MANGALAM ALLOYS LTD. V. DY. COMMISSIONER OF INCOME TAX CIRCLE 2(1)(2)

SCA/22495/2019

AI Insights

The case involves Mangalam Alloys Ltd., which challenged the reopening of its assessment for the Assessment Year 2012-2013 by the Deputy Commissioner of Income Tax under section 148 of the Income Tax Act, 1961. The reopening was based on the provision for bad and doubtful debts claimed by the company, which the Assessing Officer initially accepted during the original assessment under section 143(3). However, the Assessing Officer later issued a notice for reassessment, claiming that income had escaped assessment due to non-disclosure of material facts by the assessee. The High Court found that the reassessment was merely a change of opinion and not based on any new evidence, leading to the quashing of the notice and the subsequent order.

• Counselvise Citation: [2022] 140 COUNSELVISE.COM (IT) 672085 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 12-09-2022
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income tax v. Kelvinator of India Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: M R BHATT
• Assessee Lawyers: NITIN MEHTA
• Keywords: Income escaped assessment; Natural Justice; Provision for bad and doubtful debt; Reopening of assessment
• Section: 147; 148; 143(3); 271(1)(c); 143(3) read with 147

Judgement Text

"C/SCA/22495/2019 JUDGMENT DATED: 12/09/2022 IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/SPECIAL CIVIL APPLICATION NO. 22495 of 2019 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 ? 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 ? ========================================================== MANGALAM ALLOYS LTD. Versus DY. COMMISSIONER OF INCOME TAX CIRCLE 2(1)(2) ========================================================== Appearance: MR NITIN K MEHTA(3286) for the Petitioner(s) No. 1,2 MR MR BHATT SENIOR ADVOCATE 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 : 12/09/2022 ORAL JUDGMENT (PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA) Page 1 of 21 C/SCA/22495/2019 JUDGMENT DATED: 12/09/2022 1.Heard learned advocate Mr. Nitin k. Mehta for the petitioner and learned Senior Advocate Mr. M.R. Bhatt with learned advocate Mr. Karan Sanghani for M.R. Bhatt and Co. for 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.Rule returnable forthwith. Learned advocate Mr. Karan Sanghani waives service of notice of rule on behalf of the respondent. 4.By this petition under Article 226 of the Constitution of India, the petitioner has challenged the notice dated 25.03.2019 issued under section 148 of the Income Tax Act, 1961 Page 2 of 21 C/SCA/22495/2019 JUDGMENT DATED: 12/09/2022 (For short “the Act”) for reopening of the assessment proceedings for the Assessment Year 2012-2013 and impugned order dated 15.11.2019 passed under section 143(3) read with section 147 of the Act. 5.Brief facts of the case are as under : 5.1) The petitioner no.1 is a company registered under the Companies Act, 1956 and petitioner no.2 is the Director of the said company, which is engaged in the business of manufacturing of stainless steel ingots, round bar, flat, etc. 5.2) The assessee company filed its return of income for the assessment year 2012-2013 on 30.09.2012 declaring total income of Rs. 2,12,53,116/-. 5.3) Case of the petitioner was taken for Page 3 of 21 C/SCA/22495/2019 JUDGMENT DATED: 12/09/2022 scrutiny assessment whereby notice dated 6.08.2014 was issued under section 143 of the Act and a detailed questionnaire was issued by the Assessing Officer. 5.4) In response, the petitioner submitted the required details along with the balance sheet and profit and loss account alongwith schedules thereto. 5.5) During the course of assessment proceedings, the petitioner was asked specific queries about doubtful debts, difference between the interest income which formed part of the interest income reflected in the Profit and Loss Account and that shown as doubtful debts in the Profit and Loss account to which the petitioner supplied its explanation vide its reply. 5.6) The Assessing Officer passed under Page 4 of 21 C/SCA/22495/2019 JUDGMENT DATED: 12/09/2022 order section 143(3) of the Act on 28.01.2015 determining the total income at Rs. 2,69,26,640/-. 5.7) Subsequently, case of the petitioner was reopened by issuance of notice under section 148 of the Act dated 25.03.2019 for reassessment under section 147 of the Act. 5.8) The petitioner submitted letter dated 1.06.2019 requesting for providing the reasons recorded for reopening of the assessment. Since the petitioner did not receive such reasons recorded by the Assessing Officer, the petitioner addressed letters dated 01.06.2019, 23.09.2019, 16.10.2019 and 19.10.2019 requesting for providing the reasons recorded by the Assessing Officer. The petitioner was thereafter provided the reasons for reopening by letter dated 1.11.2019. The reasons Page 5 of 21 C/SCA/22495/2019 JUDGMENT DATED: 12/09/2022 recorded by the Assessing Officer for reopening the assessment under section 147 of the Act read as under : : “1. The Assessee company is engaged in the business of manufacturing of steel and other alloys. The assessee M/s. Mangalam Alloys Ltd. filed its return of income for the A.Y.2012-13 on 30.09.2012 declaring total income of Rs. 2,12,53,116/-. The case was finalized under section 143(3) on 28.01.2015 deciding income at Rs. 2,44,32,009/-. 2. Subsequently, on verification of the case records and P&L account it is noticed that the assessee had claimed provision for bad and doubtful debt of Rs.1,19,22,280/-. However, as per the provisions of section 37 of the Act, the expenditure incurred should have actually been incurred to claim it as an expense for Income Tax purposes, As provision for doubtful debt was just a provision, it was required to be disallowed. As per section 36 (1)(vii), the assessee has the right to write off the debt which is found irrecoverable and offered as income of any year by the assessee In the instant case, the assessee had not written off the debt but made a provision for the same. Hence, it was required to be disallowed and added to the total income of the assessee. 3. Further, on verification of the case records it is also noticed that the assessee submitted it reply on this Page 6 of 21 C/SCA/22495/2019 JUDGMENT DATED: 12/09/2022 point on perusal of the same it is noticed that assessee submitted that during the year it had sold and purchase goods with Manglam Steel & Alloys Ltd. Vietnam and which a sum of Rs. 5.84,41,221/- is outstanding including of booking claim for interest. Further, the assessee stated that chances of recovery of goods sell were doubtful and the claim of interest was not the income under income tax provisions. As the assessee it stated that the interest was not the income under income tax provisions. Hence as per section 37 of the income tax Act the above mentioned provision for bad and doubtful debt of Rs.1,19,22,280/- is not allowable as expenses and the same should be disallowed and added to the total income of the assessee. 4. In view of the above discussion it is clear that the assessee completely failed in disclosing before the A.O. that provision for bad and doubtful debt of Rs.1,19,22,280/- are not allowable as revenue expenditure in view of section 37 of the Income Tax Act. Hence, it is found that Income of Rs.1,19,22,280/- for the year under consideration has escaped assessment within the meaning of section 147 of the I.T. Act 5. In view of the above facts, have reason to believe that income of Rs.1,19,22,280/- has escaped assessment within the meaning of Section 147 of the Act. Therefore, it is a fit case for reopening of the assessment by invoking the provision of section 147 of the Income Tax Act, 1961. Accordingly, it is Page 7 of 21 C/SCA/22495/2019 JUDGMENT DATED: 12/09/2022 a fit case for issuing notice uls. 148 of the I.T. Act. 6. In this case a return of income was filed for the year under consideration and regular assessment u/s. 143(3) was made on 28.01.2015. Since, 4 years from the end of the relevant year has expired in this case, the requirement to initiate proceeding u/s, 147 of the Act are reason to believe that income for the year under consideration has escaped assessment because of failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment for the assessment year under consideration. It is pertinent to mention here that reason to believe that income has escaped assessment for the year under consideration have been recorded in above para. I have carefully considered the assessment records containing the submission made by the assessee in response to various notices issued during the assessment proceedings and have noted that the assessee has not fully and truly disclosed the following material facts necessary for its assessment for the year under consideration: The assessee has failed in disallowing provision for bad and doubtful debt of Rs.1.19.22,280/- as the same is not allowable as revenue expenditure in view of section 37 of the Income Tax Act It is evident from the above facts that the assessee had not truly and fully disclosed material facts necessary for its assessment for the year under Page 8 of 21 C/SCA/22495/2019 JUDGMENT DATED: 12/09/2022 consideration thereby necessitating reopening u/s. 147 of the Act. In this case more than four years have elapsed from the end of assessment year under consideration. Hence, necessary sanction to issue notice u/s. 148 is requested for from Pr. CIT as per the provisions of section 151 of the Act.” 5.9) Further, the petitioner also received online penalty notice dated 16.11.2019 under section 271(1)(c) of the Act. 5.10) It is the case of the petitioner that as the petitioner did not receive the assessment order, it requested the Chartered Accountant to inquire from the department about the same and upon personal visit by the Chartered Accountant to the department, he was handed over copy of assessment order dated 15.11.2019. 5.11) Being aggrieved by the action of the respondent, the petitioner has preferred this Page 9 of 21 C/SCA/22495/2019 JUDGMENT DATED: 12/09/2022 petition. 6.Learned advocate Mr. Nitin Mehta for the petitioner submitted that the impugned order is passed in gross violation of principles of natural justice inasmuch as the impugned order is passed without giving the opportunity to the assessee to object to the reasons supplied by the Assessing Officer. It was submitted that the impugned notice is without jurisdiction as the same is issued beyond the period of four years without the requirements of proviso of section 147 read with section 148 being fulfilled. 6.1) Learned advocate for the petitioner submitted that for the very assessment year, the audited statements of accounts contained Note-12 clarifying the fact of doubtful debts as well as Note 12.1 disclosing the facts on the issue under reference and therefore, Page 10 of 21 C/SCA/22495/2019 JUDGMENT DATED: 12/09/2022 there was no failure on part of the assessee to disclose fully and truly all material facts. It was further submitted that during the detailed scrutiny and upon query raised by the Assessing officer, the petitioner submitted all the details pertaining to the provision of doubtful debt and after having been satisfied with the details submitted by the petitioner, the Assessing Officer formed his opinion that no addition or disallowance is required to be made and therefore, passed the assessment order dated 28.01.2015 under section 143(3) of the Act. It was further submitted that the Assessing Officer accepted the contention and submission of the assessee on the issue of interest income and provision for doubtful debt relating to the interest income but at the same time rejected the submission of the assessee with respect to Rs. 5,63,035/- being foreign exchange fluctuation and added back the same and Page 11 of 21 C/SCA/22495/2019 JUDGMENT DATED: 12/09/2022 therefore, the impugned notice is nothing but a change of opinion on the same issue which was earlier scrutinised while finalising the assessment under section 143(3) of the Act. It was further submitted that in the assessment order dated 28.01.2015 it is concluded by the Assessing Officer that the interest income of Rs.1,13,59,245/- is not a real income and has not formed part of total income and therefore, the deduction of the same by way of Provision of Doubtful Debt also does not arise and accordingly the addition sought to be made by impugned order is erroneous and without application of mind 7.On the other hand learned Senior Advocate Mr. M.R. Bhatt for the Revenue at the outset submitted that there is an alternative efficacious remedy available to the petitioner by way of an appeal before the CIT(Appeals) and thereafter before the Page 12 of 21 C/SCA/22495/2019 JUDGMENT DATED: 12/09/2022 Tribunal. 7.1) It was submitted that on verification of the case records and Profit and Loss account, it was noticed that the assessee had claimed provision for bad and doubtful debt of Rs. 1,19,22,280/-. As per section 36(1)(vii) of the Act, the assessee had a right to write off the debt which was irrecoverable if the same had been offered as income of any year, however the assessee had not written off the debt but made a provision of the same and therefore, it was required to be disallowed and added to the total income of the assessee. Learned Senior Advocate therefore, submitted that since income chargeable to tax has escaped assessment, notice under section 148 was issued. 7.2) Learned Senior Advocate Mr. Bhatt further submitted that after the introduction Page 13 of 21 C/SCA/22495/2019 JUDGMENT DATED: 12/09/2022 of changes in the provision of section 147 of the Act with effect from 1.4.1989, the scope of reassessment has widened. It was submitted that the Assessing Officer on the basis of information and after perusal of the records had rightly formed the opinion that there was escapement of income and such escapement was because of the failure on part of the assessee to fully and truly disclose all the material facts necessary for assessment. It was therefore, submitted that there is escapement of income in view of the aforesaid facts which give jurisdiction to the Assessing Officer to reopen the assessment. 8.Considering the submissions made by the learned advocates on both the sides, it appears that the impugned notice under section 148 of the Act, 1961 is issued only on the ground that the assessee failed in disclosing before the Assessing Officer that Page 14 of 21 C/SCA/22495/2019 JUDGMENT DATED: 12/09/2022 provision for bad and doubtful debt of Rs.1,19,22,280/- are not allowable as revenue expenditure in view of section 37 of the Income Tax Act. Hence, it is found that income of Rs.1,19,22,280/- for the year under consideration has escaped assessment within the meaning of section 147 of the Act. 9.It appears from the record that during the original assessment, the petitioner had submitted the required details along with the balance sheet and profit and loss account along with schedules thereto. Thereafter during the assessment proceedings specific query regarding the doubtful debt appearing in the statement of accounts was raised and the petitioner tendered his explanation to such query. Thereafter also the Assessing Office raised query with respect to the difference between the income of Rs.1,13,59,245/- which formed part of the Page 15 of 21 C/SCA/22495/2019 JUDGMENT DATED: 12/09/2022 interest income reflected in the Profit and Loss account and Rs.1,19,22,280/- shown as doubtful debts in Profit and Loss account to which the petitioner gave detailed reply and pointed out that the difference of Rs. 5,63,035/- (Rs.1,19,22,280-Rs.1,13,59,245) is with respect to the foreign exchange variation account. The Assessing Officer after considering such explanation and submission and the details submitted during the assessment proceedings, finalised the assessment proceedings under section 143(3) of the Act without making any addition or disallowance with respect to Rs. 1,13,59,245/- shown as doubtful debts in the Profit and Loss account from the taxable income disclosed in the return of income originally filed. 10. Thus, it is not in dispute that during the course of assessment proceedings under Page 16 of 21 C/SCA/22495/2019 JUDGMENT DATED: 12/09/2022 section 143(3) of the Act all the details were fully and truly disclosed by the petitioner and there is no escapement of income chargeable to tax on account of failure on part of the assessee to disclose fully and truly all material facts. 11. From the facts on record it appears that during the detailed scrutiny and upon query raised by the Assessing officer, the petitioner submitted all the details pertaining to the provision of doubtful debt and after having been satisfied with the details submitted by the petitioner, the Assessing Officer formed his opinion that no addition or disallowance is required to be made and thereafter, passed the assessment order dated 28.01.2015 under section 143(3) of the Act. 12. It is therefore, apparent that there is Page 17 of 21 C/SCA/22495/2019 JUDGMENT DATED: 12/09/2022 change of opinion by the Assessing Officer to reopen the assessment for the Assessment Year 2012-2013, more particularly, when the issue of provision of doubtful debts is already considered during the assessment proceedings under section 143(3) of the Act, 1961. The Assessing Officer cannot have any jurisdiction to issue the notice under section 148 of the Act, 1961 for reopening the assessment for the year under consideration more particularly, when the assessment is sought to be reopened beyond a period of four years as held by the Supreme Court in case of Commissioner of Income tax v. Kelvinator of India Ltd. reported in 2010(2) SCC 723 as under: “2. A short question which arises for determination in this batch of civil appeals is, whether the concept of \"change of opinion\" stands obliterated with effect from 1st April, 1989, i.e., after substitution of Section 147 of the Income Tax Act, 1961 by Direct Tax Laws (Amendment) Act, 1987? xxxx Page 18 of 21 C/SCA/22495/2019 JUDGMENT DATED: 12/09/2022 6. On going through the changes, quoted above, made to Section 147 of the Act, we find that, 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. Hence, after 1st April, 1989, Assessing Officer has power to re-open, provided there is \"tangible material\" to come to the conclusion that there is escapement Page 19 of 21 C/SCA/22495/2019 JUDGMENT DATED: 12/09/2022 of income from assessment. Reasons must have a live link with the formation of the belief. Our view gets support from the changes made to Section 147 of the Act, as quoted hereinabove. Under the Direct Tax Laws (Amendment) Act, 1987, Parliament not only deleted the words \"reason to believe\" but also inserted the word \"opinion\" in Section 147 of the Act. However, on receipt of representations from the Companies against omission of the words \"reason to believe\", Parliament re-introduced the said expression and deleted the word \"opinion\" on the ground that it would vest arbitrary powers in the Assessing Officer. We quote hereinbelow the relevant portion of Circular No.549 dated 31st October, 1989, which reads as follows: \"7.2 Amendment made by the Amending Act, 1989, to reintroduce the expression `reason to believe' in Section 147.--A number of representations were received against the omission of the words `reason to believe' from Section 147 and their substitution by the `opinion' of the Assessing Officer. It was pointed out that the meaning of the expression, `reason to believe' had been explained in a number of court rulings in the past and was well settled and its omission from section 147 would give arbitrary powers to the Assessing Officer to reopen past assessments on mere change of opinion. To allay these fears, the Amending Act, 1989, has again amended section 147 to reintroduce the expression `has Page 20 of 21 C/SCA/22495/2019 JUDGMENT DATED: 12/09/2022 reason to believe' in place of the words `for reasons to be recorded by him in writing, is of the opinion'. Other provisions of the new section 147, however, remain the same.\" 13. In view of foregoing reasons, considering the facts of the case impugned notice under section 148 of the Act, 1961 is not tenable in law and is accordingly quashed and set aside and consequentially, impugned order dated 15.11.2019 is also quashed and set aside. 14. Rule is made absolute to the aforesaid extent. No order as to costs. (N.V.ANJARIA, J) (BHARGAV D. KARIA, J) RAGHUNATH R NAIR Page 21 of 21 "