LAMBDA THERAPEUTIC RESEARCH LIMITED V. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE - 2(1)(1)

SCA/17583/2021

AI Insights

The case involves Lambda Therapeutic Research Limited, which challenged a notice issued by the Deputy Commissioner of Income Tax under section 148 of the Income Tax Act, 1961, seeking to reopen its assessment for the Assessment Year 2014-2015. The notice was based on the grounds that there was a short disallowance under section 14A of the Act concerning the expenses related to exempt income. The petitioner had previously disallowed a certain amount under section 14A, which was contested by the Income Tax Department, leading to the reopening of the assessment. The High Court found that the issue had been thoroughly examined during the original assessment and that the reopening constituted a mere change of opinion, which is not a valid ground for reopening an assessment.

• Counselvise Citation: [2022] 140 COUNSELVISE.COM (IT) 672089 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 19-09-2022
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income Tax vs. Kelvinator of India Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: M R BHATT; KARAN SANGHANI
• Assessee Lawyers: TUSHAR HEMANI; VAIBHAVI PARIKH
• Keywords: Change of opinion; Exempt income; Income tax reassessment; Section 14A Disallowance
• Section: 147; 148; 143(3); 142(1); 14A; 226; 144(C)

Judgement Text

"C/SCA/17583/2021 JUDGMENT DATED: 19/09/2022 IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/SPECIAL CIVIL APPLICATION NO. 17583 of 2021 FOR APPROVAL AND SIGNATURE: HONOURABLE MR. JUSTICE N.V.ANJARIA and HONOURABLE MR. JUSTICE BHARGAV D. KARIA ========================================================== 1 Whether Reporters of Local Papers may be allowed to see the judgment ? Yes 2 To be referred to the Reporter or not ? Yes 3 Whether their Lordships wish to see the fair copy of the judgment ? No 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India or any order made thereunder ? No ========================================================== LAMBDA THERAPEUTIC RESEARCH LIMITED Versus DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE - 2(1)(1) ========================================================== Appearance: MR. TUSHAR HEMANI, SR. ADV. WITH MS VAIBHAVI K PARIKH(3238) for the Petitioner(s) No. 1 MR. M.R.BHATT, SR. ADV. WITH MR. KARAN SANGHANI FOR M R BHATT & CO.(5953) for the Respondent(s) No. 1 ========================================================== CORAM:HONOURABLE MR. JUSTICE N.V.ANJARIA and HONOURABLE MR. JUSTICE BHARGAV D. KARIA Date : 19/09/2022 ORAL JUDGMENT (PER : HONOURABLE MR. JUSTICE N.V.ANJARIA) In the facts and circumstances of the case and having regard to the Page 1 of 12 C/SCA/17583/2021 JUDGMENT DATED: 19/09/2022 request and consent of the learned advocates appearing for the respective parties, the petition was taken up for final consideration. 1.1 Rule, returnable forthwith. Learned advocate Mr. Karan Sanghani for M. R. Bhatt & Co. waives service of Rule on behalf of the respondent. 2. By filling this petition under Article 226 of the Constitution , the petitioner has prayed to set aside notice dated 27.3.2021 issued under section 148 of the Income Tax Act, 1961 in respect of Assessment Year 2014-2015 seeking to reopen the assessment stating that the Assessing Officer had reasons to believe that the income of the petitioner chargeable to income tax for the Assessment Year under consideration had escaped assessment within the meaning of section 147 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’). 3. The facts are that the petitioner is engaged in the business of providing clinical research services. In the year under consideration, its non-current investment as on 31.3.2013 and 31.3.2014 aggregated to Rs. 59,11,96,725/- and Rs. 69,58,82,489/- as reflected in the annual accounts. It was stated that majority of investments were in the shares of the foreign companies and dividend from the shares of the foreign companies is taxable. The petitioner incurred interest expenses of Rs. 3,19,34,823/- as is evident from the profit and loss account. In the final return of income filed by the petitioner on 27.11.2014, it made disallowance of Rs. 1,12,869/- under section 14A of the Act on its own. 3.1 The case of the petitioner was selected for scrutiny assessment. The notice was issued on 2.8.2017 under section 142(1) of the Act. The assessing officer called from the petitioner the information regarding suo motu disallowance of Rs. 1,12,869/-. The petitioner addressed letter dated 30.08.2017 and provided the working of the dis-allowance of Page 2 of 12 C/SCA/17583/2021 JUDGMENT DATED: 19/09/2022 Rs. 1,12,869/- taken under section 14A of the Act. The Assessing Officer framed assessment under section 143 (3) read with section 144(C) of the Act and passed order dated 25.1.2018 after making various additions including disallowance. The actual disallowance under section 14A of the Act was worked out by the then assessing officer to be Rs. 32,17,698/-, however, since the petitioner had itself disallowed Rs. 1,12,869/- suo motu, net disallowance of Rs. 31,04,829/- (Rs. 32,17,698/- - Rs. 1,12,869/-) was made. 3.2 The disallowance under section 14A of the Act made by the authorities came to be challenged by the petitioner by preferring the appeal before the Commissioner of Income Tax (Appeals). The appellate authority passed order dated 20.6.2018 and deleted the disallowance under section 14A observing that the investment made in foreign companies cannot be considered for the purpose of making disallowance under the said section 14A of the Act read with Rule 8D of the income tax rules. 3.3 It is the case of the petitioner that thereafter the respondent issued impugned notice dated 27.3.2021 under section 148 of the Act. The petitioner filed return of income 15.4.2021 in response to the notice and requested the officer to supply the reasons for reopening the assessment. The reasons were supplied to the petitioner by letter dated 11.5.2021. The petitioner raised objections on 25.5.2021 and by order dated 11.11.2021, the objections of the petitioner came to be rejected by the assessing officer. 3.4 Now the reasons supplied for reopening are as under, “2. Brief details of information collected/received by the AO: Scrutiny of the Case Records, Balance Sheet, P&L Account, Computation of Income, it is seen that, the assessee-company had claimed and allowed Page 3 of 12 C/SCA/17583/2021 JUDGMENT DATED: 19/09/2022 exempt income of Rs.1,43,679/- by way of dividend. It is further noticed that the assessee-company had itself disallowed of Rs.1,12,869/- under section 14A r.w.r. 8D of the IT Rules. It is further noticed from assessment order that AO has also disallowed of Rs.31,04,829/- under section 14A r.w.r. 8D(2)(iii). It is further noticed from Balance Sheet and Profit & Loss Account that assessee-company had invested in equity shares and preference shares a total sum of Rs.69,58,82,489/- as on 31.03.2015 and Rs.59,11,96,725/- as on 31.03.2014 and had incurred interest expenditure of Rs.3,19,34,823/- in P&L Account. However, the expenses in relation to the exempt income were disallowed short in terms of the provisions of section 14A of the Income-tax Act r.w.r. 8D(2)(ii) accordance with the formula (A x B)/C of the Income-tax Rules. The amount of Rs 99,81,608/- required to be disallowed under section 14A r.w.s. Rule 8D works out as under: Particulars Working Amount (In Rs.) Total interest paid during the year (i) 3,19,34,823/- Average Investment [69588489+591196725]/2 64,35,39,607/- Average total assets [3078889101+2997868844]/2 3,03,83,78,8724/- Interest x Average Investment Average- Total 31934823 x 643539607/3038378872 67,63,910/- Assets (ii) Add:0.5% of Average- 0.5% 643539607 32,17,698/- Investment (iii) Total Disallowable Amount (i + ii + iii) 99,81,608/ 3. Analysis of information collected/received: As discussed in Para-2 above, it can be seen from the case records that, assessee-company had claimed and allowed exempt income of Rs.1,43,679/- by way of dividend income. It is further noticed that the assessee-company had itself disallowed of Rs.1,12,869/- under section 14A r.w.r. 8D of the IT Rules. It is further noticed from assessment order that, the Assessing Page 4 of 12 C/SCA/17583/2021 JUDGMENT DATED: 19/09/2022 Officer in addition to the above disallowed another amount of Rs.31,04,829/- under section 14A r.w.r. 8D(2)(iii) at the time of finalizing the assessed income. It is further noticed from Balance Sheet and Profit & Loss Account that assessee-company had invested in equity shares and preference shares a total sum of Rs.69,58,82,489/- as on 31.03.2015 and Rs.59,11,96,725/- as on 31.03.2014 and had incurred interest expenditure of Rs.3,19,34,823/- in P&L Account. However, the expenses in relation to the exempt income were disallowed short in terms of the provisions of section 14A of the Income-tax Act r.w.r. 8D(2)(ii) accordance with the formula (A x B/C of the Income-tax Rules. The total amount required to be disallowed under section 14A r.w.s. Rule 8D comes to Rs.99,81,608/- whereas only amount of Rs.32,17,698/- was disallowed. This short disallowance of expenditure has resulted into underassessment of Rs. 67,63,910/- (Rs. 99,81,608/- (-) Rs. 32,17,698/-)” 3.5 The assessee responded to the reasons supplied in his letter dated 25.5.2021. 4. Heard learned senior advocate Mr. Tushar Hemani with learned advocate Ms. Vaibhavi Parikh for the petitioner and learned senior advocate Mr. M. R. Bhatt for M. R. Bhatt & Co. for the respondent. 5. The reasons for reopening reveals that the case of the Petitioner has been reopened broadly on the count that there is short disallowance under section 14A of the Act. Briefly, the case of the Respondent is that the scrutiny of case records, Balance-sheet, Profit & Loss account and computation of income revealed that the Petitioner had itself disallowed Rs. 1,12,869/- under section 14A of the Act and the then Assessing Officer had made disallowance of Rs.31,04,829/- under section 14A of the Act while framing original assessment. It was further noticed from the Balance-sheet that investments as at 31.03.15 (should be 31.03.14) & 31.03.14 (should be 31.03.13) aggregated to Rs.69,58,82,489/- and Rs.59,11,96,725/- respectively and that the Petitioner had incurred Page 5 of 12 C/SCA/17583/2021 JUDGMENT DATED: 19/09/2022 interest expenses of Rs.3,19,34,823/- in Profit & Loss account. Disallowance under section 14A of the Act read with Rule 8D(2)(ii) worked out to Rs.99,81,608/- as against which, disallowance of only Rs.32,17,698/- (Rs.1,12,869 + Rs.31,04,829) was made under section 14A of the Act. Thus, there was a short disallowance of Rs,67,63,910/- (Rs.99,81,608 - Rs.32,17,698) under section 14A of the Act. 5.1 Now there is no gainsaying that prior to the impugned notice seeking to reopen the assessment, the scrutiny assessment was undertaken in the case of the petitioner. The petitioner was issued notice dated 2.8.2017 under section 142(1) of the Act. The petitioner had responded to the same by letter dated 30.8.2017. The final final order was passed on 25.1.2018 under section 143(3) read with section 144C of the Act. 5.2 In notice dated 2.8.2017, the following details were asked for amongst other details, “(i) Details of interest free and interest bearing loans and advances made by the company, viz. name and address of such persons to whom the loans and advances were made and the specific purpose of such loan and advances. Also give clarification regarding whether any interest bearing fund has been diverted for non business purposes or for acquisition of capital asset. If yes then explain as to why proportionate interest expenses should not be disallowed u/s. 36(1)(iii) of the Act or capitalized with the capital assets. Please furnish details of advance recoverable in cash or kind along with justification for non charging of interest on such advance, if any. (ii) Details of holding of shares all the Directors of the company along with their latest addresses. Submit the copies of ledger account for the financial year 2013-14 of all such shareholders who are the beneficial owner of shares in the company holding not less than ten per cent of voting power or who is substantially interested in the Company or of any concerns in which such shareholders are substantially interested within the meaning of section 2(22)(e) of the IT Act, 1961.” Page 6 of 12 C/SCA/17583/2021 JUDGMENT DATED: 19/09/2022 5.3 The petitioner responded with the details of working of disallowance under section 14A as under, Particulars Amount INR Opening balance of Investment earning Exempt Income (A) 1,000 Closing balance of Investment earning Exempt Income (B) 4,51,46,499 Investment Balances Opening and Closing (A) + (B) = (C) 4,51,47,499 Average of above balances (D) 2,25,73,750 Disallowed @ 0.5% of Average balances = 0.5%*(D) 1,12,869 5.3.1 The details of the outstanding balance as on 31.3.2014 of allowance and advances made by the petitioner weas also furnished to be as under, Loan to Address Balances 31.3.2004 During the year Jina Pharmaceuticals Inc 28100 Ashley Circle, Suite 103, Libertyville, IL60048, USA 43,06,25,540 Nil Lambda Therapeutic Ltd. UK Sage House, 319 Pinner Road North Harrow, Middlesex U.K.HA1 4HF 1,81,39,364 Nil 5.3.2 The details of the share holding pattern of the petitioner company was also made available as under, Particulars Address Share Capital % Holding Epsilon Marketing & Cons. Pvt. Ltd. 2nd Floor, Chinubhai Center, Ashram Road, 1,350,000 32% Page 7 of 12 C/SCA/17583/2021 JUDGMENT DATED: 19/09/2022 A’bad-9. Mr. Binish H. Chudgar 11, Aaksshneem’s Vastrapur, A’bad-5. 865,750 21% Mrs. Bindi B. Chudgar 11, Aaksshneem’s Vastrapur, A’bad-5. 1,943,850 47% Total 41,59,600 5.4 After considering the above details, the assessment order under section 143(3) was passed by the assessing officer. The following aspects of disallowance of expenses under section 14A of the Act was specifically dealt with, extracting the relevant part, “On verification of the balance sheet it is noticed that the assessee has shown investments of Rs. 695882489/- in the year under consideration. Further, the assessee has paid substantial interest on the borrowings amounting to Rs.2,86,97,897/- in the year under consideration. The assessee has made investment in shares of the subsidiary company. In view of the above, during the assessment proceedings, the assessee vide notice dated 2/08/2017 was asked to show cause as to why expenses u/s. 14A r.w.r. 8D should not be disallowed. In response to the assessee has furnished its reply dated 30/08/2017, the assessee submitted that the working of disallowance of Rs. 1,12,869/- under section 14A is already made while computing the income and no further expenses requires to be disallowed.” 5.5 While filling the objections to the reasons recorded, the assessee furnished to the assessing officer Note 15 of the audited accounts, which provided details of investment, that is investment in shares held by the assessee, which included the investment in preference shares of foreign companies/foreign subsidiaries as well. 5.6 It was further pointed out that the petitioner while filed return of income on 27.11.2014 declaring income of Rs. 51,06,77,201/- after diallowing Rs. 1,12,689/- under section 14A. In absence of specific Page 8 of 12 C/SCA/17583/2021 JUDGMENT DATED: 19/09/2022 borrowings and availability of sufficient own interest free funds in the hands of the assessee, any adjustment under Rule 8D2(ii) was not made and any interest expenses was not disallowed. It was pointed out that the assessee worked out disallowance as provided in rule 8D2(iii) at 0.5% in absence of any interest expenses. The said details were given in tabular form thus, Amount in INR Particulars As on 31.3.2014 As on 31.03.2013 Investment in Shares Prime Pediatrics Ltd. 1,000 1,000 Investment in Mutual Funds Liquid Funds 4,51,43,679 0 Shares issued by Co- operative Housing Society towards holding of immovable property held in Mumbai (inadvertently included by Appellant in calculation of disallowance) The Great Eastern Summit A Premises Co- Operatives Society Ltd. 1820 1820 Total Investments 4,51,46,499 2,820 Average Investment 2,25,74,660 5.7 It was also pointed out that while passing order, the assessing officer calculated Rs. 32,17,698/- as it was disallowable amount under rule 8D(2)(iii) towards 0.5% of average investment of Rs. 64,35,39,607/- shown in the financial statement it mainly included the investments in the Page 9 of 12 C/SCA/17583/2021 JUDGMENT DATED: 19/09/2022 shares of the foreign companies as well as shares allotted towards holding of movable property. 6. From the above details, there shall be no gainsaying that the issue about the allowable expenditure under section 14A of the Act was gone into by the assessing officer at the time of scrutiny assessment on the basis of material and the information supplied and available with it. Furthermore, notice under section 148 was issued in respect of assessment year 2014-2015, after four years from the end of the year consideration. The pre-requisite was to show that there was failure on part of the petitioner assessee in fully and truly disclosing the facts as per the first proviso to section 147 of the Act. 6.1 In the facts of the case, there was full and true disclosure in the year under consideration on the part of the assessee. The submission could not be brushed aside lightly that on the said ground alone, the notice issued by the respondent under section 148 of the Act was liable to be set aside. 6.2 As could be seen from the above discussion, the assessing officer had acted to undertake the assessment, which ended up with the assessment order under section 143(3) of the Act, in which the aspect of allowability of interest under section 14A was considered alolngwith the other aspects on the basis of the material and conscious decision was taken reflected in the assessment order. It is on the basis of the very facts that the assessing officer wanted to reopen the concluded assessment proceedings. It amounted to change of opinion. 6.3 It is well settled that mere change of opinion could not be a ground Page 10 of 12 C/SCA/17583/2021 JUDGMENT DATED: 19/09/2022 for the Assessing Officer to reopen the concluded assessment. In Commissioner of Income Tax vs. Kelvinator of India Ltd. [(2010) 320 ITR 561 O(SC)], the supreme court observed that concept of change of opinion was an inbuilt test and it did not stand obliterated after substitution of section 147 in the Act by the Direct Tax Laws (Amendment) Act, 1987 and 1989. The Apex Court stated, “... prior to Direct Tax Laws (Amendment) Act, 1987, re-opening could be done under above two conditions and fulfillment of the said conditions alone conferred jurisdiction on the Assessing Officer to make a back assessment, but in section 147 of the Act with effect from 1st April, 1989, they are given a go-by and only one condition has remained, viz., that where the Assessing Officer has reason to believe that income has escaped assessment, confers jurisdiction to re-open the assessment. Therefore, post-1st April, 1989, power to re-open is much wider. However, one needs to give a schematic interpretation to the words \"reason to believe\" failing which, we are afraid, section 147 would give arbitrary powers to the Assessing Officer to re-open assessments on the basis of \"mere change of opinion\", which cannot be per se reason to re-open. We must also keep in mind the conceptual difference between power to review and power to re-assess. The Assessing Officer has no power to review; he has the power to re-assess. But re-assessment has to be based on fulfillment of certain pre-condition and if the concept of \"change of opinion\" is removed, as contended on behalf of the Department, then, in the garb of re-opening the assessment, review would take place. One must treat the concept of \"change of opinion\" as an in-built test to check abuse of power by the Assessing Officer.” 6.4 The assessing officer issued notice under section 148 only to make a roving inquiry into the facts which were already considered and which had gone into his consideration and decision. It appeared that the assessing officer wanted to re-verify the facts, which is not an acceptable ground for exercising powers to reopen the assessment. Page 11 of 12 C/SCA/17583/2021 JUDGMENT DATED: 19/09/2022 7. For all the foregoing reasons and discussions, the impugned notice dated 27.3.2021 under section 148 of the Income Tax Act, 1961 issued by the respondent, whereby the Assessing Officer proposed to exercise the powers to reopen the assessment for the year 2014-2015 stands illegal and is liable to be set aside. Also deserves to be set aside is the order dated 11.11.2021 of the Assessing Officer disposing of the objections of the petitioner filed against the reopening to reject the same. Accordingly, the impugned notice dated 27.3.2021 is hereby set aside. Also set aside are the consequential actions and orders. The petition is allowed. Rule is made absolute (N.V.ANJARIA, J) (BHARGAV D. KARIA, J) C.M. JOSHI Page 12 of 12 "