GUJARAT CARBON & INDUSTRIES LTD. vs. ASSTT.COMMISSIONER OF INCOME TAX

C/SCA/5073/2005 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION NO. 5073 of 2005

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 CARBON & INDUSTRIES LTD.....Petitioner(s) Versus ASSTT.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 and HONOURABLE MS JUSTICE SONIA GOKANI Page 1 of 9

C/SCA/5073/2005 JUDGMENT

Date : 12/02/2014

ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE AKIL KURESHI) 1. The   petitioner   has   challenged   notice   dated   25.7.2003 issued   by   the   respondent   Assessing   Officer   seeking   to reopen the assessment of the petitioner for the assessment year 1997­1998. 2. The   petitioner   is   a   company   registered   under   the Companies Act. For the assessment year 1997­1998, the petitioner filed its return of income. Such return was taken in   scrutiny.   The   Assessing   Officer   framed   scrutiny assessment under section 143(3) of the Income Tax Act, 1961 (“the Act” for short) on 27.3.2000. Beyond a period of four years from the end of relevant assessment year, the impugned notice came to be issued on 25.7.2003. 3. At   the   request   of   the   petitioner,   the   Assessing   Officer supplied   the   reasons   recorded   for   issuing   such   notice. Such reasons read as under : “In this case net profit as per account was Rs.5.5 crore. The said net profit arose only on account of profit on sale of assets  shown  in schedule  8 of the balance  sheet  to an extent of Rs.7.51 crores. However, no taxes were paid even under   section   115JA   on   account   of   noting   in   schedule 12(3)(d)   of   the   notes   to   the   account,   which   stated   that arrears of depreciation were to an extent of Rs. 6.25 crore. 2. It is also noticed that in schedule 12(3) of the notes to the account, the auditors have noted that ­ Page 2 of 9

C/SCA/5073/2005 JUDGMENT During the year Carbon Black Unit of the   Company has been sold and transferred to M/s. Philip Carbon Blank Ltd. (PCBL). The profit on sale of asset including the balance lying in revaluation reserve account in respect of Carbon Black Division after setting off losses of MEK and Foods Division  as on  30.091993  is credited  to  profit  and   loss account. The above accounting treatment shows that profit on sale of assets of Rs. 7.51 crore and taken to profit and loss account is only a netted figure after adjustment of brought forward   losses   of   MEK   and   Foods   Division   as   on 30.09.1993.  What  should have been taken to profit and loss account is the gross profit on sale of assets without such profit being reduced by losses of the other two units upto 30.9.1993. 3. It is  also noticed that no disallowance u/s. 32A(5) in respect   of   investment   allowance   earlier   granted   to   the assessee pertaining  to its Caron Black Unit now sold is made. 4. It is also noted that in the agreement for sale dated 27.5.1996,   the   assessee   company   was   to   transfer   raw material,  work in progress,  etc. of the business of book value (para 5(ii) of the agreement). Similarly the assessee was asked to transfer the packed finished goods at market rate (Para.5(iii) of the agreement. But from the assessment order, it is seen that finished goods of Rs. 1,04,22,912/­ were transferred to PCBL by the assessee at book value. This   is   in   violation   of   agreement   stipulating   transfer   of finished goods at market rate.” 4. The   petitioner   raised   objections   to   the   proceedings   of reopening  under  a communication dated 7.10.2004. The Assessing   Officer   however,   rejected   such   objection   on Page 3 of 9

C/SCA/5073/2005 JUDGMENT 3.2.2005. Hence this petition. 5. Drawing   our   attention   to   the   reasons   recorded   by   the Assessing Officer in issuing notice for reopening, counsel for the petitioner contended that : 1) there   was   no   new   material   available   with   the Assessing   Officer   to   reopen   the   assessment   which   was previously framed after scrutiny. 2) there was no allegation in the reasons recorded that the income chargeable to tax had escaped assessment for the failure of the petitioner to disclose truly and fully all material facts. 3) even otherwise, drawing our attention to the material on   record,   it   was   contended   that   there   was   in   fact   no failure on part of the petitioner to disclose true and full facts at the time of scrutiny assessment. 5.1) In support of his contentions, counsel relied on the decision of this   Court in case of   Sadbhav Engineering Ltd. v. Deputy Commissioner of Income­tax  reported in (2011) 333 ITR 483(Guj) in which finding that there was no failure on part of the assessee to disclose fully and truly all material   facts   necessary   for   assessment,   the   Court quashed the notice for reopening. 6. On the other hand, learned counsel  Shri Parikh for the department   opposed   the   petition   contending   that   the petitioner   had   transferred   only   one   of   the   units   but adjusted the brought forward loss of other units against Page 4 of 9

C/SCA/5073/2005 JUDGMENT the   sale   consideration   of   the   unit   sold.   He   however, submitted   that   mere   mentioning   of   the   method   of accounting in the note appended by the auditor, would not satisfy   the   requirement   of   full   and   true   disclosure particularly, seen in the background of explanation (1) of section 147 of the Act. 7. From  the reasons  recorded by the Assessing  Officer,  we notice that he had referred to three separate grounds on which, according to him, reopening of the assessment was required to be done. 7.1)  First   ground   was   regarding   the   profit   on   sale   of assets of  the petitioner company from which the petitioner received Rs. 7.51 crores. However, the petitioner set off loss of   MEK and Foods Division against such profit and the remainder   was   credited   to   Profit   and   Loss   account. According to the Assessing Officer, entire amount of Rs. 7.51  crores   should   have   been   taken  to   Profit  and   Loss account without netting the said figure after adjustment of the   brought   forwarded   the   loss   of     MEK   and   Foods Division. 7.2 The second reason pertained to disallowance under section 32A of the Act of the investment allowance earlier granted to the assessee with respect to  Carbon Black unit which was sold. It was noted that no such disallowance was made though required. 7.3) The third ground was that as per the agreement to sale dated 27.5.1996, the assessee company was required Page 5 of 9

C/SCA/5073/2005 JUDGMENT to   transfer   the   packed   finished   goods   at   market   value. From the assessment order, however, it was seen that such goods were transferred at book value. This in the opinion of the   Assessing   Officer   was   in   violation   of   the   agreement stipulated for transfer of finished goods on market value. 8. From the reasons recorded, it can be immediately seen that the   second   and   the   third   grounds   relied   upon   by   the Assessing Officer simply would not permit him to reopen the assessment that too after four years of end of relevant assessment  year.   The second ground itself is based on inaction  on part of the Assessing  Officer  in the original assessment  in  not  disallowing  the  investment  allowance under section 32A(4) of the Act which was earlier granted to the assessee pertaining to its unit which was now sold. Whatever  be  the  validity  of  such  objection,  it  emanates from inaction on part of the Assessing Officer that it cannot be   and   nor   is   it   attributed   to   failure   on   part   of   the petitioner to disclose true and full facts. 9. The ground no.3 not only emerges from the face of the record, is otherwise also not valid. The petitioner agreed to sale a certain unit. In the agreement  parties decided to transfer  the finished  goods  at market  value.  Eventually, however,   it   was   found   that   along   with   the   plant   and machinery,   the   finished   goods   were   also   transferred   on book value and not at market value.  Such deviation from the agreement may either be by mutual consent, explicit or implied,   or   may   even   be   in   breach   of   terms   of   the agreement. In any case, when the admitted fact is that the assessee charged and received only the book value of its Page 6 of 9

C/SCA/5073/2005 JUDGMENT finished product,  there was no reason for the Assessing Officer   to   tax   the   amount   which   the   petitioner   never received.   There   was   simply   no   escapement   of   income chargeable to tax  in this case. 10. This   brings   us   to   the   more   contested   issue   of reopening the assessment. Ground (1) pertains to sale of one   of   the   unit   of   the   petitioner   company   at   Rs.   7.51 crores. According to the Assessing Officer, this entire sale proceeding should have been credited to Profit and Loss account. The petitioner instead adjusted the loss of  MEK and Foods Division and only net amount was transferred to Profit and Loss account. 11. We are not concerned with sufficiency of the reasons recorded by the Assessing Officer. Whether the Assessing Officer’s contention that due to such treatment given by the   petitioner,   income   chargeable   to   tax   had   escaped assessment   is   true   or   not,   is   not   our   query.   For   the purpose of this petition, we are also prepared to proceed on the basis that the Assessing Officer had reason to believe that income  chargeable  to tax had escaped  assessment. However, when the notice for reopening had been issued beyond  a period  of four  years  from  the  end  of  relevant assessment   year,   the   additional   requirement   that   such escapement of income was for the reason of failure of the assessee   to   disclose   truly   and   fully   all   material   facts necessary for assessment, must also be satisfied. In that context   we   may   recall   that   the   assessee’s   account contained   schedule­12(3)   which   were   notes   of   accounts submitted by the auditor. Clauses(c) and (d) thereof read as Page 7 of 9

C/SCA/5073/2005 JUDGMENT under : “(c) During the year, Carbon Black Unit of the Company has been sold and transferred to the M/s. Philips Carbon Black Limited (PCBL). The profit on sale of assets including the balance lying in Revaluation Reserve account in respect of Carbon and  Food Division after setting off losses of MEK and   Food   Division   as   on   30.09.1993   is   credited   to   the profit and loss account. The balance amount of Rs. 75.67 lakhs   recoverable   from   PCBL   included   in   Loans   & Advances account is subject to confirmation/adjustment, if any.   The   accounts   are   subject   to   adjustment   on   final outcome  of value  of furniture  and fixture  transferred  to PCBL. (d) The arrears of depreciation calculated under section 205 of the  Companies Act 1956 will however, have to be first set off against future profit of the Company and only balance profit will be available for distribution of dividend. Such arrears of depreciation is Rs.625.10 lacs. Sales  of Rs.3363.06  lakhs  is net  of Discount  Rs.162.43 lakhs allowed to customers (Previous year Rs.202.14 lakhs) and   inclusive   of   Rs.   104.23   lakhs   being   the   stock   of Carbon   Black   transferred   to   Phillips   Carbon   Black Limited.” 12. From   such   notes,   it   can   clearly   be   seen   that   the reason   why   the   assessee   did   not   credit   the   entire   sale consideration   of   Rs.   7.51   crores   to   the   Profit   and   Loss account was explained.  Explanation whether valid in law is not important at this stage. What is important is that the reason for such reduced amount being credited to Profit and Loss account was eloquently and elaborately stated in the notes. In the return filed by the assessee itself, thus Page 8 of 9

C/SCA/5073/2005 JUDGMENT there was clear explanation why and on what basis the assessee  adjusted  the loss of   MEK and Foods  Division against   the   sale   proceeds   of   Carbon   Black   unit   before crediting remainder to the Profit and Loss account. There was thus no failure on part of the assessee to disclose truly and fully all material facts. Quite apart from case of the assessee, thus not falling within explanation(1) of section 147, even in the reasons recorded, there was no suggestion that the income chargeable to tax had escaped assessment for the failure of the assessee to disclose truly and fully all material facts. We are prepared to concede for the purpose of   this   petition   with   contention   of   the   counsel   for   the Revenue   that   recitation   of   such   words   in   the   reasons recorded or failure to do so by itself would not be crucial and what is to be judged is whether the reasons contained such   averments   and   allegations.   In   our   reading   of   the reasons, even such requirement is not satisfied. There was simply no hint in the reasons recorded by the Assessing Officer that there was failure on part o the petitioner in disclosing true and full facts. Independently, also we have found that full facts were disclosed. 13. In the result, impugned notice dated   25.7.2003 is quashed. Petition is disposed of. Rule made absolute. (AKIL KURESHI, J.) (MS SONIA GOKANI, J.) raghu Page 9 of 9