CHAMUNDA PHARMA MACHINERY PVT. LT.D vs. ASST. COMMISSIONER OF INCOME TAX, CIRCLE 1(1)(2)

C/SCA/16139/2018 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/SPECIAL CIVIL APPLICATION NO. 16139 of 2018

FOR APPROVAL AND SIGNATURE:

HONOURABLE MS.JUSTICE HARSHA DEVANI

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 ? ========================================================== CHAMUNDA PHARMA MACHINERY PVT. LT.D Versus ASST. COMMISSIONER OF INCOME TAX, CIRCLE 1(1)(2) ========================================================== Appearance: MS VAIBHAVI K PARIKH(3238) for the Petitioner(s) No. 1 MRS MAUNA M BHATT(174) for the Respondent(s) No. 1 ========================================================== CORAM: HONOURABLE MS.JUSTICE HARSHA DEVANI and HONOURABLE MR. JUSTICE BHARGAV D. KARIA

Date : 30/04/2019

ORAL JUDGMENT Page 1 of 13

C/SCA/16139/2018 JUDGMENT (PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA)

C/SCA/16139/2018 JUDGMENT Rs.3,00,73,657/­   written   off   which   is   due   from   a foreign customer, approval of Reserve Bank of India is awaited. 4.2 The case of the petitioner was selected for scrutiny assessment and various details and information were called for. The petitioner by letter dated 16.9.2014 furnished the information such as, acknowledgment of   income   tax   return   along   with   computation   of return of income, audited annual accounts and tax audit report. 4.3 The Assessing Officer issued notice dated 3.8.2015 under section 142(1) of the Act and called upon the petitioner to furnish various details including ledgers of   persons   whose   bad   debts   were   written   off.   The petitioner   by   letter   dated   15.9.2015   furnished   the details   called   for   including   the   list   of   bad   debts written   off   as   on   31.3.2013   along   with   copies   of relevant ledger accounts. 4.4 The   Assessing   Officer   thereafter,   issued   another notice dated 14.10.2015 under section 142(1) of the Act   calling upon the petitioner to furnish various details   including   the   ledgers   of   person   whose   bad debts   were   written   off   during   the   year   under consideration   with   narration   of   transactions   and permission of Reserve Bank Of India ( for short “RBI”) for   writing   off   bad   debts   against   dues   arising   on account of foreign transactions. The petitioner vide letter dated 21.10.2015 furnished the details called Page 3 of 13

C/SCA/16139/2018 JUDGMENT for along with ledgers of persons whose bad debts were written off and the communications made with the authorised dealer (Karur Vysya Bank) and with the Reserve Bank of India for writing off the dues outstanding in foreign currency as bad debts. 4.5 The   Assessing   Officer   thereafter,   called   upon   the petitioner to furnish the communication made with Export Credit Guarantee Corporation of India (here­ in­after referred to as “ECGC”) in connection with the bad   debts   written   off   during   the   year   under consideration.   The   petitioner     vide   letter   dated 18.10.2015

submitted

copies

various communications with ECGC and GCCI and clarified that the insurance cover with ECGC was against any economic or political risks or commercial risks like bankruptcy or insolvency etc. and not against non recovery of export dues under normal circumstances. The   petitioner   submitted  that   the  petitioner  would not   be   able   to   recover   anything   from   ECGC   in connection with dues recoverable from foreign party which has been written off as bad debts. 4.6 The   Assessing   Officer   thereafter,   called   upon   the petitioner

furnish

certain

additional details/information   pertaining   to   bad   debts   of   Rs. 3,00,73,657/­ written off against export transactions with “The Government Pharmaceutical Organization, (Thailand)”   out   of   total   bad   debts   of   Rs. 3,47,24,109/­   written   off   by   the   petitioner.   The petitioner by letter dated 24.11.2015 submitted that Page 4 of 13

C/SCA/16139/2018 JUDGMENT it   had   exported   various   components/   parts   of   the machineries   to   “The   Government   Pharmaceutical Organization (Thailand)” and details in respect of the same, including the amount written off as bad debts, were furnished. The petitioner also submitted  that bank advices, retails, invoices (original and revised), packing list in respect of each invoice and shipping bills for export with respect to such exports in order to prove the genuineness of such transactions. 4.7 The Assessing Officer passed the assessment order dated   30.11.2015   under   section   143(3)   of   the   Act after considering the details furnished and averments made by the petitioner and did not disturb the claim of   bad   debts   written   off   during   the   year   under consideration. 4.8 Thereafter,   the   respondent   issued   the   impugned notice dated 28.3.2018 under section 148 of the Act seeking to reopen the assessment of the petitioner for A.Y. 2013­2014. In response thereof, the petitioner furnished return of income on 21.4.2018   and vide letter dated 10.5.2018, the respondent supplied the copies of reasons recorded for reopening. 4.9 On perusal of the reasons for reopening, it is revealed that   reopening   is   made   as   the   petitioner   did   not obtain   permission   of   RBI   for   writing   off   of   foreign receivables as bad debts as claim of such bad debts cannot be allowed without permission of RBI to write it off as per circular No.88 dated 12.3.2013   issued Page 5 of 13

C/SCA/16139/2018 JUDGMENT by   RBI.   The   respondent   has   therefore,   formed   a reason to believe that income chargeable to tax has been   under­assessed   by   an   amount   of Rs.3,00,73,657/­   since  the  petitioner   did  not  have permission   from   RBI   to   write   off   debts   from   the export receivable. 4.10 The petitioner thereafter filed objections for reopening of assessment on 31.5.2018 which were rejected by the   respondent   by   order   dated   4.9.2018.   The petitioner   has   therefore,   filed   captioned   petition challenging   the   impugned   notice   issued   under section 148 of the Act. 5. Mr. Tushar Hemani, learned advocate with Ms. Vaibhavi Parikh, learned advocate for the petitioner submitted that all details pertaining to bad debts written off, amounting to Rs.3,00,73,657/­   from   export   receivable   have   been scrutinised by the Assessing Officer at the time of passing the assessment order under section 143(3) of the Act. He referred   to   the   details   submitted   during   the   course   of regular assessment as stated here­in­above and submitted that the Assessing Officer after verifying all the details and after   due   application   of   mind   allowed   the   claim   of   the petitioner   while   passing   the   assessment   order.   It   was submitted   that   the   issue   of   bad   debts   was   thoroughly scrutinised and discussed with the Assessing Officer by the petitioner at the time of original assessment proceedings, therefore,   reopening   of   assessment   on   the   basis   of information already available on records and thoroughly examined during the course of assessment proceedings, is Page 6 of 13

C/SCA/16139/2018 JUDGMENT nothing but a mere change of opinion. 6. It   was   further   submitted   that   on   perusal   of   reasons recorded , it is evident that the respondent has not referred to any new tangible material brought on record, on the basis   of   which   he   could   have   any   reason   to   believe regarding escapement of income. It was submitted that it is apparent   from   the   reasons   recorded   that   notice   under section 148 of the Act is issued merely on review of the material   and   facts   which   already   formed   part   of   the assessment record at the time of completion of the original assessment. It was  therefore, submitted that reopening of the completed assessment   based on a change of opinion on   a   review   of   the   same   material   resulting   cannot   be permitted, more particularly in absence of any live link or close   connection   between   the   materials   before   the Assessing Officer and the belief he has formed regarding the   escapement   of   income.   It   was   submitted   that   such belief must lead to a conclusion that income has escaped assessment.   Learned   advocate   for   the   petitioner   after referring   to   the   details   submitted   during   the   course   of regular assessment contended that the Assessing Officer at the time of original assessment after minutely examining the claim of bad debts written off  during the year under consideration consciously, chose not to disturb the claim of bad debts written off by the petitioner while framing the assessment under section 143(3) of the Act. 7. Learned advocate for the petitioner submitted that there is no new information or fresh evidence which has come into possession of the respondent which was not there when Page 7 of 13

C/SCA/16139/2018 JUDGMENT original   assessment   was   framed   inasmuch   as   the respondent   has   merely   relied   upon   the   contents   of   the financials of the petitioner for the purpose of reopening and as such reopening is based on re­appreciation of evidence which   was   already   furnished   at   the   time   of   original assessment proceedings. It was therefore, submitted that the respondent cannot take any action under section 147 of the Act, merely because he happens to have different opinion from that of his predecessor on the same set of facts. 8. It was submitted that on perusal of the reasons recorded, it is   apparent   that   there   is   nothing   to   indicate   that   the respondent,   in   consequence   of   any   information   in   his possession   which   came   subsequent   to   framing   of   the original assessment, had reason to believe that income had escaped   assessment.   It   was   submitted   that   during   the course of original assessment proceedings, the Assessing Officer having  considered  the details submitted    by  the petitioner consciously, built an opinion and did not call for any further information and clarifications while allowing deduction of bad debts claimed by the petitioner and as such it is not now open to the respondent to change such opinion and take a different stand based on the very same set of facts and information. It was further submitted that even   on   merits,   there   is   no   escapement   of   income chargeable to tax as claim of bad debts written off in books of account is allowable inasmuch as under section 36(1) (vii) of the Act, the requirement for the purpose of claiming deduction in respect of bad debts is that the underlying amount must be written off as bad debts. The petitioner Page 8 of 13

C/SCA/16139/2018 JUDGMENT was therefore, eligible for claim of deduction of bad debts written off and such deduction could not have been denied on   the   ground   that   the   petitioner   has   failed   to   obtain permission of RBI for writing off such bad debts. It was further submitted that as there is no new tangible material on record after framing of assessment, it transpires that the case of the petitioner has been reopened on the basis of audit objection raised by the audit party. It was therefore submitted   that   it   is   a   settled   law   that   the   assessment cannot be reopened based on audit objection. 9. On   the   other   hand,   Mrs.   Mauna   Bhatt,   learned   senior standing counsel for the respondent submitted that there is a mandatory requirement of the permission from RBI for writing   off   foreign   debt   as   per   Circular   No.88     and admittedly,   the   petitioner   had   not   obtained   such permission before claiming bad debts and therefore, the same is not allowable resulting into escapement of income and, therefore, the impugned notice under section 148 is legal and valid notice. It was further submitted that the income has escaped on account of the assessee not making full and true disclosures as it is clear that the petitioner has not fulfilled the requirement of furnishing necessary permission   of   RBI   for   bad   debts   written   off     of   foreign export receivable. It was submitted that as mandated by Reserve   Bank   of   India   under   circular   No.88,   necessary permission upon fulfilling certain conditions is absent in the present case. Moreover, though the Assessing Officer under notice dated 14.10.2015 had requested the assessee to   furnish   various   details   including   details   of   ledger   of person against whom bad debts were written off and the Page 9 of 13

C/SCA/16139/2018 JUDGMENT permission   for   writing   off   the   bad   debts   from   RBI,   the petitioner   failed   to   provide   such   permission.   It   was therefore, submitted that  the impugned notice was issued after   following   due   procedure   as   there   was   reasonable belief that income has escaped assessment inasmuch as at this stage, sufficiency of reasons is not required to be gone into.   It   was   therefore,   submitted   that   the   petition   be dismissed   as   the   impugned   notice   is   legal   and   a   valid notice. 10. The petitioner has challenged the notice for reopening for  A.Y. 2013­2014 within a period of four years from the end of relevant assessment year. On perusal of the reasons recorded by the respondent, it is revealed that the reason to believe has been formed as income chargeable to tax has been under­assessed by an amount  of Rs.3,00,73,657/­ since the petitioner did not have permission from the RBI to   write   off   the   same   as   bad   debt   from   the   export receivable. During the original assessment proceedings, the Assessing Officer considered the claim of the petitioner in detail.   The   petitioner   submitted   all   the   required   details called upon by the Assessing Officer in respect of the claim of bad debts written off including the bad debts written off pertaining  to   export  receivables.   With   respect  to   foreign debts,   the   petitioner   was   called   upon   to   furnish   RBI permission.   The   petitioner   replied   vide   communication dated   21.10.2015   pointing   out   that   the   application   for permission to write off the bad debts is already made to the Reserve Bank of India. The Assessing Officer accepted the contention of the petitioner that upon application of RBI pending final approval, debts could be written off  and the Page 10 of 13

C/SCA/16139/2018 JUDGMENT amount   of   bad   debts   written   off   was   allowed   and   the Assessing Officer did not make any addition on this ground in the original assessment. 11. In view of the aforesaid undisputed facts emerging from the record, the respondent could not have formed a belief that the income chargeable to tax has been under­ assessed.   With   regard   to   writing   off   of   bad   debts   from export   receivables   resulting   into   income   escaping assessment within the meaning of section 147 of the Act, the reassessment proceedings have been initiated merely on   reviewing   the   same   subject   matter   of   original assessment proceedings amounting to assessing the same set of facts already available with the department which is mere change of opinion on part of the respondent. The Assessing Officer during the course of original assessment has   formed   an   opinion   that   the   bad   debts   from   export receivables can be written off during the pendency of the application for approval from Reserve Bank of India and as such, the respondent could not have formed a different opinion   that   income   has   escaped   assessment   as   the petitioner did not have permission from the Reserve Bank of   India   to   write   off   the   bad   debts   from   the   export receivables. 12. The Apex Court in case of CIT v Kelvinator of India reported   in   (2010)   187   Taxman   312   (SC)   affirming   the decision of  CIT vs. Kelvinator of India Ltd.  reported in 256 ITR 1 (Delhi)(FB) held thus : “   ….Therefore, post 1­4­1989, power to re­open is much wider.   However,   one   needs   to   give   a   schematic Page 11 of 13

C/SCA/16139/2018 JUDGMENT interpretation to the words “reason to believe” falling which section 147 would give arbitrary powers to the Assessing Officer to reopen assessments on the basis of 'mere change of opinion' which cannot be per se reason to reopen. One must also keep in mind the conceptual difference between power   to   review   and   power   to   reassess.   The   Assessing Officer   has   no   power   to   review;   he   has   the   power   to reassess,   but   the   reassessment   has   to   be   based   on fulfillment of certain pre­conditions and if the concept of 'change of opinion' is removed as contended on behalf of the   department,   then   in   the   garb   of   reopening   the assessment, review would take place. One must treat the concept of 'change of opinion' as an in­built test to check abuse of power by the Assessing Officer. Hence after 1­4­ 1989, the Assessing Officer has power to reopen, provided there is tangible material to come to conclusion that there is escapement of income from assessment.” 13. In the facts of this case, the respondent has formed a second opinion on the same material and has issued the impugned   notice   merely   on   the   ground   that   on   second thought   a   different   view   is   possible.   Such   facts   do   not authorise   him   to   reopen   the   assessment   under   section 147/148   of   the   Act.   Therefore,   if   the   Assessing   Officer while passing the original assessment order chose not to give any findings in respect of any issue which is properly replied by the assessee company, that cannot give him or his successor in office to reopen the completed assessment or to contend that because the facts were not considered in the assessment order, full disclosure was not made as the entire material has been placed by the petitioner before the Assessing Officer at the time when the original assessment was made and on due application of mind to the materials before   him,   the   Assessing   Officer   accepted   the   view canvassed   by   the   assessee.   Merely   because   he   did   not express the same in the assessment order that by itself Page 12 of 13

C/SCA/16139/2018 JUDGMENT would not give the respondent a ground to conclude that the income has escaped assessment for issuance of notice of   reopening.   Therefore,   in   facts   of   the   present   case, impugned notice under section 148 of the Act is without jurisdiction and authority of law as the respondent has reopened the proceedings merely on the ground that from the material once a view earlier adopted was erroneous one,  such facts cannot be a ground for reassessment. 14. For   the   foregoing   reasons,   initiation   of   the reassessment proceedings under section 147 of the Act by issuing notice under section 148 of the Act is based upon the change of opinion on the same facts and circumstances which   were   already   in   the   knowledge   of   the   Assessing Officer   during   the   original   assessment   proceedings   and cannot be sustained. 15. The   petition   therefore,   succeeds   and   is   hereby allowed. The impugned notice dated 28.3.2018 issued by the   respondent   under   section   148   of   the   Act   is   hereby quashed and set aside. Rule is made absolute accordingly with no order as to costs. (HARSHA DEVANI, J) (BHARGAV D. KARIA, J) RAGHUNATH R NAIR Page 13 of 13