SADBHAV ENGINEERING LTD vs. DEPUTY COMMISSIONER OF INCOME-TAX (OSD), CIRCLE-8

C/SCA/5848/2010 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION NO. 5848 of 2010 TO SPECIAL CIVIL APPLICATION NO. 5850 of 2010

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 ? ================================================================ SADBHAV ENGINEERING LTD....Petitioner(s) Versus DEPUTY COMMISSIONER OF INCOME-TAX (OSD), CIRCLE-8 & 1....Respondent(s) ================================================================ Appearance: MR RK PATEL, ADVOCATE for the Petitioner(s) No. 1 MRS MAUNA M BHATT, ADVOCATE for the Respondent(s) No. 1 - 2 ================================================================ CORAM: HONOURABLE MR.JUSTICE AKIL Page 1 of 22

C/SCA/5848/2010 JUDGMENT KURESHI and HONOURABLE MS JUSTICE SONIA GOKANI

Date : 09/04/2014

COMMON ORAL JUDGMENT (PER : HONOURABLE MS.JUSTICE SONIA GOKANI) 1. All   the   three   petitions   since   involve   common questions of facts and grounds, they are being decided by this common judgment. 2. The facts as may be necessary for the purpose of determination shall be drawn from Special Civil Application No.5848 of 2010, which in brief are as under : 2.1 The   petitioner­Company   is   regularly   being assessed. For the assessment year 2005­06, the return   of   income   was   filed   which   was   taken under scrutiny assessment under section 143(1) of   the   Income­tax   Act,   1961   (hereinafter referred   to   as   'the   Act')   and   the   same   was framed under section 143(3) of the Act. One of the disallowances was a part of deduction under Page 2 of 22

C/SCA/5848/2010 JUDGMENT section 80IA(4) of the Act. 2.2 The   petitioner   challenged   such   order   of scrutiny before the Commissioner of Income­tax (CIT)   (Appeals)   and   such   appeal   was   partly allowed.   Both   the   sides   challenged   the   same before   the   Tribunal   and   the   Tribunal   has already adjudicated upon the issue in a recent past. 3. By way of these petitions, the challenge is made to the notice issued under section 148 read with section   147   of   the   Act.   On   the   basis   of retrospective   amendment,   the   explanation   given under sub­section (13) of section 80IA of the Act is substituted by the Finance (No.2) Act, 2009. On March 15, 2010, the reasons recorded by the Deputy   Commissioner   of   Income­tax   state   as follows : “1.   The   assessment   order   u/s.143(3)   was passed   on   29/06/2007,   assessing   the   total income at Rs.6,06,14,076/­ wherein the claim of   deduction   u/s.80IA   of   Rs.1,42,20,515/­ Page 3 of 22

C/SCA/5848/2010 JUDGMENT allowed

against

the

claim

of Rs.4,81,64,760/­. 2. As per explanation given below to sub­ section   (13)   of   section   80IA   of   the   Act, which   has   been   substituted   by   the   Finance (No.2)   Act,   2009   w.r.e.f.   01.04.2000, deduction u/s.80IA shall not be admissible to   an   assessee   who   carries   on   a   business which is in the nature of a works contract. The relevant explanation is reproduced below for the sake of ready reference : “Explanation : For the removal of doubts, it is hereby declared that nothing contained in this section shall apply in relation to a business   referred   to   in   sub­section   (4) which is in the nature of a works contract awarded by any person (including the central or   state   Government)   and   executed   by   the undertaking   or   enterprise   referred   to   in sub­section­1”. 3. Due to insertion of the explanation to section   80IA   w.r.e.f.   01.04.2000,   the assessee   is   not   eligible   for   deduction u/s.80IA as claimed by the assessee as the assessee is a Civil Contractor working for Government.   Therefore,   I   have   reason   to believe   that   income   chargeable   to   tax   has escaped assessment for the Assessment Year Page 4 of 22

C/SCA/5848/2010 JUDGMENT 2005­06. 4. Issue notice u/s.148 of the I.T. Act.” 4. The   petitioner   objected   to   reassessment proceedings vide its communication dated May 03, 2010 contending  inter alia  that this is nothing but a change of opinion. The Assessing Officer on due   scrutiny   on   the   basis   of   the   material available   before   it,   allowed   deduction   under section 80IA of the Act. The reopening is only on account   of   amendment   to   the   explanation   under sub­section   (13)   of   section   80IA   of   the   Act, which was substituted by the Finance (No.2) Act, 2009   with   effect   from   April   01,   2000,   on   the ground   of   retrospective   effect   from   April   01, 2000.   The   assessee   would   not   be   eligible   for deduction under section 80IA of the Act for the assessee   being   a   civil   contractor   for   the Government. When the notice had been issued, such notice   is   impermissible.   Relying   on   various decisions,   a   request   was   made   to   drop   the proceedings. Page 5 of 22

C/SCA/5848/2010 JUDGMENT 5. The   objections   came   to   be   disposed   of   by   the Assessing   Officer   on   May   04,   2010,   reiterating the fact that the amendment introduced by way of Finance Act, 2009 would permit such reassessment proceedings. 6. In   the   interregnum,   the   petitioner   also challenged the  vires  of section 80IA(4) of the Act by way of Special Civil Application No.11287 of 2009 and such petition came to be decided in a group of petitions on February 28, 2013/ March 04, 2013, which shall be referred to at a later stage in this judgment. 7. Aggrieved by rejection of the objections raised, the   petitioner   preferred   present   petitions seeking the following reliefs : “(A) Issue a writ of certiorari and/or a writ   of   mandamus   and/or   any   other   writ direction or order to quash and set aside the  impugned  notice  dated  17.03.2010  under section   148   of   the   Income­tax   Act,   1961 annexed   hereto   at   Annexure­'D'   along   with preliminary   order   dated   4.05.2010   annexed Page 6 of 22

C/SCA/5848/2010 JUDGMENT hereto   at   Annexure   'H'   for   proceeding   and completing Reassessment proceedings. (B) Pending   admission,   hearing   and disposal of this petition, ad­interim relief be granted and the Respondent be ordered to restrain   from   enforcing   compliance   of   the impugned notice dated 17.03.2010 at Annexure 'defendant' and/or taking any other steps in this   regard   including   ex.parte   order   or implementation   of   Preliminary   order   dated 04.05.2010 at Annexure 'H'. (C) Pending   admission,   hearing   and   till final   disposal   of   this   petition,   stay   the implementation/ operation of the notice and orders   to   restrain   the   Respondent   from taking  any  further  proceedings  pursuant  to the   impugned   notices   at   Annexure   'D' including  stay of operation  of  Preliminary order at Annexure 'H'. (D) Award the cost of this petition. (E) Grant such other and further relief as this Hon'ble Court deems fit.” 8. The   petitioner   was   protected   at   the   time   of admitting   the   petition   and   the   respondent   No.1 was permitted to proceed further pursuant to the Page 7 of 22

C/SCA/5848/2010 JUDGMENT impugned   notice,   however,   the   assessment   order was not to be passed till final disposal of the petition. 9. On due service, the respondent appeared and filed affidavit­in­reply contending inter alia that the assessment for the year 2004­05 came to be framed on   June   29,   2007.   On   having   realised   that   the income chargeable to tax has escaped assessment, after   recording   the   reasons,   a   notice   under section 148 came to be issued on March 17, 2010, which is within a period of four years from the end   of   relevant   assessment   year   as   all requirement of law are fully complied with. The assumption   of   jurisdiction   on   the   part   of   the Assessing   Officer   would   not   require   any indulgence.  It   is   further   contended   that   there was   no   conscious   consideration   with   regard   to allowability   of   the   deduction,   taking   into consideration the amendment to section 80IA(4) of the Act at the time of scrutiny assessment, and, therefore,   this   is   not   a   case   of   change   of opinion on the part of the Assessing Officer. It Page 8 of 22

C/SCA/5848/2010 JUDGMENT is also the averment of the respondent that the assessee is a Civil Contractor working for the Government and is not a Developer and, therefore, the deduction under section 80IA(4) of the Act would not be admissible to him in view of the explanation   given   below   sub­section   (13)   of section   80IA   of   the   Act,   which   has   been substituted by the Finance (No.2) Act, 2009 with retrospective effect from April 01, 2000. Since in   the   explanation,   it   is   clarified   that   the deduction under section 80IA of the Act would not be   admissible   to   an  assessee   who   carries   on  a business   which   is   in   the   nature   of   works contract,   such   deduction   was   not   admissible   to the   assessee   and,   therefore,   the   income chargeable to tax escaped the assessment. 10. Heard   learned   counsel   Mr.R.K.   Patel appearing with learned counsel Mr.B.D. Karia for the petitioner, who has fervently  submitted that the   Assessing   Officer   cannot   assume   the jurisdiction   merely   because   the   amendment   has been brought making it effective from April 01, Page 9 of 22

C/SCA/5848/2010 JUDGMENT 2000, even if it is held to be clarificatory in nature. It is further held that this Court in the case   of Parikshit   Industries   v.   Assistant Commissioner of Income­tax, reported in 352 ITR 349,   has   decided   the   issue   in   favour   of   the assessee.   This   has   been   challenged   before   the Apex Court by way of Special Leave Petition and the   said   decision   has   been   upheld.   He   further submitted that the Court in  Karita Construction Ltd. v. Union of India and others, reported in 352 ITR 513 (Guj.) has held that introduction of the   explanation   in   question   did   not   amount   to introduction   of   a   new   provision   of   law   with retrospective operation. The Court also has held that   the   explanation   to   sub­section   (13)   of section 80IA of the Act with retrospective effect from   April   01,   2000   was   introduced   by   the legislature   for   clarifying   certain   doubts   for removing confusions and such explanation was to fill in the gap left in the statute to suppress the mischief. The Court at the relevant time also had   referred   to   the   decision   in   the   case   of Parikshit   Industries   Pvt.   Ltd.   (supra).   Yet Page 10 of 22

C/SCA/5848/2010 JUDGMENT another   decision   sought   to   be   relied   on   is rendered by the Division Bench of this Court in the case of  Agrawal J.V. v. Income Tax Officer and another, rendered while dealing with Special Civil Application No.17885 of 2007, reported in 83 DTR 101. 11. The   learned   senior   counsel   Mr.Bhatt appearing   for   the   respondent­Revenue   has   urged that   at   the   time   of   issuance   of   notice   for reassessment, there was no change of opinion on the   part   of   the   Assessing   Officer,   however, counsel   could   not   controvert   the   decision rendered   in   the   case   of  Parikshit   Industries Pvt. Ltd. (supra). 12. On   thus   hearing   both   the   sides   and considering   the   material   on   record,   we   notice that   in   the   reasons   recorded   by   the   Assessing Officer,   the   sole   ground   while   initiating reassessment is the explanation to section 80IA of the Act with effect from April 01, 2000. As per explanation given below sub­section (13) of Page 11 of 22

C/SCA/5848/2010 JUDGMENT section   80IA   of   the   Act   substituted   by   the Finance (No.2) Act, 2009, it has explained that the deduction under section 80IA of the Act would not apply in relation to a business referred to in   sub­section   (4)   which   is   in   the   nature   of works contract. This Court in the case of Katira Construction   Ltd.   (supra),   where   challenge   was made   to   the   provision   of   sub­section   (4)   of section 80IA of the Act, has held thus : “34. Clearly, thus, post 1.4.2002 also, the   involvement   of   the   enterprise in developing infrastructure facility when the claim was covered under such expression was essential.   In   the   same   context,   we   must understand   the   expression   “developing   or operating   and   maintaining   or   developing, operating and maintaining”. Keeping in mind the   new   areas   where   such   private participation   would   be   required   and therefore had to be encouraged and keeping in mind that such areas, such as, surface transport,   water   supply,   water   treatment system,   irrigation   project,   etc.   would necessarily be highly investment intensive, the Legislature provided for a tax break of 10 consecutive years out of a total of 20 years period and also proposed to do away Page 12 of 22

C/SCA/5848/2010 JUDGMENT with the requirement of such infrastructure facility being transferred to the Central or the State Government or the local authority. 35. In   2007,   the   explanation   below   sub­ section   (13)   of   section   80IA   came   to   be added which clarified that nothing contained in the said section shall apply to a person who executes a works contract entered into with the undertaking or enterprise, as the case   may   be.   In   clear   terms,   this explanation targeted the second level works contractor who might have been employed by the enterprise developing the infrastructure facility. However, this was not found to be sufficient explanation clearing doubts with respect to the exclusion of the enterprise engaged in execution of a works contract. It was,

therefore,

that

the

impugned explanation

came

introduced substituting the existing explanation below sub­section   (13)   to   section   80IA.   The explanatory memorandum recorded that profit linked deductions were prone to considerable misuse.   With   a   view   to   preventing   such misuse   of   the   tax   holiday   under   section 80IA,   it   was   proposed   to   amend   the explanation to the said section to clarify that nothing contained in the section shall apply in relation to a business which is in the nature of a works  contract executed by Page 13 of 22

C/SCA/5848/2010 JUDGMENT an undertaking. 36.  We,   therefore,   notice   that   from   the inception,   deduction   was   envisaged   for development   of   infrastructure   facilities with private participation. Of course, post 2002, certain relaxations were granted and in addition to extending tax holiday period, requirement for claiming such deduction was split   into   developing   or   operating   and maintaining   or   developing,   operating   and maintaining   infrastructure   facility.   The Revenue   could   therefore,   legitimately contend that no such deduction was envisaged for   mere   execution   of   works   contract.   If this was the position, in our understanding, what the explanation, did was to clarify a statutory   provision   which   was   at   best possible of a confusion. If that be so, the explanation must be seen as one being in the nature of plain and simple explanation and not either adding or subtracting anything to the   existing   statutory   provision.   When   we hold   that   the   impugned   explanation   was purely   explanatory   in   nature   and   did   not mend the existing statutory provisions, the question   of   levying   any   tax   with retrospective effect would not arise. If we agree with the submission of the counsel for the   petitioners   that   such   explanation restricted   or   aimed   to   restrict   the Page 14 of 22

C/SCA/5848/2010 JUDGMENT provisions   of   deduction,   certainly   a question of reasonableness in the context of retrospective operation would arise. In the present case, however, we have come to the conclusion   that   the   explanation   only supplied   clarity   where,   at   best   confusion was possible in the unamended provision. In that view of the matter, this cannot be seen as a retrospective levy even if we were to accept that withdrawal of a deduction would amount to a fresh levy. 37. Much stress was laid by the petitioners on the decision of this Court in the case of Parixit   Industries   Pvt.   Ltd.   (supra)   to contend   that   the   impugned   explanation   did not   in   any   manner   alter   the   statutory provisions contained in section 80IA(4) of the Act and therefore, deductions which were previously available cannot be withdrawn. We have   already   expressed   our   opinion   on   the effect of the explanation under challenge. In our understanding, we have not taken any stand   different   from   the   decision   of   this Court in the case of Parixit Industries Pvt. Ltd. (supra). We must appreciate that such decision was rendered in the background of the   assessee’s   challenge   to   a   notice   for reopening   of   the   assessment   which   was previously   framed   after   scrutiny.   The assessment pertained to the assessment year Page 15 of 22

C/SCA/5848/2010 JUDGMENT 2006­07   and   the   notice   for   reopening   was issued within four years from the end of the relevant assessment year. Revenue relied on the   impugned   explanation   which   substituted the   previous   explanation   introduced   with effect from 1.4.2007. This change was also given retrospective effect of 1.4.2000. In this context, this Court held and observed as under: “25. It is now a settled law that if an explanation   is   added   to   a   section   of   a statute   for   the   removal   of   doubts,   the implication   is   that   the   law   was   the   same from   the   very   beginning   and   the   same   is further explained by way of addition of the Explanation.   Thus,   it   is   not   a   case   of introduction   of   new   provision   of   law   by retrospective operation. We have found that the   petitioner   had   disclosed   all   the materials regarding its activities and there was no suppression of materials. In spite of such disclosure, the Assessing Officer gave benefit of the provision by considering the then Explanation which was substantially the same and thus, it could not be said that any income escaped assessment in accordance with the then law. We have already pointed out that the  Assessing Officer has now given a second thought over the same materials and according   to   him,  as   the   assessee   is   a Page 16 of 22

C/SCA/5848/2010 JUDGMENT contractor   or   supplier   of   irrigation products, it cannot be called a developer of any new infrastructural facility. 26. From the materials placed before him by the   petitioner,   the   Assessing   Officer earlier   did   not   arrive   at   such   conclusion and

thus,

the

amended

Explanation subsequently added cannot be of any help to him in arriving at the second opinion based on the alleged new law.” The   Court   was   thus   of   the   opinion   that introduction of the explanation in question did   not   amount   to   introduction   of   a   new provision   of   law   with   retrospective operation.   The   assessee   was,   therefore, given the benefit of deduction considering the   then   explanation   which   was   introduced with effect from 1.4.2007, which according to the Court was substantially the same and any   attempt   on   the   part   of   the   Revenue, therefore, to reopen the assessment would be in the nature of second opinion. Thus, we do not think that we have stated anything which runs contrary to the ratio in the case of Parixit   Industries   Pvt.   Ltd   (supra).   In fact, the context of the said  decision was entirely different from the challenge being considered   by   us   in   the   present   group   of petitions.” Page 17 of 22

C/SCA/5848/2010 JUDGMENT 13. While   deciding   the   issue   of  vires,   the judgment   rendered   in   the   case   of  Parikshit Industries Pvt. Ltd. (supra) was taken note of. In  Parikshit  Industries  Pvt. Ltd. (supra), the challenge was made to the issue of reopening. The Court   having   noted   that   the   claim   made   for deduction under section 80IA of the Act, which was allowed by the Assessing Officer in scrutiny assessment.   However,   later   on   the   reassessment proceedings were initiated only on account of the addition of explanation. The Court held that it is a settled law that if the explanation is added to   a   statute   for   the   removal   of   doubts,   the implication   is   that   the   law   was   same   from   the beginning and the same is further explained by way of addition of the Explanation. Therefore, it is not a case of introduction of new provision of law by retrospective operation, but when all the materials regarding activities of the assessee if are available on record and the benefit of the provision   is   already   made   available   to   such assessee,   reassessment   proceedings   cannot   be Page 18 of 22

C/SCA/5848/2010 JUDGMENT initiated   only   on   account   of   addition   of   such Explanation. It would be profitable to reproduce relevant   paragraph   of   the   said   decision   as under : “25. It is now a settled law that if an explanation   is   added   to   a   section   of   a statute   for   the   removal   of   doubts,   the implication   is   that   the   law   was   the   same from   the   very   beginning   and   the   same   is further explained by way of addition of the Explanation.   Thus,   it   is   not   a   case   of introduction   of   new   provision   of   law   by retrospective operation. We have found that the   petitioner   had   disclosed   all   the materials regarding its activities and there was no suppression of materials. In spite of such disclosure, the Assessing Officer gave benefit of the provision by considering the then Explanation which was substantially the same and thus, it could not be said that any income escaped assessment in accordance with the   then   law.   We  have   already   pointed   out that the Assessing Officer has now given a second thought over the same materials and according   to   him,   as   the   assessee   is   a contractor   or   supplier   of   irrigation products, it cannot be called a developer of any new infrastructural facility.” Page 19 of 22

C/SCA/5848/2010 JUDGMENT 14. This was challenged before the Apex Court. The   Apex   Court   dismissed   the   Special   Leave Petition,   which   is   reported   in  25   taxmann.com 301. 15. In   the   case   of  Agrawal   J.V.   (supra),   in respect of the reassessment proceedings initiated on   account   of   introduction   of   explanation,   the Court held the same in favour of the assessee by holding   that   all   necessary   facts   and   material relating to the claim for deduction under section 80IA(4) of the Act were already available in the return of income and the same was considered duly by the Assessing Officer. There was nothing to demonstrate or reveal that there was any reason for   the   reopening   assessment   on   the   identical material only on account of any introduction of such provision. 16. In the present case, as could be noted from the material on record, the Assessing Officer on a detailed scrutiny had explained the claim made Page 20 of 22

C/SCA/5848/2010 JUDGMENT by the Assessing Officer under section 80IA(4) of the Act. This was also challenged further before the   CIT   (Appeals)   and   the   Tribunal.   The   sole question, therefore, is whether the reassessment proceedings can be initiated only on the basis of insertion   of   Explanation   which   had   been substituted by the Finance (No.2) Act, 2009 with retrospective   effect   from   April   01,   2000.   Such Explanation   clarified   that   the   deduction   under section 80IA of the Act would not be admissible in the case of an assessee carrying on business in the nature of works contract. Such explanation having held to be clarificatory in nature, the ratio   laid   down   in   the   case   of  Parikshit Industries   Pvt.   Ltd.   (supra)   would   apply.   The Assessing Officer initiated such proceedings of reopening solely on such ground of insertion of explanation and, therefore, it needs to be held as mere change of opinion. Hence, the assumption of   jurisdiction   on   the   Assessing   Officer   shall need   to   be   interfered   by   way   of   writ jurisdiction. Page 21 of 22

C/SCA/5848/2010 JUDGMENT 17. Resultantly, all the three petitions deserve to be allowed quashing the impugned notice issued under   section   148   of   the   Act   and   all consequential   proceedings   emanating   therefrom. Rule is made absolute. There shall be, however, no order as to costs. (AKIL KURESHI, J.) (MS SONIA GOKANI, J.) Aakar Page 22 of 22