SHARDA EXPORT V. COMMISSIONER OF INCOME TAX DEHRADUN and ORS

WPMS/2546/2011

AI Insights

Sharda Exports, a partnership firm engaged in the manufacture and export of carpets, faced reassessment proceedings by the Income Tax Department for several assessment years from 2005-06 to 2008-09. The firm claimed benefits under Section 80-IC of the Income Tax Act, which were applicable to manufacturing units in certain states, including Uttarakhand. However, a survey conducted by the Revenue revealed that the manufacturing activities were primarily based in Meerut and Delhi, not in Haridwar, Uttarakhand, as claimed by the firm. The firm contested the reassessment, arguing that it was a different entity post-2009 and that the reassessment was based on new grounds not initially stated. The court dismissed these arguments, upholding the validity of the reassessment proceedings.

• Counselvise Citation: [2019] 140 COUNSELVISE.COM (IT) 761611 (HC-UTTARAKHAND)
• Appeal Type: Others
• Pronouncement Date: 19-07-2019
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income-Tax-5, Mumbai v. Jet Airways (I) Ltd., Principal Commissioner of Income-Tax v. Lark Chemicals (P) Ltd.
• Laws Referred To: Income Tax Act
• Result in Favour of: Revenue
• Court: HIGH COURT
• Department Lawyers: HARI MOHAN BHATIA
• Assessee Lawyers: P R MULLICK
• Keywords: Income Tax; Manufacturing activity; Reassessment; Survey; Tax holiday; Uttarakhand
• Section: 147; 148; 131; 80-IC; 133-A

Judgement Text

"IN THE HIGH COURT OF UTTARAKHAND AT NAINITAL Writ Petition (M/S) No. 122 of 2013 Sharda Exports ………….Petitioner Versus Commissioner of Income Tax, Dehradun and others ……...Respondents Writ Petition (M/S) No. 2546 of 2011 Sharda Exports ………….Petitioner Versus Commissioner of Income Tax, Dehradun and others ……...Respondents Writ Petition (M/S) No. 49 of 2013 Sharda Exports ………….Petitioner Versus Commissioner of Income Tax, Dehradun and others ……...Respondents Writ Petition (M/S) No. 120 of 2013 Sharda Exports ………….Petitioner Versus Commissioner of Income Tax, Dehradun and others ……...Respondents 2 Writ Petition (M/S) No. 121 of 2013 Sharda Exports ………….Petitioner Versus Commissioner of Income Tax, Dehradun and others ……...Respondents Present : Mr. P.R. Mullick, Advocate for the petitioner. Mr. Hari Mohan Bhatia, Advocate for the respondents. Hon’ble Sudhanshu Dhulia, J. (Oral) The petitioner is common in all these writ petitions which arise out of the reassessment proceedings initiated by the Income Tax Department, and the orders passed therein. The assessment year to which these petitions pertain are 2005-06 (WPMS No. 2546 of 2011 and WPMS No. 49 of 2011), 2006-07 (WPMS No. 120 of 2013), 2007-08 (WPMS No. 121 of 2013, 2008-09 (WPMS No. 122 of 2013). As the point raised by the learned counsel for the petitioner in all these writ petitions is common, these petitions are being decided by a common order. All the same, for the sake of convenience, unless the context otherwise requires, the general facts would be the ones relating to WPMS No. 122 of 2013. 2. The petitioner is a partnership firm which is duly registered. According to the petitioner, the firm was constituted on 01.12.2003 vide partnership deed dated 01.12.2003 having following partners : “1. Shri Jitendra Kumar Gupta 2. Shri Aditya Kumar Gupta and 3. Shri Ashish Kumar Gupta” 3. Later in the year 2005, Smt. Meenakshi Gupta w/o Shri Jitendra Kumar Gupta was also inducted as a 3 partner. This firm was reconstituted on 01.01.2009 with the same name i.e. Sharda Exports” with Sri Jitendra Kumar Gupta, Sri Aditya Kumar Gupta and Sri Ashish Kumar Gupta as partners, with its office at Plot No. 11, Sector-4, Sidcul Integrated Industrial Estate Ranipur, Haridwar and the firm M/s Sharda Exports which has the above three partners and Smt. Meenakshi Gupta as partner was dissolved on 31.3.2009. These facts are being stated here as one of the submissions of the learned counsel for the petitioner is that post 2009 there is a different firm than what was for the assessment year 2005-06 to assessment year 2008-09. 4. The firm is in the business of manufacture and export of handmade, hand tufted and hand woven carpets, inter alia, at its factory at Ranipur, Haridwar. For the assessment years 2005-06 to 2008-09 the petitioner claims benefit under Section 80-IC of the Income Tax Act, which is given to a manufacturing unit which derives its income from the manufacturing activity carried out in “certain category State”. Admittedly for the assessment years, Uttarakhand was one of the State which came under such category and manufacturer was liable to get benefit under Section 80- IC of the Income Tax Act. 5. It may also be necessary to mention here that the Government of India in order to boost industrialisation in the newly formed State of Uttarakhand had introduced a number of schemes which gave a “tax holiday” to the new industries in Uttarakhand. One such benefit was under Section 80-IC of the Income Tax Act. 4 6. In his returns, the petitioner showed that their manufacturing activity was being carried out in Uttarakhand and income was generated out of that manufacturing unit in Uttarakhand. The petitioner was accordingly assessed for the assessment year 2005-06. Thereafter the petitioner received the first reassessment notice under Section 147/148 of the Income Tax Act on 17.08.2010. On 15.09.2010, the petitioner sought reasons from the Revenue as to why reassessment is being done. The reasons were given by the Revenue on 08.11.2011 to which objections were raised by the assessee/petitioner on 14.11.2011 and the objections itself were decided on 22.11.2011. Against that order, the petitioner has filed the writ petition no. 2546 of 2011. 7. Admittedly, no order of reassessment has yet been passed by the Revenue but before it could do so, a survey was done by the Revenue at different factory premises of the petitioner on 23.02.2012. This survey was carried out in terms of the provisions under Section 133-A of the Income Tax Act. During its survey, it was found that no manufacturing activity was being carried out in Haridwar. A similar survey was done at the factory premises of the petitioner at Meerut and Delhi and the combined survey report revealed that the manufacturing activity was actually being carried out in Meerut, and partly in Delhi. This assessment of the survey report was based on the books of account and other material found in the factory premises. Since the petitioner did not cooperate in the survey and as information was being sought from the petitioner therefore in terms of sub-section (6) of Section 133-A 5 read with sub-section (1) of Section 131, a notice was given to the petitioner. In reply to the notice, the petitioner objected to the survey and stated that it is in violation of law. The Revenue thereafter initiated reassessment proceedings under Section 147/148 of the Act. 8. Pursuant to the survey and the material discovered by the Revenue as far as assessment year 2005-06 is concerned, another notice was given to the petitioner on 29.03.2012. At the same time reassessment notices were sent to the petitioner for assessment year 2006-07, 2007-08 and 2008-09 as well, which have all been challenged before this Court. 9. The reasons for the reassessment were assigned by the Revenue, by disclosing the material it had discovered from the survey made in the factory premises at Haridwar and other places, which showed that there was no manufacturing activity being carried out at Haridwar in Uttarakhand. In the reasons assigned by the Revenue subsequent to the survey, it has been stated in detail as to what was reflected from the books of accounts and other documents in the survey. The material discovered showed that carpets were actually being exported from Meerut and not from the Haridwar unit. Washing activity and final stage activity was also being carried out at Meerut. Whereas the petitioner claims that apart from spinning and dying of the carpet, all other work are done in Haridwar and according to the learned counsel for the petitioner the major work of manufacturing was being carried out at Haridwar. Yet the consumption of electricity at that time was 3-4 units per day! The exemption claimed by the 6 petitioner for the Assessment Year 2008-09 was Rs. Thirty Seven Crores odd. It was not possible for a unit of such a size to have next to nothing as far as consumption of electricity. Further though the Register shows a large working staff of 52 in January, 2006, but for the next month it shows that there were only 15 workers. From the staff salary record from March, 2005 to December 2008, the average number of employees shown is 12. 10. The main argument of the petitioner is that firstly it was a different firm for the assessment year 2005-06 to 2008-09. This firm stood dissolved on 31.03.2009. The new firm and for which the records were actually surveyed is a different entity altogether, which was constituted only on 01.01.2009 and therefore the petitioner is being re-assessed on the basis of a record of a different firm. The second argument of the petitioner is that in any case, if the reassessment is being done for reason “A”, then unless and until the Revenue comes to the conclusion that reassessment is valid under “A”, it cannot go to reassess on “B” which has come up during the course of reassessment. 11. In order to bring home this argument, the learned counsel for the petitioner has relied upon a judgment of Bombay High Court in the case of Commissioner of Income-Tax-5, Mumbai v. Jet Airways (I) Ltd. reported in (2010) 195 Taxman 117 (Bombay), which has also been relied upon by the Hon’ble Apex Court in the case of Principal Commissioner of Income-Tax v. Lark Chemicals (P) Ltd. reported in (2018) 99 taxmann.com 312 (SC). 7 12. The law as laid down in Jet Airways while examining Explanation 3 to Section 147 of the Income Tax Act is that the Assessing Officer has to necessarily assess/re-assess the income which escaped assessment on the basis of formation of the reasonable belief for opening the assessment, but this has to be read with the language as given in the main body of Section 147 of the Act. The precise emphasis is on the words “and also”, which is in the substantive part of Section 147. In short, what has been held that if reassessment was being done for reason “A” then Revenue can do reassessment on reason “B” only if it comes to the conclusion that reassessment for reason “A” is valid. If it comes to the conclusion that the reassessment for reason “A” is not at all called for then it is restrained from reassessing the assessee for reason “B”. 13. Under what conditions and under what limitations, reassessment can be done is provided under Section 147 to Section 153 of the Income Tax Act. The essential condition for exercising reassessment is that the assessing officer must have “a reason to believe” that an income chargeable to tax has escaped assessment, for which notices were liable to be given under Section 147/148 of the Act. As there were conflicting opinions of different High Courts as to the limitations on reassessment, i.e. precisely as to whether an assessing officer can also determine on “other reasons for reassessment” i.e. the reasons other than what were given in the notice (under Section 147/148 of the Act), therefore in order to remove any doubt, Explanation 3 was added to Section 147 by Finance (No. 2) Act of 2009 w.e.f. 01.04.1989. Explanation 3 of Section 147 reads as under:- 8 “Explanation 3. – For the purpose of assessment or reassessment under this Section, the Assessing Officer may assess or reassess the income in respect of any issue which has escaped assessment, and such issue comes to his notice subsequently in the course of the proceedings under this Section, notwithstanding that the reasons for such issue have not been included in the reasons recorded under sub-section (2) of section 148.” 14. The net effect of the amendment and insertion of Explanation 3 in Section 147 of the Act was explained by the Division Bench of Bombay High Court in the case of Commissioner of Income-Tax-5, Mumbai v. Jet Airways (I) Ltd. reported in (2010) 195 Taxman 117 (Bombay). It said “the Assessing Officer may assess or reassess such income, which he has reason to believe, has escaped assessment 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 the section”, but only under certain limitations. It said:- “16. Explanation 3 lifts the embargo, which was inserted by judicial interpretation, on the making of an assessment or reassessment on grounds other than those on the basis of which a notice was issued under section 148 setting out the reasons for the belief that income had escaped assessment. Those judicial decisions had held that when the assessment was sought to be reopened on the ground that income had escaped assessment on a certain issue, the Assessing Officer could not make an assessment or reassessment on another issue which came to his notice during the proceedings. This interpretation will no longer hold the field after the insertion of Explanation 3 by the 9 Finance Act (No.2) of 2009. However, Explanation 3 does not and cannot override the necessity of fulfilling the conditions set out in the substantive part of section 147. An Explanation to a statutory provision is intended to explain its contents and cannot be construed to override it or render the substance and core nugatory. Section 147 has this effect that the Assessing Officer has to assess or reassess the income (“such income”) which escaped assessment and which was the basis of the formation of belief and if he does so, he can also assess or reassess any other income which has escaped assessment and which, comes to his notice during the course of proceedings. However, if after issuing a notice under section 148, he accepted the contention of the assessee and holds that the income which he has initially formed a reason to believe had escaped assessment, has as a matter of fact not escaped assessment, it is not open to him independently to assess some other income. If he intends to do so, a fresh notice under section 148 would be necessary, the legality of which would be tested in the event of a challenge by the assessee. 17. We have approached the issue of interpretation that has arisen for decision in these appeals, both as a matter of first principle, based on the language used in section 147(1) and on the basis of the precedent on the subject. We agree with the submission which has been urged on behalf of the assessee that section 147(1) as it stands postulates that upon the formation of a reason to believe that income chargeable to tax has escaped assessment for any assessment year, the Assessing Officer may assess or reassess such income “and also” any other income chargeable to tax which comes to his notice subsequently during the proceedings as having escaped assessment. The words “and also” are used in a cumulative and 10 conjunctive sense. To read these words as being in the alternative would be to rewrite the language used by Parliament. Our view has been supported by the background which led to the insertion of Explanation 3 to section 147. Parliament must be regarded as being aware of the interpretation that was placed on the words “and also” by the Rajasthan High Court in Shri Ram Singh’s case (supra). Parliament has not taken away the basis of that decision. While it is open to Parliament, having regard to the plenitude of its legislative powers to do so, the provisions of section 147(1) as they stood after the amendment of 1-4-1989 continue to hold the field.” 15. The above principle, however, will not help the petitioner in the present case, since the admitted position here is that the Revenue has so far not done the reassessment of the petitioner. No reassessment order has been passed on any of the ground and therefore we do not have a situation on which the above law can be made applicable. All which is presently done is notice under Section 147/148 and thereafter the reasons have been fully assigned by the Revenue as to why reassessment is being done. It is not a case of change of opinion but discovery of new material which is the basis of reassessment proceedings. 16. Moreover, in any case it is not a case where the Revenue has assigned “A” reason and then again reason “B” as well. The reason for the reassessment is that correct books of account have not been shown to the Revenue and that manufacturing activity was not being done at Haridwar as claimed. This appears to be the only reason. This reason has still to be tested. Even 11 for the assessment year 2005-06 a separate notice has been sent after the survey. 17. As regarding the first argument of the petitioner that the reassessment in fact is of a different entity, this too is not liable to be accepted, inter alia, for the reasons that it still remains a family firm. Initially the father, mother and two sons were the partners and now all what has happened by the reconstitution of the firm is that it remains a firm of father and two sons. Practically it is the same firm, and in any case the present partners cannot escape the liability. 18. From the records presently before this Court also, it is very clear that the dominant partners of the firm continue to be the same. To that extent, there has been no change in the firm, particularly as to the control of the affairs of the firm. When the firm was first constituted on 01.12.2003, it had following partners : “1. Shri Jitendra Kumar Gupta -Father 2. Shri Aditya Kumar Gupta and - Son 3. Shri Ashish Kumar Gupta -Son” 19. The father i.e. Jitendra Kumar Gupta had 10% share of the firm, whereas the remaining 90% share was divided equally between the two sons i.e. Aditya Kumar Gupta and Ashish Kumar Gupta having 45% share each. Thereafter when in the year 2005, the mother was also included as a partner, the sons continued to retain their share and only the share of Jitendra Kumar Gupta was now divided between him and his wife. In the newly constituted firm in the year 2005 the share of the partners was as under: 12 “1. Shri Jitendra Kumar Gupta - 7% 2. Smt. Meenakshi Gupta - 3% 3. Shri Aditya Kumar Gupta - 45% 4. Shri Ashish Kumar Gupta - 45%” 20. In the newly constructed firm in the year 2009, although the share of the partners is not stated in the writ petition, but the fact is clear that all the earlier three partners i.e. Jitendra Kumar Gupta, Aditya Kumar Gupta and Ashish Kumar Gupta continue to be dominant partners of the firm. 21. In any case, this argument is always available for the petitioner, which can be taken before the assessing authority, which shall not be prejudiced by any remarks in this regard. 22. The learned counsel for the petitioner has also submitted that the assessment is being carried out for the new firm for assessment year 2010-11 onwards, in accordance with law. However, this is the matter to be decided again by the assessment authority and nothing can be said on this aspect. 23. In view of the discussions made above, the writ petitions fail and are hereby dismissed. (Sudhanshu Dhulia, J.) 19.07.2019 Avneet/ "