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

C/SCA/25089/2006 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION NO. 25089 of 2006 With SPECIAL CIVIL APPLICATION NO. 25090 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 JP SHAH with MR MANISH J SHAH, ADVOCATE for the Petitioner(s) No. 1 MR KM PARIKH, ADVOCATE for the Respondent(s) No. 1 NOTICE SERVED BY DS for the Respondent(s) No. 1 ================================================================ CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI Page 1 of 9

C/SCA/25089/2006 JUDGMENT and HONOURABLE MS JUSTICE SONIA GOKANI

Date : 24/03/2014

ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE AKIL KURESHI) 1. These petitions are filed by the same assessee challenging two separate notices issued by the respondent assessing officer for reopening assessments of earlier years. 2. Since facts are common, we have heard these petitions together and would dispose of the same by this common judgment. 3. Brief facts from Special Civil Application No.25089 of 2006 may be noted. The petitioner is a company registered under the Companies Act. For the assessment year 1995-96, petitioner had filed its return of income claiming deduction under section 35D of the Income Tax Act, 1961 (“the Act” for short). The assessee had amortized Global Depositors Receipts (“GDR” for short) issue expenses of Rs.8.77 crores (rounded off) over a period of 10 years. The claim was granted by the assessing officer after scrutiny assessment. Accordingly, the petitioner was entitled Page 2 of 9

C/SCA/25089/2006 JUDGMENT to benefit of deduction of Rs.87.73 lakhs every year for 10 years starting from financial year 1995-96. 4. For the assessment year 2003-, the assessing officer examined the claim again and restricted the sum of Rs.13.50 lakhs as against the petitioner’s claim of Rs.87.73 lakhs. The matter, ultimately, reached the Income Tax Appellate Tribunal (“the Tribunal” for short). The Tribunal held in favour of the assessee on the ground that in last several years no such disallowances were made and that the same cannot be done abruptly in a later year. Issue reached the High Court. This Court in judgment in the case of Deputy Commissioner of Income-Tax vs. Gujarat Narmada Valley Fertilizers Co.Ltd. reported in [2013]356 ITR 460 (Guj) rejected the Revenue’s appeal. We are informed that against such judgment, the Revenue has approached the Supreme Court, however, so far, no decision is rendered.

C/SCA/25089/2006 JUDGMENT on 21.3.2006. Thus, within a period of 4 years from the end of relevant assessment year, he supplied the reasons recorded for issuing such notice, which read as under:- “ In this case, return of income declaring total income at Rs.54,30,57,988/- was filed on 29.10.2001.The assessment u/s.143(3) of the I.T.Act was completed on 31.12.2003 determining total income at Rs.66,57,27,300/- and Rs.69,20,58,567/- in view of the order passed u/s.154 of the Act on 14.10.2004. The income was recomputed at Rs.57,43,17,641/- in view of CIT(A)-VI, Baroda’s order dated 17.02.2005. 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.1995-96 onwards. No adjustment has been made in the statement of total income, in this regard, thereby treating the expenses as deductible u/s.35D of the Act. 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 clause-5 of schedule- 6 to the balance sheet (Page No.30), 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 in A.Y.2001-2002 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 Page 4 of 9

C/SCA/25089/2006 JUDGMENT 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.” 6. The petitioner raised several objections to the notice for reopening under communication dated 10.10.2006. Such objections were, however, rejected by the assessing officer by order dated 27.10.2006. Hence, the petition. 7. On identical grounds, the assessing officer also issued notice for reopening of assessment for the assessment year 2002-03 which notice is impugned in the Special Civil Application No.25090 of 2006. 8. Having heard learned counsel for the parties and having perused the materials on record, it does emerge that the impugned notices were issued within a period of 4 years from the end of relevant assessment years. It is equally true that in the scrutiny assessments, the assessing officer had not addressed the question of such deduction under section 35D of the Act. He had routinely accepted the same as being part of periodic claim arising out of the claim granted for the assessment year 1995-96. Admittedly, there were no queries, no answers from the petitioner, Page 5 of 9

C/SCA/25089/2006 JUDGMENT no discussion in the assessment year why such claim should be granted. 9. Point that the assessing officer seeks to raise is that in terms of the provisions contained in section 35D(3) of the Act, such claim had to be restricted to two and one-half per cent of the cost of the project or at the option of the assessee company, the capital employed in the business of the company and the rest had to be ignored. That is how he has worked out the figure of Rs.13.50 lakhs for limiting the assessee’s claim for deduction under section 35D of the Act. 10. Ordinarily, when a claim is accepted in assessment without any examination, reopening within 4 years from the end of the relevant assessment year would be permissible. In the present case, however, an additional dimension is added, which is of the validity of the proposed disallowances itself. As noted earlier in the regular assessment, the assessing officer attempted to make such disallowance precisely on this ground of the petitioner’s claim for deduction under section 35D of the Act exceeding the limit laid Page 6 of 9

C/SCA/25089/2006 JUDGMENT down in sub-section(3) thereof. In such year also after putting the assessee to notice, he had restricted claim of Rs.13.50 lakhs as against claim of Rs.87.73 lakhs put-forth by the assessee in the return. The Tribunal reversed the assessing officer’s view on the ground that having accepted the claim of this nature, which is to enure for several years, in the first year of occurrence of the same could not be abruptly withdrawn without disturbing the allowances made in the earlier year. It was in this background when the Revenue approached the High Court, Revenue’s appeal was dismissed in following terms:- “5. Question IV pertains to claim of deduction of the assessee under Section 35D of the Act. In the year under consideration, such claim was made to the extent of Rs. 87.73 lakhs. The Assessing Officer restricted it to Rs. 13.50 lakhs on the ground that only eligible expenses are allowed to be spread over under Section 35D of the Act and therefore, expenses only to the extent that have nexus to the eligible projects are admissible. 5.1 Tribunal, however, noted that in last seven years, no such disallowances were made. Referring to and relying on the decision in case of Radha Satsang V. CIT 193 ITR 321, the Tribunal directed that such benefit be granted. 5.2 It is an undisputed position that claim under Section 35D of the Act did not arise for consideration for the first time. Since last several years, the Assessing Officer had granted such claim on the same consideration. The Tribunal therefore, correctly held that Page 7 of 9

C/SCA/25089/2006 JUDGMENT such claim could not have been suddenly disallowed. We may refer to a decision of this Court in case of Saurashtra Cement & Chemical Industries Ltd. V. Commissioner of Income-tax, Gujarat, reported in [(1980) 123 ITR 669], wherein, in the context of successive claim of tax holiday, the Court held that the ITO was not justified in refusing to continue the benefit of such tax holiday granted to the assessee in the earlier years, without disturbing the relief granted for the initial years. We are conscious that the issue is not identical in nature. However, the Income-tax Act recognizes the principle of consistency. In the present case, for as many as seven years, previously the Assessing Officer did not dispute certain claims and therefore, the Tribunal correctly interpreted that the Assessing Officer has sought to reopen the issue.” 11. It is well accepted that if assessing officer’s reason to believe lacks validity, the reopening of assessment would not be permissible. It is true that the words used are “reason to believe” and that therefore, the same must be based on subjective satisfaction of the assessing officer. The Court’s scrutiny in exercise of writ jurisdiction would, therefore, be necessarily limited. Nevertheless, if the proposed addition on the basis of which the entire notice of reopening is founded, lacks legal validity, surely, such notice cannot be sustained. In the present case, additions sought to be made by the assessing officer through this process of reopening of Page 8 of 9

C/SCA/25089/2006 JUDGMENT the assessment previously closed after scrutiny has not been approved by this Court. The Tribunal’s judgment that even at the first instance in regular assessment, such addition could not be made is confirmed by the High Court in the case of Deputy Commissioner of Income-Tax vs. Gujarat Narmada Valley Fertilizers Co.Ltd. (supra). 12. In the circumstances, both the writ petitions are allowed. Impugned notices for reopening assessments are quashed. (AKIL KURESHI, J.) (MS SONIA GOKANI, J.) SUDHIR Page 9 of 9