INDIA GELATINE AND CHEMICALS LTD. vs. ASSTT. COMMISSIONER OF INCOME TAX

C/SCA/954/2004 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION NO. 954 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 ? ================================================================ INDIA GELATINE AND CHEMICALS LTD.....Petitioner(s) Versus ASSTT. COMMISSIONER OF INCOME TAX....Respondent(s) ================================================================ Appearance: MR MANISH J SHAH AND MR JP SHAH, ADVOCATE for the Petitioner(s) No. 1 MRS MAUNA M BHATT, ADVOCATE for the Respondent(s) No. 1 ================================================================ CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI and Page 1 of 7

C/SCA/954/2004 JUDGMENT HONOURABLE MS JUSTICE SONIA GOKANI

Date : 23/04/2014

ORAL JUDGMENT

(PER : HONOURABLE MR.JUSTICE AKIL KURESHI) 1.The   petitioner   has   challenged   a   notice   dated   27.1.2003 issued   by   the   respondent   Assessing   Officer   seeking   to reopen the assessment of the petitioner for the assessment year 1999­2000. 2.The facts are as under : 2.1. The   petitioner   is   a   company   registered   under   the Companies Act and is assessed to tax regularly. For the said   assessment   year,   petitioner   filed   its   return   of income in due course declaring total income of Rs.2.76 crores( rounded off). Such return was accepted under section  143(1)  of  Act  without  any  scrutiny.  It  is this return the Assessing Officer desired to reopen for which the impugned notice came to be issued. 2.2. At   the   request   of   the   petitioner,   he   supplied   the reasons recorded for issuing such notice. Such reasons are   rather   elaborate.   We   may   however,   note   the concluding portion of the reasons which is the gist of Assessing Officer’s belief that the income chargeable to tax has escaped assessment. Such conclusions read as under : Page 2 of 7

C/SCA/954/2004 JUDGMENT “It   can   be   seen   that   as   per   Schedule   19   of   notes annexed and forming part of the accounts for the year ended 31 st March 1998­5(b) of Annual Report of 1998­ 99, India Gelatine and Chemicals Ltd. The term liability incurred   in   foreign   currency   for   acquisition   of   fixed assets has been translated  at the year and exchange rate   and   the   resultant   deficit   amounting   to   Rs.84.84 lakh was charged to Revenue Account. As the expenditure of Rs.84.84 lakh debited to Revenue Account was not backed by the actual remittance and loss arisen due to fluctuation on the first and last day of accounting  year  the  allowance  of  exchange  loss  as  a deduction in the computation of the business income has resulted in underassessment. In   view   of   the   above   I   am   of   the   firm   belief   that substantial income has escaped assessment within the meaning of Section 147, for which assessments need to be re­opened.” 2.3. The   petitioner   raised   objections   to   the   process   of reopening under communication dated 7.8.2003. Such objections   were   rejected   by   the   Assessing   Officer   by order dated 15.9.2003. Hence this petition. 3.We   may   also   notice   that   on   31.3.2003,   the   Assessing Officer  recorded  further  reasons  titled  as supplementary reasons which read as under : “It can also be seen that the assessee company has claimed depreciation on the portion of loan used for acquisition of fixed   assets.   The   depreciation   claimed   on   account   of exchange fluctuation added to cost of fixed assets has also to   be   disallowed   after   due   quantification   during   the assessment. The same has to be quantified as the assessee Page 3 of 7

C/SCA/954/2004 JUDGMENT has claimed depreciation on the term liability incurred in the foreign currency for the acquisition of the fixed assets at the year end exchange rate and the foreign exchange fluctuation amounting to Rs.100.66 lacs has been added to the actual cost to the assets as per the note 5(c) of the schedule 19 i.e. Notes annexed to & forming part of the accounts   for   the   year   ended   31 st  March,   1999.   The depreciation on the account of the addition such amount to the fixed assets in the earlier AY i.e. 1998­1999 has to be calculated and accordingly disallowed.” 4.We   are   conscious   that   in   the   present   case   the   original assessment was not after scrutiny. In view of the decision of the Supreme Court in case of Assistant Commissioner of Income­tax v. Rajesh Jhaveri Stock Brokers P. ltd reported in (2007)  291 ITR 500(SC),  the Revenue  would therefore,   have   considerable   latitude   in   reopening   the assessment after issuing notice for such purpose. However, in our judgement in case of Inductotherm (India) P. Ltd. v.   M.   Gopalan,   Deputy   Commissioner   of   Income­tax reported in (2013) 356 ITR 481(Guj), it was held that even in case where a return which is accepted under section 143(3) of the Act without scrutiny, to reopen the same the basic   requirement   of   section   147   of   the   Act   that   the Assessing   Officer   has   reason   to   believe   that   income chargeable   to   tax   has   escaped   assessment,   is  not   done away with. It was observed as under : “13.   Despite   such   difference   in   the   scheme   between   a return which is accepted under section 143(1) of the Act as compared to a return of which scrutiny assessment under section 143(3) of the Act is framed, the basic requirement of section 147 of the Act that the Assessing Officer has reason   to   believe   that  income   chargeable   to   tax   has Page 4 of 7

C/SCA/954/2004 JUDGMENT escaped assessment is not done away with. Section 147 of the Act permits the Assessing Officer to assess, re­assess the income or re­compute the loss or depreciation if he has reason to believe that any income chargeable to tax has escaped assessment for any assessment year. This power to reopen assessment is available in either case, namely, while   a   return   has   been   either   accepted   under   section 143(1) of the Act or a scrutiny assessment has been framed under section 143(3) of the Act. A common requirement in both  of cases  is that  the Assessing  Officer  should  have reason to believe that any income chargeable to tax has escaped assessment.”

5.In this context, we may note that supplementary reasons were   recorded   on   31.3.2003   and,   therefore,   well   after issuance  of  the  notice.  It  is well  settled  that  validity  of notice   for   reopening   must   be   judged   on   the   basis   of reasons recorded. Such reasons in terms of section 148(2) of the Act have to be recorded before issuance of the notice. The Assessing Officer therefore, would not be in a position to  support  the  notice   of   reopening  on  the  basis  of  any reasons recorded subsequent to notice itself. 6.In this light, we need to judge the validity of the Assessing Officer’s belief that income chargeable to tax has escaped assessment on the strength of the reasons recorded before issuance of the notice for reopening. In case of this very assessee   in   Special   Civil   Application   No.12552   of   2002, this issue had come up for consideration. In a separate judgement passed today it was held as under : “6. On the first aspect, we notice that it is wrongly referred to in the reasons recorded as para 5(B) of the annual report of the company, the correct reference would be to para 5(C) where there Page 5 of 7

C/SCA/954/2004 JUDGMENT is a reference to a sum of Rs.116.86 lakhs which was charged by the assessee to the revenue account. In that context, the question is   whether   the   Assessing   Officer’s   belief   that   the   income chargeable to tax has escaped assessment, is valid. He formed such   belief   on   the   premise   that   the   assessee   had   claimed deduction of such sum on mere fluctuation of the rate of foreign exchange and the loss computed was without actual remittances. In   this   context,   the   Supreme   Court   in   case   of    Woodward Governor India P. Ltd.(supra) held that the loss suffered by the assessee on account of fluctuation in the rate of foreign exchange as on the date of the balance­sheet is an item of expenditure under   section   37(1)   of   the   Act   and   further   that   under   the mercantile system of accounting, what is due is brought into credit before it is actually received. It also brings into debit an expenditure for which a legal liability has been incurred before it is   actually   disbursed.     This   decision   was   latter   followed   and reiterated in case of  Oil   and  Natural   Gas  Corporation   Ltd. (supra) by the Supreme Court as can be seen from the following discussion : “Opining that the amendment of Section 43A of the Act by the Finance Act, 2002 with effect from 1st April, 2003 is amendatory and not clarificatory and would thus, apply prospectively, the Court   explained   that   under   the   unamended   Section   43A, adjustment to the actual cost takes place on the happening of change in the rate of exchange, whereas under the amended Section 43A, the adjustment in the actual cost is made on cash basis. In other words, under the unamended Section 43A, “actual payment” was not a condition precedent for making necessary adjustment in the carrying cost of the fixed asset acquired in foreign currency but under the amended Section 43A, with effect from 1st April, 2003, such payment of the decreased/enhanced liability on account of fluctuation in foreign exchange rate has been made a condition precedent for making adjustment in the carrying amount of the fixed asset. We   are   of   the   opinion   that   the   decision   of   this   Court   in Woodward’s case  (supra) settles the second issue as well. We respectfully   concur   with   the   same   and   hold   that   all   the assessment years in question being prior to the amendment in Section   43A   of   the   Act   with   effect   from   1st   April,   2003   the Page 6 of 7

C/SCA/954/2004 JUDGMENT Assessee   would   be   entitled   to   adjust   the   actual   cost   of   the imported capital assets, acquired in foreign currency, on account of fluctuation in the rate of exchange at each of the relevant balance­sheet   dates   pending   actual   payment   of   the   varied liability.” 7. In the result, impugned notice dated  27.1.2003 is quashed. The petition is allowed and disposed of. Rule made absolute. No costs. (AKIL KURESHI, J.) (MS SONIA GOKANI, J.) raghu Page 7 of 7