T.K.SALIM, V. UNION OF INDIA,

WP(C)/15023/2022

AI Insights

The case involves T.K. Salim, the proprietor of M/s. Greenland Condiments, who challenged the re-assessment orders issued by the Income Tax Department for the assessment years 2013-14 and 2014-15. The re-assessments were based on the claim that the petitioner had improperly deducted interest payments on loans used for investments in a business that generated tax-exempt income. The Income Tax Department argued that these deductions were not permissible under Section 14A of the Income Tax Act, 1961, as amended. The petitioner contended that the original assessments had allowed these deductions, and the re-opening constituted a mere change of opinion. The court, however, upheld the re-assessments, citing the need for compliance with Section 14A and the non-disclosure of material facts by the petitioner.

• Counselvise Citation: [2024] 140 COUNSELVISE.COM (IT) 724237 (HC-KERALA)
• Appeal Type: Others
• Pronouncement Date: 15-02-2024
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income Tax v. Usha International Ltd., Assistant Commissioner of Income Tax and Others v. Marico Limited, M/s.Phool Chand Bajrang Lal and Another v. Income Tax Officer and Another, CIT v. Essar Teleholdings Ltd.
• Laws Referred To: Income Tax Act, 1961, Income Tax Rules, 1962
• Result in Favour of: Revenue
• Court: HIGH COURT
• Department Lawyers: JOSE JOSEPH; P K MENON; NAVANEETH NATH; SUSIE VARGHESE
• Assessee Lawyers: M NAMBIAR; K MATHAI
• Keywords: Business expenditure; Change of opinion; Exempt income; Income Tax; Re-assessment
• Section: 147; 148; 143(3); 142(1); 14A; 151

Judgement Text

" IN THE HIGH COURT OF KERALA AT ERNAKULAM 'C.R.' PRESENT THE HONOURABLE MR. JUSTICE DINESH KUMAR SINGH THURSDAY, THE 15TH DAY OF FEBRUARY 2024 / 26TH MAGHA, 1945 WP(C) NO. 15023 OF 2022 PETITIONER/S: T.K.SALIM, AGED 64 YEARS 1 GREENLAND CONDIMENTS, XIX/18D, KAREYELI VALLAM ROAD, PERUMBAVOOR, ERNAKULAM-683542. BY ADVS. M.GOPIKRISHNAN NAMBIAR K.JOHN MATHAI JOSON MANAVALAN KURYAN THOMAS PAULOSE C. ABRAHAM RAJA KANNAN RESPONDENT/S: 1 UNION OF INDIA, REPRESENTED BY ITS REVENUE SECRETARY, MINISTRY OF FINANCE, NEW DELHI-110004. 2 THE ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-1, KANDAMKULATHY TOWERS, M.G.ROAD, KOCHI-682011. BY ADVS. JOSE JOSEPH P.K.RAVINDRANATHA MENON (SR.) JOSE JOSEPH, SC, INCOME TAX DEPARTMENT, KERALA NAVANEETH.N.NATH, CGC SUSIE B VARGHESE OTHER PRESENT: SMT.SUSIE B. VARGHESE- SC THIS WRIT PETITION (CIVIL) HAVING BEEN FINALLY HEARD ON 15.02.2024, ALONG WITH WP(C).14875/2022, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: WP(C)s 14875 & 15023/22 2 IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR. JUSTICE DINESH KUMAR SINGH THURSDAY, THE 15TH DAY OF FEBRUARY 2024 / 26TH MAGHA, 1945 WP(C) NO. 14875 OF 2022 PETITIONER/S: T.K.SALIM, AGED 64 YEARS 1 GREENLAND CONDIMENTS, XIX/18D, KAREYELI VALLAM ROAD, PERUMBAVOOR, ERNAKULAM-683542. BY ADVS. M.GOPIKRISHNAN NAMBIAR K.JOHN MATHAI JOSON MANAVALAN KURYAN THOMAS PAULOSE C. ABRAHAM RAJA KANNAN RESPONDENT/S: 1 THE UNION OF INDIA, REPRESENTED BY ITS REVENUE SECRETARY, MINISTRY OF FINANCE, NEW DELHI-110004. 2 THE ASSISTANT COMMISSIONER OF INCOME TAX (HQ), OFFICE OF THE PRINCIPAL CIT, CENTRAL RANGE, KOCHI-682018. WP(C)s 14875 & 15023/22 3 3 THE ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-1, KANDAMKULATHY TOWERS, M.G.ROAD, KOCHI-682011. BY ADVS. JOSE JOSEPH P.K.RAVINDRANATHA MENON (SR.) JOSE JOSEPH, SC, INCOME TAX DEPARTMENT, KERALA NAVANEETH.N.NATH SUSIE B VARGHESE, SC THIS WRIT PETITION (CIVIL) HAVING BEEN FINALLY HEARD ON 15.02.2024, ALONG WITH WP(C).15023/2022, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: WP(C)s 14875 & 15023/22 4 “C.R.” J U D G M E N T [WP(C) Nos.14875/2022 & 15023/2022] The present two writ petitions have been filed by the very same petitioner, an assessee under the provisions of the Income Tax Act, 1961 and the Rules made thereunder, impugning the fresh assessment orders, Exts.P9 and P12, passed on re- opening of the earlier assessment orders and penalty notices, Exts.P10 and P13, in respect of the assessment years 2013-14 and 2014-15, respectively. 2. The petitioner is the proprietor of M/s.Greenland Condiments. The petitioner deals in spices and condiments. He is also a partner in several firms and drawing income from those firms. He is also the Managing Director of a limited Company named 'Greenland Particle Boards Pvt. Ltd.', which is involved in the business of manufacture of products of wood, cork, straw and plaiting materials. The petitioner filed returns of his income for the assessment years 2013-14 and WP(C)s 14875 & 15023/22 5 2014-15 on 28.1.2014 and on 31.3.2015 returning income of Rs.60,20,910/- and Rs.42,35,870/-, respectively. The assessments in respect of both the assessment years got completed under Section 143(3) of the Income Tax Act, 1961 ('Act', for short) on 23.3.2016 and 30.6.2016, respectively. 3. Subsequently, with respect to the assessment year 2014-15, the case was re-opened under Section 147 and assessment was completed on 18.6.2019 assessing the income at Rs.50,74,280/-. 4. In respect of both the assessment years, i.e. 2013-14 and 2014-15, notices under Section 148 of the Act were issued on 31.3.2021 (Exts.P2 and P4, respectively) stating that the assessing officer had reasons to believe that the petitioner's income chargeable to tax for these assessment years had escaped assessment within the meaning of Section 147 of the Act. The petitioner was required to deliver within 30 days from service of the notices, returns in the prescribed form in respect of the assessment years 2013-14 and 2014-15. Notices under Section 142(1) in WP(C)s 14875 & 15023/22 6 respect of the aforesaid assessment years came to be issued on 24.1.2022, (Exts.P3 and P5, respectively) directing the petitioner to furnish documents mentioned in the notices on or before 3.2.2022. The petitioner filed objections, (Exts.P4 and P6, respectively) to the notices under Section 148 requesting to provide the reasons for re-opening of the assessments. 5. The assessing officer vide Exts.P5 and P7 communications dated 23.2.2022 addressed to the petitioner furnished the reasons for re-opening of the assessments. The reasons as intimated to the petitioner would disclose that the assessee had debited interest paid by him on loans availed from Banks as business expenditure. The petitioner had claimed deduction of interest paid to the Kotak Mahindra Bank on property loan at Rs.11,10,815/- for the assessment year 2013-14. For the assessment year 2014-15 also, he claimed total deduction of Rs.37,06,094/- towards the interest paid to Kotak Mahindra Bank. The said amount includes the interest paid on the loan availed for WP(C)s 14875 & 15023/22 7 investment in petitioner's another business concern also. The assessing officer was of the view that under Section 14A of the Act, the expenditure incurred by a tax payer in relation to income that excludes total income as per the provisions of the Act should not be considered as an expenditure while computing the total income of the tax payer. Therefore, the interest paid by the assessee on loans for the purpose of investment in M/s.Greenland Particle Board Pvt. Ltd. ought to have been disallowed. Since ineligible deduction was allowed to the petitioner/assessee, the aforesaid two amounts have escaped assessment in the relevant assessment years. It was also noticed that the petitioner had not truly and fully disclosed material facts necessary for completing the assessments for these two years. Therefore, decision was taken to re- open the assessments as the petitioner/assessee had not truly and fully disclosed the material facts necessary for completion of the assessment proceedings for the years under consideration. WP(C)s 14875 & 15023/22 8 6. The petitioner filed objections to the said communication. The objections were disposed of vide orders dated 10.3.2022 in respect of both the assessment years, Exts.P7 and P10, respectively. It was stated that four years had expired and, therefore, necessary sanction from the Principal Commissioner of Income Tax had been obtained for re-opening the assessments, under Section 151 of the Act. It was also said that Section 14A had been incorporated to the Act to ensure that expenditure incurred in generating such tax exempted income is not allowed as a deduction while calculating total income of the concerned assessee. The petitioner's objections were over-ruled and the petitioner was given further opportunity to submit written submissions through the e-filing portal. The petitioner had submitted detailed submissions and, thereafter, fresh assessment orders in Exts.P9 and P12 had been passed on 22.3.2022 in respect of the assessment years 2013-14 and 2014-15, respectively. WP(C)s 14875 & 15023/22 9 7. Learned counsel for the petitioner submits that in the original assessment orders, the question of allowing the interest paid by the petitioner to Banks as business expenditure and non-applicability of Section 14A of the Act were considered and the petitioner claimed for deduction and that was allowed for both the assessment years. He also submits that the petitioner had made true and full disclosure of the material facts and the assessing authority, after considering the provisions of law and books of accounts, held that Section 14A of the Act would not be applicable in the case of the petitioner. The reason disclosed for re-opening the assessment orders is nothing, but change of opinion regarding the applicability of Section 14A in the case of the petitioner. Therefore, the impugned assessment orders in Exts.P9 and P12 become bad in law and are liable to be set aside. 8. In support of the contentions, learned counsel for the petitioner has placed reliance on the Full Bench judgment of the Delhi High Court in WP(C)s 14875 & 15023/22 10 the case of Commissioner of Income Tax v. Usha International Ltd. [(2012) 348 ITR 485 (Delhi) : 2012 SCC OnLine Del 5645] and the Supreme Court judgment in the case of Assistant Commissioner of Income Tax and Others v. Marico Limited [(2020) 16 SCC 354 : (2020) 190 DTR 0190 (SC)]. 9. On the other hand, Smt.Susie B.Varghese, learned Senior Standing Counsel for the Income Tax Department submits that before the original assessment proceedings got completed, CBDT had issued Circular No.5/2014 dated 11.2.2014 in exercise of its power under Section 119 of the Act clarifying that Rule 8D of the Income Tax Rules, 1962, read with Section 14A of the Act, provides that expenditure would be disallowed even where a tax payer in a particular year has not earned any exempt income. She submits that the said circular was ignored or not taken note of by the assessing officer while finalising the original assessment orders. She also submits that the petitioner did not make full and true disclosure of the material facts. The petitioner obtained loan and invested WP(C)s 14875 & 15023/22 11 the said loan amount in his other business concern and claimed deduction in respect of the interest liability paid to the Bank on the said loan and, therefore, it was not liable to be allowed, as the petitioner had not utilised the loan in his business and, therefore, the interest paid to the Bank could not have been treated as a business expenditure. In support of her contention, she has placed reliance on the judgment of the Hon'ble Supreme Court in the case of M/s.Phool Chand Bajrang Lal and Another v. Income Tax Officer and Another [(1993) 4 SCC 77]. 10. On the basis of the aforesaid judgment in M/s.Phool Chand Bajrang Lal (supra), she submits that if the assessing officer comes in possession of any document and material, which was not considered while finalising the assessment orders, that would itself be sufficient for re-opening the assessments earlier completed. In this case, the Circular was not considered by the earlier assessing officer at the time of completing the assessment orders and, therefore, the decision to WP(C)s 14875 & 15023/22 12 re-open the assessments had been taken, which is not liable to be interfered with. She further submits that once the assessment orders have been passed, the remedy of the petitioner is to challenge those orders before the appellate authority and not before this Court to interfere with the assessment orders. 11. Smt.Varghese further submits that Section 14A of the Act has been amended by Finance Act, 2022 and this amendment is only clarificatory in nature and, therefore, it would be treated that the amended provision has been in existence since incorporation of Section 14A. She, therefore, submits that there is no error in re-opening the assessment orders and therefore, the present writ petitions are liable to be dismissed. 12. The questions which arise for consideration in these writ petitions are that whether the reasons supplied by the assessing officer for re-opening the assessment of the petitioner are change of opinion?, and whether the assessment orders passed in pursuance to the WP(C)s 14875 & 15023/22 13 returns filed in response to the notices issued under Section 148 of the Act can be challenged before this Court on the ground that the assessment orders are bad in law as the re-opening itself was not in accordance with the provisions of the Act?. 13. Under the provisions of Section 147 of the Act, a mere change of opinion, ipso facto, would not confer or empower the assessing officer to embark upon reassessment exercise. Notwithstanding that, the power to make assessment or reassessment within the four years of the end of the relevant assessment year, would be effected even in cases where there has been complete disclosure of all facts upon which the assessment might have been based at the first instance, but for, in case of mistake, as is provided under Section 147 of the Act. 14. The expression “reason to believe” in Section 147 of the Act would mean some cause or justification of the competent authority. If the competent authority has a ground or some WP(C)s 14875 & 15023/22 14 justification that the income had escaped assessment or that there was a mistake in making assessment, the competent authority would be empowered to re-open the assessment after four years with prior approval of the jurisdictional Commissioner, as provided under Section 151 of the Act. 15. If the assessment had not been completed in accordance with the provisions of the Act, Rules or Circular, the same would be a reason for the assessing authority to believe that the income chargeable to tax had escaped assessment and in such cases, the assessing authority assumes the power to redo the assessment, in accordance with law. 16. Section 14A of the Act has been amended with effect from 1.4.2022 by the Finance Act, 2022, wherein it is provided that for the purposes of computing the total income under Chapter IV, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total WP(C)s 14875 & 15023/22 15 income under the Act. Sub-Section (1) has non- obstante clause, which means that the provisions of Section 14A would have an overriding effect to any other provision of the Act or the Rules made thereunder. Before the amendment was incorporated by Finance Act, 2022, circular No.5/2014 clarified the position that in certain cases, where no income has been earned by an assessee which has been claimed as exempt during the financial year, under Section 14A the said expenditure would be disallowed even when the tax payer in a particular year had not earned any income. Section 14A was inserted by Finance Act, 2001 with retrospective effect from 1.4.1962 and which got amended in 2007 and thereafter in 2022 by inserting a non-obstante clause, which is clarificatory in nature. Sub- Sections (2) and (3) thereto were inserted by Finance Act, 2006 with effect from 1.4.2007 to the effect that the assessing officer shall determine the amount of expenditure incurred in relation to such income, which does not form part of total income under the Act in accordance with such WP(C)s 14875 & 15023/22 16 method as may be prescribed, if the assessing officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under the Act; and where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under the Act. 17. Rule 8D of the Income Tax Rules, 1962, prescribing the methodology for determining the amount of the expenditure in addition to income not includible in total income, was inserted with effect from 24.3.2008 to implement sub-Sections (2) and (3) of Section 14A. It is a clear indicator that a new method for computing the expenditure was brought in by the Rules, which was to be utilised for computing the expenditure for the assessment years 2007-08 and onwards, as held in CIT v. Essar Teleholdings Ltd. [(2018) 401 ITR 445 (SC)]. WP(C)s 14875 & 15023/22 17 18. An assessee has the obligation to provide full material disclosures at the time of filing of the return. The nexus between expenditure disallowed and earning of exempt income is required to be established. 19. In the present cases, the petitioner had obtained loans and invested in his new Company and earned income and claimed the interest paid by him on the said loans obtained as expenditure. Such expenditure is not exempt under the provisions of Section 14A read with Rule 8D. 20. If the assessments concluded are not in accordance with the law, it is not change of opinion, but it is a valid reason for reopening the assessments. The assessing officer has ignored the mandatory provision of Section 14A and Circular No.5/14 while completing the assessments, which got re-opened. In view thereof, I do not find that the assessing officer has committed any error of law or jurisdiction, which requires this Court to interfere with the present writ petitions. Therefore, these writ petitions are WP(C)s 14875 & 15023/22 18 hereby dismissed. If the re-assessment proceedings are already complete and if the petitioner has any grievance, he may resort to the statutory remedy of appeal, if so advised. If the petitioner files appeal, the time expended in prosecuting these writ petitions before this Court would be condoned and the appellate authority should proceed with the appeal on merits. Pending interlocutory application, if any, in these writ petitions stands dismissed. Sd/- DINESH KUMAR SINGH JUDGE jg WP(C)s 14875 & 15023/22 19 APPENDIX OF WP(C) 14875/2022 PETITIONER EXHIBITS Exhibit P1 THE TRUE COPY OF THE ASSESSMENT ORDER DATED 23.3.2016 ISSUED BY THE 2ND RESPONDENT. Exhibit P2 THE TRUE COPY OF THE NOTICE DATED 31.3.2021 ISSUED BY THE 3RD RESPONDENT UNDER SECTION 148 OF THE ACT. Exhibit P3 THE TRUE COPY OF THE NOTICE DATED 24.1.2022 ISSUED BY THE 3RD RESPONDENT UNDER SECTION 142(1) OF THE ACT. Exhibit P4 THE TRUE COPY OF THE LETTER (WITHOUT ANNEXURES) DATED 18.2.2022 SUBMITTED BY THE PETITIONER BEFORE THE 3RD RESPONDENT. Exhibit P4(A) THE TRUE COPY OF THE E-ACKNOWLEDGMENT DATED NIL, AUTO-GENERATED IN THE IT WEB-PORTAL, ON FILING OF EXT-P4 LETTER. Exhibit P5 THE TRUE COPY OF THE LETTER DATED 23.2.2022 ISSUED BY THE 3RD RESPONDENT. Exhibit P6 THE TRUE COPY OF THE REPLY LETTER DATED 7.3.2022 SUBMITTED BY THE PETITIONER. Exhibit P6(A) THE TRUE COPY OF THE E-ACKNOWLEDGMENT DATED NIL, AUTO-GENERATED IN THE IT WEB-PORTAL, ON FILING OF EXT-P6 REPLY LETTER. Exhibit P7 THE TRUE COPY OF THE LETTER DATED 10.3.2022 ISSUED BY THE 3RD RESPONDENT. Exhibit P8 THE TRUE COPY OF THE REPLY LETTER DATED 17.3.2022 (THE YEAR WRONGLY SHOWN AS 2021) FILED BY THE PETITIONER BEFORE THE 3RD RESPONDENT. WP(C)s 14875 & 15023/22 20 Exhibit P8(A) THE TRUE COPY OF THE E-ACKNOWLEDGMENT DATED NIL, AUTO-GENERATED IN THE IT WEB-PORTAL, ON FILING OF EXT-P8 REPLY LETTER. Exhibit P9 THE TRUE COPY OF THE ORDER OF RE-ASSESSMENT DATED 22.3.2022 ISSUED BY THE 3RD RESPONDENT. Exhibit P10 THE TRUE COPY OF THE NOTICE OF PENALTY DATED 22.3.2022 ISSUED BY THE 3RD RESPONDENT. WP(C)s 14875 & 15023/22 21 APPENDIX OF WP(C) 15023/2022 PETITIONER EXHIBITS Exhibit P1 THE TRUE COPY OF THE ASSESSMENT ORDER (WITHOUT ANNEXURES) DATED 30.06.2016 ISSUED BY THE 2ND RESPONDENT. Exhibit P2 THE TRUE COPY OF THE NOTICE DATED 15.03.2019 ISSUED BY THE 2ND RESPONDENT UNDER SECTION 148 OF THE ACT. Exhibit P3 THE TRUE COPY OF THE ORDER OF ASSESSMENT (WITHOUT ANNEXURES) DATED 18.06.2019 ISSUED BY THE 2ND RESPONDENT. Exhibit P4 THE TRUE COPY OF THE NOTICE DATED 31.03.2021 ISSUED BY THE 2ND RESPONDENT UNDER SECTION 148 OF THE ACT. Exhibit P5 THE TRUE COPY OF THE NOTICE DATED 24.01.2022 ISSUED BY THE 2ND RESPONDENT UNDER SECTION 142(1) OF THE ACT Exhibit P6 THE TRUE COPY OF THE LETER (WITHOUT ANNEXURES) DATED 18.02.2022 SUBMITTED BY THE PETITIONER BEFORE THE 2ND RESPONDENT. Exhibit P6(a) TRUE COPY OF THE E-ACKNOWLEDGMENT DATED NIL,AUTO-GENERATED IN THE IT WEB PORTAL ON FILING OF EXT.-P6 LETTER Exhibit P7 THE TRUE COPY OF THE LETTER DATED 23.02.2022 ISSUED BY THE 2ND RESPONDENT Exhibit P8 THE TRUE COPY OF THE NOTICE DATED 03.03.2022 ISSUED BY THE 2ND RESPONDENT UNDER SECTION 142(1) OF THE ACT. Exhibit P9 THE TRUE COPY OF THE REPLY LETTER DATED 08.03.2022 SUBMITTED BY THE PETITIONER BEFORE WP(C)s 14875 & 15023/22 22 THE 2ND RESPONDENT. Exhibit P9(A) THE TRUE COPY OF THE E-ACKNOWLEDGMENT DATED NIL,AUTO-GENERATED IN THE IT WEB-PORTAL, ON FILING OF EXT.-P9 REPLY LETTER Exhibit P10 THE TRUE COPY OF THE LETTER DATED 10.03.2022 ISSUED BY THE 2ND RESPONDENT Exhibit P11 THE TRUE COPY OF THE REPLY LETTER DATED 17.03.2022 (THE YEAR IS WRONGLY SHOWN AS 2021)FILED BY THE PETITIONER BEFORE THE 2ND RESPONDENT Exhibit P11(A) THE TRUE COPY OF THE E-ACKNOWLEDGMENT DATED NIL, AUTO-GENERATED IN THE IT WEB-PORTAL,ON FILING OF EXT.P11 REPLY LETTER Exhibit P12 THE TRUE COPY OF THE ORDER OF RE-ASSESSMENT DATED 22.03.2022 ISSUED BY THE 2ND RESPONDENT Exhibit P13 THE TRUE COPY OF THE NOTICE OF PENALTY DATED 22.03.2022 ISSUED BY THE 2ND RESPONDENT. "