KUNAL ORGANICS PVT.LTD. vs. DEPUTY COMMISSIONER OF INCOME TAX

C/SCA/16347/2004 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION NO. 16347 of 2004

FOR APPROVAL AND SIGNATURE:

HONOURABLE MR.JUSTICE AKIL KURESHI

and HONOURABLE MS JUSTICE SONIA GOKANI

================================================================ 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, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ================================================================ KUNAL ORGANICS PVT.LTD.....Petitioner(s) Versus DEPUTY COMMISSIONER OF INCOME TAX....Respondent(s) ================================================================ Appearance: MR TUSHAR P HEMANI, ADVOCATE for the Petitioner(s) No. 1 MRS MAUNA M BHATT, ADVOCATE for the Respondent(s) No. 1 ============================================================ ==== CORAM: HONOURABLE MR.JUSTICE AKIL Page 1 of 18

C/SCA/16347/2004 JUDGMENT KURESHI and HONOURABLE MS JUSTICE SONIA GOKANI

Date : 03/03/2014

ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE AKIL KURESHI) 1. The   petitioner   has   challenged   a   notice   dated March 08, 2004, issued by the Assessing Officer under   section   148   of   the   Income­tax   Act,   1961 (hereinafter referred to as ‘the Act’). 2. The brief facts are as under : 2.1 The petitioner is a company registered under the   Companies   Act.   For   the   assessment   year 1997­1998, the petitioner filed its return of income on November 27, 1997, declaring total income of Rs.22.91 lakh (rounded off). In the return so filed, the petitioner appended a note indicating   that   it   had   debited   Rs.6.22   lakh (rounded off) on account of Keyman Insurance premium. The petitioner also indicated that the Life   Insurance   Corporation   of   India   would Page 2 of 18

C/SCA/16347/2004 JUDGMENT allocate   guaranteed   addition   and   bonus   of Rs.8.85 lakh on such insurance. However, such amount   of   bonus   and   other   additions   being contingent receipts, were not offered for tax for the year under consideration. 2.2 The   return   of   the   petitioner’s   income   was accepted without scrutiny. On June 11, 1999, the Assessing Officer issued first notice of reopening of assessment under section 148 of the Act to the petitioner, indicating that he has   reason   to   believe   that   the   petitioner’s income   chargeable   to   tax   for   the   assessment year 1997­98 had escaped the assessment. He, therefore,   proposed   to   reassess   such   income requiring the petitioner to deliver the return in the prescribed format before June 30, 1999. 2.3 Being a case prior to the decision of the Supreme Court in the case of  GKN Driveshafts (India) Ltd. v. Income­tax Officer and others, reported in 259 ITR 19, the petitioner was not aware   about   the   reasons   recorded   by   the Page 3 of 18

C/SCA/16347/2004 JUDGMENT Assessing Officer for issuing such notice. The Assessing Officer issued a notice under section 142(1) of the Act on March 06, 2002, calling upon   the   petitioner   to   supply   the   following details : “Details of premium paid on Insurance policy taken   on   Keyman's   life   of   your   company   & details   of   guaranteed   addition   and   bonus intimated   by   LIC   &   received   by   you.   The above   details   may   please   be   furnished   for A.Y. 96­97 & A.Y. 97­98.

It may please be noted that guaranteed addition   &   bonus   are   taxable   as   per provisions of I.T. act.” 2.4 From such communication it can be seen that the   Assessing   Officer   had   dispute   with   the petitioner not offering for tax the guaranteed addition and bonuses of the Keyman’s Insurance policy. Alongside the reopening of assessment for   assessment   year   1997­98,   the   Assessing Officer   also   desired   to   inquire   into   the taxability of such additions and bonus on the insurance policy for the assessment year 1995­ Page 4 of 18

C/SCA/16347/2004 JUDGMENT 96   for   which   the   regular   assessment   was underway. The petitioner filed his common reply for   both   the   assessment   years   under   its communication dated March 11, 2002. Regarding the   taxability   of   the   amount   itself,   the petitioner

raised

several

contentions. Additionally,   with   respect   to   the   reopened assessment, the petitioner contended as under : “(5) Lastly   as   regards   taxability   of bonus   on   keyman   insurance   is   concerned   we enclose herewith copy of policy and invite attention   to   condition   no.45   and   7   which lays down that unless insured pays premium for at least three years than only insurance policy carries value upon surrender and if insured fails to pay premium at least for 3 (three)   years   policies   shall   be   having   no surrender value since A.Y. 1995­96 and 1996­ 97 do not fall after date of commencement of any key man insurance policy hence question of   right   receive   bonus   within   period   of reassessment  also arise.

In   view   of   aforesaid   submissions   we request   you   to   cancel   reassessment   and oblige.” Page 5 of 18

C/SCA/16347/2004 JUDGMENT 2.5 On   March   11,   2002,   the   Assessing   Officer passed two separate orders. The first order was with respect to the regular assessment under section 143(3) of the Act for the assessment year 1995­96. In this assessment order, he made no additions for the returns and bonuses under the Keyman’s Insurance policy receivable by the petitioner. There was, however, no discussion on this issue in the order of assessment. On the same day, he passed the second order for the   assessment   year   1997­98,   which   reads   as under : “The   proceedings   initiated   u/s.148   are hereby dropped.” 2.6 Nearly   two   years   later,   the   respondent issued a fresh notice under section 148 of the Act, seeking to reopen the assessment of the petitioner for the said assessment year 1997­ 98.   The   petitioner   this   time   around   was supplied the reasons recorded by the Assessing Officer for issuing such notice. The reasons read as under : Page 6 of 18

C/SCA/16347/2004 JUDGMENT “”Return of income was filed on 27.11.1997 declaring total income Rs.22,91,690/­ which was processed u/s.14391). The assessee has deducted   from   the   income,   an   amount   of Rs.6,97,500/­   being   guaranteed   addition   as keyman   insurance   policy.   Any   amount received/   accrued   as   key   man   insurance policy   is   taxable   income   in   view   of   the provisions of section 2(24)(xi), read with section 28(vi) of the I.T. Act. The same is also   not   exempt   u/s   10(10D).   By   wrongful claim for exclusion of guarantee addition to Keyman   insurance   policy   to   the   extent   of Rs.6,97,500/­   become   chageable   to   tax   to that extent had escaped assessment. In these circumstances, the assessment for A.Y. 1997­ 98   for   which   no   scrutiny   assessment   u/s 143(3) was made is required to be reopened u/s 147 of the Act.”” 2.7 From the reasons, it can be seen that even in   the   reasons   recorded   for   issuing   the impugned notice, the central and, in fact, the sole   question   was   regarding   taxability   of additions   and   bonuses   guaranteed   under   the Keyman’s   Insurance   policy.   The   petitioner thereupon made a detailed representation dated Page 7 of 18

C/SCA/16347/2004 JUDGMENT June   11,   2004   opposing   the   notice   for reassessment.   In   addition   to   raising   various grounds on the taxability of the amount itself, the   petitioner   further   contended   that   the notice itself was arbitrary and capricious and lacking   in   good   faith.   Since   the   Assessing Officer   did   not   drop   the   proceedings,   the petitioner filed this petition. 3. The   learned   counsel   Shri   Himani   for   the petitioner raised the following contentions : (i) Previously the Assessing Officer had issued a notice for reopening on the same ground, but after   considering   the   representation   of   the petitioner   dropped   the   proceedings.   This   was, thus,   an   order   of   assessment   not   making   any addition on the ground on which the notice was issued.   The   reopening   on   the   same   ground   was, therefore, not permissible. (ii) The   Assessing   Officer   for   the   assessment year 1996­97 had passed an order of assessment Page 8 of 18

C/SCA/16347/2004 JUDGMENT dated March 11, 2002, accepting the petitioner’s contention that no addition could be made on the ground   in   question.   When   on   the   same   day,   the Assessing   Officer   passed   his   order   for   the assessment year 1997­98 dropping the proceedings, it would demonstrate that he was convinced that no additions were justified on merits. 3.1 In support of his contentions, the counsel relied on the following decisions : (i) Decision   of   the   learned   Single   Judge   of Calcutta High Court in the case of  Indian Tube Co. Ltd. v. Income­tax Officer, reported in 272 ITR   439,   in   which   the   Assessing   Officer   had issued notices for reopening the assessment for the   assessment   years   1974­75   and   1975­76,   in which   it   was   mentioned   that   the   notices   were being

issued

after

obtaining

necessary satisfaction of the Commissioner of Income­tax. However, such paragraph was deleted. Pursuant to such notice, the petitioner filed returns for the said years. Subsequently, the Income­tax Officer Page 9 of 18

C/SCA/16347/2004 JUDGMENT issued   fresh   notices   for   the   same   assessment years.   Declaring   that   such   notices   were   issued after   obtaining   necessary   satisfaction   of   the Commissioner of Income­tax, the Court held that when   the   petitioner   had   filed   returns   in compliance with the invalid notice under section 148 of the Act, the same should be treated as returns and before making assessment on the basis of those returns, no further notice under section 148 of the Act could be issued. (ii) Decision   in   the   case   of  KLM   Royal   Dutch Airlines   v.   Assistant   Director   of   Income­tax, reported in 292 ITR 49, where the Division Bench of Delhi High Court held and observed that once the assessment has been reopened and notice under section   143(2)   of   the   Act   has   been   issued,   it would be mandatory for the Assessing Officer to complete the assessment under section 143(3) of the Act. 4. On the other hand, the learned counsel Mrs.Mauna Bhatt   for   the   Revenue   opposed   the   petition Page 10 of 18

C/SCA/16347/2004 JUDGMENT contending that : (i) Original assessment was not completed after scrutiny.   Reopening   such   an   assessment   was, therefore, permissible as held by the Apex Court in the case of Assistant Commissioner of Income­ tax   v.   Rajesh   Jhaveri   Stock   Brokers   P.   Ltd., reported in 291 ITR 500. (ii) The   reassessment   initiated   pursuant   to notice dated June 11, 1999, was dropped by the Assessing   Officer   without   completing   the assessment. This order of the Assessing Officer dated   March   11,   2002,   therefore,   cannot   be equated   with   the   order   of   assessment   under section 143(3) of the Act. The second notice for reassessment   was,   therefore,   permissible.   There is   no   limitation   on   the   Assessing   Officer   to issue   successive   notice   for   reopening   an assessment as long as the requirements of section 147 of the Act are satisfied. 5. Section   147   of   the   Act   pertains   to   income Page 11 of 18

C/SCA/16347/2004 JUDGMENT escaping the assessment. It provides  inter alia that   if   the   Assessing   Officer   has   reason   to believe   that   any   income   chargeable   to   tax   has escaped   assessment   for   any   assessment   year,   he may subject to the provisions of sections 148 to 153 of the Act assess or reassess such income and other income chargeable to tax, which has escaped assessment   and   which   comes   to   his   notice subsequently in the course of proceedings under the   said   section   or   recompute   the   loss   or depreciation allowance or another allowances. It is well­settled that there is no limitation on the Assessing Officer to undertake reopening of the assessment under section 147 of the Act only once.   For   valid   reasons   and   subject   to fulfillment   of   the   other   procedural   and substantive requirements, an assessment which has been   subject   matter   of   reopening   can   still   be reopened under section 147 of the Act. However, the limitation of an assessment not permissible to   be   reopened   on   a   change   of   opinion   would attach   not   only   to   the   reopening   of   the assessment under section 147 of the Act, but also Page 12 of 18

C/SCA/16347/2004 JUDGMENT to any subsequent or successive proceedings. If an assessment, therefore, was completed or if an addition though proposed in reasons recorded was later on not made for any substantive reasons, the scope for reopening the same assessment on the same ground subsequently under section 147 of the Act would not be available. 6. In this context, we may revisit the facts of the case,   which   are   rather   peculiar   in   nature. Undoubtedly,   the   return   of   the   assessee   was accepted without a scrutiny. In that view of the matter,   the   Assessing   Officer   had   reasonable latitude to proceed under section 147 of the Act, if   he   had  prima   facie  reason   to   believe   that income chargeable to tax for the assessment year in question had escaped the assessment. This is precisely   what   he   did   after   issuing   the   first notice under section 148 of the Act on June 11, 1999. At this stage, we are not concerned with the petitioner’s contention that the guaranteed addition and the bonus under Keyman’s Insurance policy was not a taxable income of the petitioner Page 13 of 18

C/SCA/16347/2004 JUDGMENT for the said assessment year. We are prepared to proceed on the basis that the Assessing Officer had   reason   to   believe   that   such   receipts   were taxable   and   that   they   were   taxable   during   the year under consideration. 7. As noted, since the first instance of reopening occurred when  the decision in the case of  GKN Driveshafts   (India)   Ltd.   (supra)  was   not   yet delivered, the petitioner could not avail of the reasons   recorded   by   the   Assessing   Officer   for issuance of such notice. However, taxability of the guaranteed return and the bonus were the only issues,   as   can   be   seen   from   the   Assessing Officer’s   notice   to   the   petitioner   dated   March 06, 2002 under section 142(1) of the Act. 8. After   the   petitioner   made   a   detailed representation   why   such   amount   should   not   be added   to   its   total   income   for   the   assessment years 1996­97 and 1997­98, the Assessing Officer dropped the entire issue. For the assessment year 1997­98,   he   passed   one   line   order   ordering Page 14 of 18

C/SCA/16347/2004 JUDGMENT dropping of the proceedings under section 148 of the   Act.   For   the   assessment   year   1995­96,   he passed a formal order of assessment under section 143(3) of the Act, making no addition towards the said sum. 9. It may be that in technical terms the order dated March   11,   2002,   dropping   the   proceedings   under section   148   of   the   Act   may   not   amount   to   an assessment   under   section   143(3)   of   the   Act, however, it would not be open for the Assessing Officer,   in   the   present   case,   to   reopen   the assessment on the same ground all over again. Our reasons for such conclusion are as follows : 9.1 Though no reasons were recorded for dropping the proceedings under section 148 of the Act by the Assessing Officer, from the attendant facts and circumstances, it can be safely culled out that he was convinced that no addition under the   said   disputed   item   could   be   made.   He himself in the assessment year 1996­97 made no addition in a scrutiny assessment. Page 15 of 18

C/SCA/16347/2004 JUDGMENT 9.2 If the notice under section 148 of the Act was being dropped for any technical reasons, after curing the technicality, it perhaps may have   been   open   for   the   Assessing   Officer   to issue   a   fresh   notice.   In   the   present   case, however, no such ground is made out. Neither in the   order   dated   March   11,   2002   nor   in   the affidavit   filed   before   us,   the   Revenue   has contended that the first notice under section 148 of the Act was dropped because it suffered from any technical defect and that after curing such defect, fresh notice was issued, may be on the   same   ground.   Thus,   therefore,   when   the Assessing   Officer   dropped   the   proceedings   of reassessment   on   a   substantive   ground   of   the additions not  being sustainable, subsequently the   same   Assessing   Officer   or   even   his successor in office, in our opinion, could not have reviewed such a decision and come to a different   conclusion   to   be   able   to   issue   a notice for reassessment on the same ground. Any other view would lead to anomalous situation. Page 16 of 18

C/SCA/16347/2004 JUDGMENT Post   the   decision   in   the   case   of GKN Driveshafts (India) Ltd. (supra), the assessee would have access to the reasons recorded for issuing the notice for reassessment. He would also have right to raise objections, which the Assessing Officer would have been duty bound to dispose of. If an Assessing Officer in a given case   accepts   such   objections   and   drops   the proceedings under section 148 of the Act, can later on another Assessing Officer who steps in his position, issue a fresh notice on the same ground expressing opinion that he did not agree with the approach of his predecessor  and that since   his   predecessor   had   not   completed assessment under section 143(3), it would be open for him to issue fresh notice of reopening ?   This   for   obvious   reasons   would   be   wholly impermissible. 9.3 In the result, our conclusion is that in the facts   of   the   case,   the   second   notice   for reopening of assessment on the same ground on which the previous notice was issued for the Page 17 of 18

C/SCA/16347/2004 JUDGMENT same   purpose,   but   later   on   dropped   not   on technical but substantive grounds, was wholly impermissible. 10. For   the   foregoing   reasons,   the   present petition succeeds and is, accordingly, allowed. The   impugned   notice   dated   March   08,   2004   is, therefore, quashed. Rule is made absolute. There shall be, however, no order as to costs. (AKIL KURESHI, J.) (MS SONIA GOKANI, J.) Aakar Page 18 of 18