GUJARAT NARMADA VALLEY FERTILIZERS CO.LTD. vs. DY.COMMISSIONER OF INCOME TAX

C/SCA/24985/2006 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION NO. 24985 of 2006

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 ? ================================================================ GUJARAT NARMADA VALLEY FERTILIZERS CO.LTD.....Petitioner(s) Versus DY.COMMISSIONER OF INCOME TAX....Respondent(s) ================================================================ Appearance: MR MANISH J SHAH, ADVOCATE for the Petitioner(s) No. 1 MR KM PARIKH, ADVOCATE for the Respondent(s) No. 1 =========================================================== CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI Page 1 of 10

C/SCA/24985/2006 JUDGMENT and HONOURABLE MS JUSTICE SONIA GOKANI

Date : 19/03/2014

ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE AKIL KURESHI) 1. The   petitioner   has   challenged   a   notice   dated March   21,   2006,   issued   by   the   respondent­ Assessing   Officer   under   section   148   of   the Income­tax Act, 1961 (hereinafter referred to as 'the   Act').   Under   such   notice,   he   proposed   to reopen the assessment of the petitioner for the assessment year 1999­2000, which was framed after scrutiny. The notice was, thus, issued beyond the period   of   four   years   from   the   end   of   relevant assessment year. 2. The Assessing Officer had recorded the following reasons for issuance of notice : “In   this   case,   return   of   income   declaring total income at Rs.68,09,01,730/­ was filed on 29.12.1999. The assessment u/s.143(3) of the   I.T.   Act   was   completed   on   30.03.2002 determining

total

income

at Page 2 of 10

C/SCA/24985/2006 JUDGMENT Rs.92,07,62,670/­,   which   was   revised   at Rs.69,17,49,861/­  as  a   result  of  CIT(A)­VI Baroda order dated 30.04.2004. 2. The assessee has amortized GDR (Global Depository   Receipts)  issue  expenses  over   a period   of   10   years   and   debited   Rs.87.73 lakhs (being 1/10th of the total expenditure on GDR issue) to its P & L A/c. for F.Y. 1995­96 onwards. No adjustment has been made in the  statement  of  total  income,  in  this regard,   thereby   treating   the   expenses   as deductible   u/s.35D   as   mentioned   in   clause No.2.3 of Notes forming part of the return of income. In this regard, during the course of  reassessment   proceedings   for   A.Y.   2000­ 01, it was seen that part of the GDR issue was   used   for   making   investments,   which includes  the   investment  of  Rs.96.62  crores in UTI. On scrutiny of clause­5 of schedule­ 6   to   the   balance   sheet   (Page   No.20), investments in UTI and other funds mentioned at   Rs.96.64   crores.   As   such,   the   assessee has   not   utilized   the   full   amount   of   GDR issue for the purpose of investment in the new project. Hence, the admissible deduction per year was worked out at Rs.13,50,000/­ on the   basis   of   2.5%   of   cost   of   project   for which the assessee had utilized the proceeds of   the   GDR   issue.   Thus,   the   assessee   has claimed excess deduction u/s.35D of the Act Page 3 of 10

C/SCA/24985/2006 JUDGMENT in A.Y. 1999­2000 also. The excess deduction u/s.35D   of   the   Act   was   allowed   to   the assessee   on   account   of   its   failure   to disclose all material details like cost of project,   necessary   for   the   purpose   of working   out   admissible   deduction.   Thus, income   of   Rs.74,23,000/­   has   escaped assessment by reason of failure on the part of the assessee to disclose fully and truly all   material   facts   necessary   for   its assessment. 3. I   have,   therefore,   reason   to   believe that   the   income   chargeable   to   tax   has escaped to the tune of Rs.74,23,000/­. It is a fit case for issue of notice u/s.148 of the I.T. Act.” 3. The petitioner raised several objections under a communication   dated   October   10,   2006,   opposing the   Assessing   Officer's   action   of   reopening   of assessment. It was contended  inter alia  that in the   assessment   the   claim   of   deduction   under section 35D of the Act was accepted. Any change on   the   part   of   the   Assessing   Officer   would   be based   on   similar   set   of   facts   and,   therefore, Page 4 of 10

C/SCA/24985/2006 JUDGMENT change of opinion. It was also contended that the claim on merits was also otherwise valid. 4. The Assessing Officer rejected the objections by an order dated October 27, 2006. The petitioner, therefore, filed this petition and challenged the notice of reopening. 5. The   learned   counsel   Shri   J.P.   Shah   for   the petitioner   contended   that   the   sole   ground,   on which the notice is based, is the petitioner's claim of deduction under section 35D of the Act. According   to   the   Assessing   Officer,   there   was excess   deduction   under   the   said   head.   Counsel submitted   that   this   was   the   fifth   year   of   the amortised   deduction   spread   over   10   assessment years. After scrutiny in the earlier years, the claim   was   accepted.   Excess   claim   was   made   and allowed. Necessary facts were not produced by the assessee. Sufficiency of the reasons recorded by the Assessing Officer cannot be gone into by this Court at this stage. Page 5 of 10

C/SCA/24985/2006 JUDGMENT 6. Having   thus   heard   the   learned   counsel   for   the parties, we may recall that notice for reopening has been issued beyond the period of four years from   the   end   of   relevant   assessment   year.   The additional   requirement   flowing   from   the provisions   of  section   147   of   the   Act   that   the income chargeable to tax had escaped assessment for   the   reasons   of   the   assessee's   failure   to disclose   truly   and   correctly   all   the   material facts, must be satisfied. In this context, we may notice that along with the return filed by the assessee, notes which form part of the return of income,   were   produced.   In   such   notes   in   the context of claim of deduction under section 35D of the Act, it was stated as under : “Company   has   incurred   expenditure   on   Euro Issue (GDR) for the first time in A.Y. 1995­ 96 and 1/10th of total expenditure amounting to Rs.87,73,074 is debited to Profit & Loss Account for the year ended 31.03.1999 (A.Y. 99­00). This amount is claimed as deduction u/s 35 D (fifth year) of the Income­tax Act. Similar   claim   has   been   allowed   in   the regular assessment for the A.Y. 1995­96.” Page 6 of 10

C/SCA/24985/2006 JUDGMENT 7. Thus, the assessee not only made a claim in the return   filed,   but   also   clarified   in   the   notes that such claim was for expenditure incurred on Euro Issue for the first time in the assessment year   1995­96   and   1/10th out   of   the   total expenditure of Rs.87,73,074/­ is debited to the Profit & Loss Account for the year ended on March 31,   1999.   In   the   current   year,   such   amount   is claimed as deduction under section 35D of the Act for   the   fifth   time.   Similar   claim   was   also allowed in the earlier regular assessments. 8. In our opinion, the assessee made full and true disclosure of all the material facts. Had this been the first year of assessment for the claim of   deduction   under   section   35D   of   the   Act,   we would have been tempted to examine the learned counsel for the Revenue's contention that fully and truly all the material particulars were not produced along with the return or in the notes forming   part   of   the   return.   In   such   context, explanation (1) to section 147 of the Act would Page 7 of 10

C/SCA/24985/2006 JUDGMENT assume   significance.   Such   explanation   provides that production before the Assessing Officer of account   books   or   other   evidence   from   which material evidence could with due diligence have been discovered by the Assessing Officer will not necessarily   amount   to   disclosure   within   the meaning of the proviso to section 147 of the Act. The   Revenue's   contention   is   that   the   deduction under   section   35D   of   the   Act   is   subject   to fulfillment   of   certain   conditions.   One   of   them being flowing from sub­section (2) of section 35D is that aggregate amount of expenditure exceeds 2.5% of the costs of the product or the capital employed   in   the   business   of   the   company,   the deduction has to be limited to 2.5%. It is true that in the present case, the assessee did not produce either the costs of the project or the capital employed in the business of the company. It was, therefore, not possible for the Assessing Officer to ascertain from such return whether the assessee's   claim   for   deduction   was   hit   by   the provision of section 35D(2) of the Act. In that context, as noted above, had this been the first Page 8 of 10

C/SCA/24985/2006 JUDGMENT year   of   claim,   the   Revenue's   contention   would require   closer   scrutiny.   However,   this   was   the fifth   year   of   assessee's   claim   for   deduction under section 35D. As per section 35D of the Act, the expenditure clarifying such deduction would be spread over a span of 10 assessment years. In four previous years, when such claim was made and as   pointed   out   by   the   assessee   in   the   note forming part of the return, the same was accepted in a scrutiny assessment for the first year of the claim, the rest was a matter of computation. In that context, it can safely be stated that the assessee   disclosed   all   the   material   facts.   As held   and   observed   by   the   Supreme   Court   in   the case of Calcutta Discount Co. Ltd. v. Income­tax Officer, reported in 41 ITR 191, the duty is on the assessee to disclose all the facts which had a bearing on the question of a claim. 9. In the context of the above decision, the assessee's disclosure that the company had incurred expenditure for the first time in the year 1995­96, which was also   allowed   after  regular  assessment  and  that  in Page 9 of 10

C/SCA/24985/2006 JUDGMENT the   present   year,   a   10th   of   the   total   amount recognised   in   the   year     1995­96   is   claimed   under section   35D   of   the   Act,   in   our   opinion,   was   a sufficient   disclosure   of   material   facts.   If   the Assessing  Officer  had  doubt  about  the  validity  of the   claim   in   law,   during   scrutiny   the   same   could have   been  examined.  However,   beyond  the  period  of four years, it would not be open for the Assessing Officer to disturb such claim in absence of failure on the part of the assessee to disclose fully and truly all material facts. Only on this count, the petition is allowed. The impugned notice is quashed. We   make   it   clear   that   we   have   not   expressed   any opinion   on   the   other   grounds   pressed   by   the petitioner to question the legality of the impugned notice.   Rule   is   made   absolute   accordingly.   There shall be, however, no order as to costs. (AKIL KURESHI, J.) (MS SONIA GOKANI, J.) Aakar Page 10 of 10