M/S ADANI ENTERPRISE LIMITED vs. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 1(1)(1)

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SCA/14446/2018HC GujaratGJHC24055974201816 October 2018Author: HONOURABLE MR. JUSTICE AKIL KURESHI,HONOURABLE MR. JUSTICE B.N. KARIA12 pages
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What did the High Court hold?

The High Court held that the impugned notice for reopening the assessment was liable to be quashed. The Court found that the entire issue concerning the assessee's treatment of unutilized CENVAT credit in the valuation of closing stock had been subjected to minute scrutiny during the original assessment proceedings. The Assessing Officer had raised multiple queries, received replies from the assessee, and after such examination, passed the original assessment order, making limited additions. Therefore, the AO was not justified in re-examining the same issue, which amounted to a mere change of opinion, a ground that prevents reopening even after amendments to Section 147, as held in CIT vs. Kelvinator of India Limited. Furthermore, the Court noted that the notice was issued beyond a period of four years from the end of the relevant assessment year. Since there was no failure on the part of the assessee to disclose truly and fully all material facts, and the AO referred to material already on record, the notice was quashed on this ground as well. The petition was allowed, and the impugned notice was set aside.

What were the facts?

The assessee, M/s Adani Enterprise Limited, is challenging a notice for reopening of assessment issued by the Assistant Commissioner of Income Tax, Circle 1(1)(1) on March 27, 2018, for assessment year 2011-12. The assessee had filed its return of income on November 26, 2011. The original assessment order under section 143(3) was passed on May 25, 2015. During the original assessment, the Assessing Officer (AO) had raised queries regarding the assessee's method of valuation of closing stock, specifically concerning the applicability of Section 145A and the inclusion of unutilized CENVAT credit. The AO made limited additions of Rs. 2.56 crores in the original assessment related to unutilized CENVAT credit.

What were the issues?

1. Whether the Assessing Officer had valid reasons to reopen the assessment under Section 147 of the Income Tax Act, 1961, when the issue of unutilized CENVAT credit in closing stock was already examined during the original assessment proceedings? Assessee's Contention: The assessee argued that the AO's decision to reopen the assessment was based on a mere change of opinion, as the entire issue of unutilized CENVAT credit and its treatment in closing stock was scrutinized during the original assessment. The assessee also contended that the positive balance of CENVAT credit of Rs. 2,56,69,111 was for service tax receivable on services availed, and therefore, Section 145A was not applicable. Revenue's Contention: The revenue, through the AO's reasons for reopening, contended that the assessee had not fully and truly disclosed material facts necessary for the assessment. The AO believed that the unutilized CENVAT credit should have been included in the closing stock as per Section 145A, and its non-inclusion resulted in under-assessment. The AO also argued that even though the assessee provided financial statements, the material facts were embedded in such a manner that they could not be discovered by the AO without due diligence, thus attracting Explanation 1 to Section 147.

Which sections of the Income-tax Act were involved?

Section 143(3),Section 145A,Section 147,Section 148,Section 151

AI-generated summary — verify with the full judgment below

Cause title — parties, addresses and appearances
C/SCA/14446/2018 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/SPECIAL CIVIL APPLICATION NO. 14446 of 2018 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE AKIL KURESHI and HONOURABLE MR.JUSTICE B.N. KARIA ========================================================== 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 or any order made thereunder ? ========================================================== M/S ADANI ENTERPRISE LIMITED Versus THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 1(1)(1) ========================================================== Appearance: MR B S SOPARKAR(6851) for the PETITIONER(s) No. 1 MRS MAUNA M BHATT(174) for the RESPONDENT(s) No. 1 ========================================================== CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI and HONOURABLE MR.JUSTICE B.N. KARIA Date : 16/10/2018

ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE AKIL KURESHI)

1.

Petitioner has challenged a notice for reopening of the assessment issued by the respondent­Assessing Officer on 27.03.2018. Brief facts are as under.

2.

Petitioner   is   a   limited   company.     For   the assessment year 2011­12, the petitioner had filed the return of income on 26.11.2011 declaring total income of   Rs.44.69   crores   under   regular   computation   and Rs.145.70 crores under section 115JB of  the Income Tax Act, 1961 ('the Act' for short).  The return of the   petitioner   was   taken   in   scrutiny.     Assessing Officer passed order under section 143(3) of the Act on   25.05.2015. During   the   assessment   proceedings several issues arising out of the return came up for consideration, one of them being the applicability of section 145A of the Act to the petitioner's method of valuation of closing stock.   Assessing Officer had raised queries in this respect.  In particular, under a   notice   dated   22.08.2014,   the   Assessing   Officer called   upon   the   assessee   to   provide   the   following details:

“17. Please state whether you have followed the method of valuation as prescribed in S 145A of the IT Act in the valuation of raw materials,   work   in   progress,   finished products and closing stock.  If you have not followed the inclusive method as prescribed u/s 145A, please show how the method adopted by you is neutral with respect to profit and hence,   tax.     Do   this   by   showing   detailed calculations   using   the   exact   figures   from your financial statement and not by citing examples.”

3.

In   a   further   letter   dated   19.01.2015,   the Assessing Officer asked the petitioner to supply the following details:

“19. It is observed from Annexure­XIV of Tax Audit   Report   that   the   opening   balance   of Modified   VAT   Credit   Rs.6,56,96,786/­   while closing   balance   Modified   VAT   Credit   is Rs.9,13,65,897/­.  Thus, there is a positive balance of Rs.2,56,69,111/­.  Please explain as to why this amount is not added following provision u/s.145A of the Act.”

4.

In   reply   to   such   queries,   the   petitioner answered to the Assessing Officer under communication dated   28.01.2015   and   04.03.2015,   in   which,   it   was conveyed as under:

“17. In so far as valuation of inventories by following inclusive method of accounting as prescribed u/s 145A of the Act vis­a­vis exclusive method of accounting as prescribed in Accounting Standard is concerned kindly refer to clause no. 12(b) of the tax audit report,   on   perusal   of   the   same   your   good self will find that there is no deviation in method   of   closing   stock   employed   from Accounting Standard prescribed u/s 145A of the Act.  The detailed working for the same will be provided in next submission.” “19. Your   good   self   has   observed   that opening   balance   of   CENVAT   Credit   IS   OF Rs.9,13,65,897 and accordingly, there is a positive   balance   of   Rs.2,56,69,111. Your good self has sought an explanation as to why the said positive balance should not be added   u/s   145A   of   the   IT   Act.     At   the outset,   we   submit   that   the   said   positive balance of Rs 2,56,69,111 of CENVAT Credit is   of   SERVICE   TAX   RECEIVABLE   ON   SERVICES AVAILED   during   the   year   as   is   evident   on perusal of Annexxure­XII of Tax Audit Report submitted   to   your   good   self.     In   this context, the provisions of Section 145A are worth referring which read as under: 145A.  Notwithstanding anything to the contrary contained in section 145,­ (a) the valuation of purchase and sale of goods and inventory  for the purposes of determining the income chargeable under the head “Profits and gains of business or profession” shall be— (i) in   accordance   with   the   method   of accounting   regularly   employed   by   the assessee; and (ii) further   adjusted   to   include   the amount of any tax, duty, cess or fee (by whatever   name   called)   actually   paid   or incurred   by   the   assessee   to   bring   the goods   to   the   place   of   its   location   and condition as on the date of valuation. Explanation.—  For   the   purposes   of   this section,  any  tax, duty,  cess  or fee  (by whatever   name   called)   under   any   law   for the time being in force, shall include all such   payment   notwithstanding   any   right arising as a consequence to such payment.]

5.

In the final order of assessment, the Assessing Officer under this head made limited additions to the tune   of   Rs.2.56   crores   in   relation   to   unutilized CENVAT credit.

6.

To reopen such assessment, the Assessing Officer has issued the impugned notice, for which purpose, he had recorded following reasons: “Reasons for reopening of the assessment in the case of M/s. Adani Enterprise Ltd.

1.

Brief   details   of   Assessee:  In   this case,   the   assessee   company   M/s   Adani Enterprise Limited engaged in the business of   Export   and   Import/Domestic   Trading   & Manufacturing   in   various   commodities   filed its   return   of   income   for   A.Y.2011­12   on 26.11.2011   declaring   total   income   of Rs.44,69,74,307/­.   The same was processed u/s.143(1) of the Act and subsequently order u/s   143(3)   of   the   Act   was   passed   on 25.05.2015   determining   total   income   at Rs.69,22,75,577/.

2.

Brief

details

of information collected/received by the AO: On perusal of the   assessment   records   for   the   year   under consideration,   it   is   noticed   that   the assessee   is   following   exclusive   method   of accounting and the unutilized Cenvat Credit has not been included in the closing stock in the Profit and Loss account.  During the year ended on 31.03.2011, the assessee had unutilized

Cenvat

Credit

of Rs.9,13,65,897/­.     During   the   course   of assessment proceedings, proper and necessary enquiry on the issue involved could not be made due to which income was underassessed. In terms of the provisions u/s 145A of the Act,   this   unutilized   Cenvat   Credit   shall form part of the closing Stock.  Despite the fact that, inclusive method of accounting as per   the   provision   of   section   145A   has mandatorily to be followed, the assessee has adopted exclusive method of accounting and thus the assessee has violated the provision of section 145A of the Act.

3.

Analysis

of information collected/received: As per the section 145A of the Act, notwithstanding anything to the contrary contained in section 145: (a) the valuation of purchase and sale of goods and inventory  for the purposes of determining the income chargeable under the head “Profits and gains of business or profession” shall be— (i) in   accordance   with   the   method   of accounting   regularly   employed   by   the assessee; and (ii) further   adjusted   to   include   the amount of any tax, duty, cess or fee (by whatever   name   called)   actually   paid   or incurred   by   the   assessee   to   bring   the goods   to   the   place   of   its   location   and condition as on the date of valuation. Explanation.—  For   the   purposes   of   this section,  any  tax, duty,  cess  or fee  (by whatever   name   called)   under   any   law   for the time being in force, shall include all such   payment   notwithstanding   any   right arising as a consequence to such payment. In   view   of   the   above   provision,   it   is evident   that   the   Unutilized   Cenvat   Credit must be included in the closing stock as the Unutilized Cenvat Credit shall form part of closing   stock   in   view   of   provision   of section   145A   of   the   Act.     However,   the assessee   has   not   included   the   Unutilized Cenvat Credit in the closing stock though it was   mandatorily   required   to   be   included. Non inclusion of Unutilized Cenvat Credit in the closing stock attracts the provision of section 145A of the Act.

4.

Enquiries made by the AO as sequel to information   collected/received:   The   facts enumerated   above   have   been   found   out   on examination   on   the   case   records   of   the assessee   and   are   self   explanatory. Therefore, no further enquiry is required in this case.  On the basis of the same there are   reasons   to   believe   that   the   income chargeable to tax has escaped assessment.

5.

Findings   of   the   AO:    In   view   of   the provision of section 145A of the Act, the unutilized   Cenvat   Credit   should   have   been included   in   closing   stock;   however,   the assessee has failed to include the same in the   closing   stock. The   assessee   had followed   exclusive   method   for   accounting CENVAT as against inclusive method mandated u/s 145A of the Act and the total income was determined without the statutory adjustment of   the   cost   of   raw   materials   and   work   in progress by unutilized CENVAT credits at the beginning   and   end   of   previous   year   as stipulated in section 145A of the Act.   It is   well   settled   position   that   unutilized Cenvat   Credit   shall   form   part   of   closing stock   and   therefore   the   unutilized   Cenvat Credit   is   mandatorily   required   to   be included in Closing Stock.

6.

Basis for forming reason to believe and details of escapement of income: On perusal of the assessment records for the year under consideration,   it   is   noticed   that   the assessee   is   following   exclusive   method   of accounting instead of inclusive method and the   unutilized   Cenvat   Credit   has   not   been included in the closing stock int eh Profit and Loss account whereas as per section 145A of the Act, unutilized Cenvat credit had to be   included   in   closing   stock   but   the assessee had followed exclusive method which violates   the   provision   of   section   145A   of the   Act.    Therefore,   I   have   reasons   to believe that

income chargeable to tax to the

extent of Rs.6,56,96,786/­ has escaped the assessment within the meaning of section 147 of the I. T. Act for AY 2011­12 and it is a fit case to issue notice u/s 148 of the Act.

7.

Seventh

paragraph

will

include escapement   of   income   chargeable   to   tax   in relation to any assets (including financial interest   in   any   entity)   located   outside India: Not Applicable.

8.

Findings   of   the   AO   on   true   and   full disclosure of the material facts necessary for assessment under Proviso to section 147: On perusal of the assessment records for the year   under   consideration,   it   has   been observed   that   the   assessee   is   following exclusive   method   of   accounting   instead   of mandatory   inclusive   method   which   is   not permissible as per the provision of section 145A of the Act.  As per section 145A of the Act, the assessee is mandatorily required to follow   inclusive   method   of   accounting   and non­inclusion of unutilized Cenvat Credit in closing   stock   leads   to   underassessment. During the course of assessment proceedings, necessary   and   adequate   enquiries   on   the issue involved could not be made as a result the   assessee   enjoyed   the   benefit   by   not furnishing true and full disclosure of the facts   in   respect   of   unutilized   Cenvat Credit.

9.

Applicability   of   the   provisions   of section 147/151 to the facts of the case: In this case a return of income was filed for the year under consideration and assessment u/s   143(3)   of   the   Act   was   completed   on 25.05.2015. Since 4 years from the end of the relevant year has expired in this case, the requirements to initiate proceedings u/s 147 of the Act are reason to believe that income for the year under consideration has escaped assessment because of failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment   for   the   assessment   year   under consideration.   It is pertinent to mention here that reasons to believe that income has escaped   assessment   for   the   year   under consideration have been recorded above (para 3   &   4).     I   have   carefully   considered   the assessment

records

containing

the submissions made by the assessee in response to   various   notices   issued   during   the assessment proceedings and have noted that the   assessee   has   not   fully   and   truly disclosed   the   facts   in   respect   of   Non­ Inclusion   of   Unutilised   Cenvat   Credit   in closing   stock   during   the   year   under consideration. It is evident from the above facts that the   assessee   had   not   truly   and   fully disclosed material facts necessary for his assessment for the year under consideration thereby necessitating reopening u/s 147 of the Act. It is true that the assessee has filed a copy of annual report and audited P&L A/c and   balance   sheet   along   with   return   of income   where   various   information/material were disclosed.  However, the requisite full and   true   disclosure   of   all   material   facts necessary for assessment has not been made as noted above.  It is pertinent to mention here   that   even   though   the   assessee   has produced books of accounts, annual report, audited P&L A/c and balance sheet or other evidence as mentioned above, the requisite material facts as noted above in the reasons for reopening were embedded in such a manner that   material   evidence   could   not   be discovered   by   the   AO   and   could   have   been discovered   with   due   diligence,   accordingly attracting   provisions   of   Explanation   1   of section 147 of the Act. It is important to highlight here that material facts relevant for the assessment on the issue under consideration embedded in annual report, audited P&L Account, balance sheet and books of account in such a manner that it would require due diligence by the Assessing   Officer   to   extract   these information.   For aforesaid reasons, it is not a case of change of opinion by the AO. In this case more than four years have lapsed from the end of assessment year under consideration.  Hence necessary sanction to issue   notice   u/s   148   has   been   obtained separately from Pr.CIT­I, Ahmedabad as per the provisions of section 151 of the Act.” In view of above, it is evident that Section 145A   of   the   IT   Act   refers   to   taxes paid/payable   and   CENVAT   on   the   same   in respect of purchases, sales and inventory of GOODS.     As   submitted   herein   above,   the positive balance of Rs.2,56,69,111 of CENVAT credit   is   of   SERVICE   TAX   RECEIVABLE   ON SERVICES   AVAILED   during   the   year   &

accordingly the provisions of Section 145A are not apply and therefore, the question of addition of the same does not arise.”

7.

Having heard learned counsel for the parties and having perused the documents on record, it emerges that the sole ground on which the Assessing Officer desired to reopen the assessment was in relation to the assessee's valuation of closing stock.  According to   the   Assessing   Officer,   unutilized   CENVAT   credit should have been included in the closing stock which would alter the assessee's profit for the year under consideration.  He relied on the provisions contained in section 145A of the Act for this purpose.

8.

The documents on record would however show that the   entire   issue   of   assessee's   treatment   of   such unutilized   CENVAT   credit   while   computing   the valuation   for   the   closing   stock   had   come   up   for minute   scrutiny   during   the   original   assessment proceedings.  The Assessing Officer was conscious of the   methodology   adopted   by   the   assessee.     He   had raised multiple queries which we have reproduced. The assessee had replied to such queries.  The replies of the   assessee   have   already   been   reproduced.   It   was only after such scrutiny that the Assessing Officer had passed the order of assessment, in which, after recording   detailed   reasons,   he   made   limited disallowance   in   relation   to   the   unutilized   CENVAT credit.  We are informed that even this disallowance is a subject matter at the ends of the assessee. With this aspect we are however not directly concerned.

9.

It   was   therefore   simply   not   open   for   the Assessing Officer to reexamine the entire issue which would   be   merely   on   the   change   of   opinion.     It   is well­settled as held by the Supreme Court in case of [2010]   320   ITR   561   (SC).    Even   post   01.04.1989, amendments in section 147, the concept of change of opinion prevented the Assessing Officer to reopen the assessment still holds good.

10.

This quite apart, the impugned notice has been issued beyond a period of four years from the end of relevant   assessment   year.   Clearly,   there   was   no failure on the part of the assessee to disclose truly and   fully   all   material   facts   necessary   for assessments.   The Assessing Officer in the reasons recorded, referred to the material which was already on record during the course of assessment.  On this ground also, notice must be quashed.

11.

In   the   result,   impugned   notice   is   set   aside. Petition is allowed and disposed of. (AKIL KURESHI, J) (B.N. KARIA, J) ANKIT SHAH

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