil. D.Nair” occurring in the first sentence of paragraph 4 of the judgment dated 12/04/2013 in W.P.(C)No. 5061/2013 is corrected and substituted as “Mr. Kuryan Thomas” vide order dated 24/05/2013 in W.P.(C) No.5061/2013. Sd/- Registrar (Judicial) "