E-INFOCHIPS LIMITED vs. ASST. COMMISSIONER OF INCOME TAX CIRCLE 2(1)(1)

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SCA/13566/2018HC GujaratGJHC24053678201815 October 2018Author: HONOURABLE MR. JUSTICE AKIL KURESHI,HONOURABLE MR. JUSTICE B.N. KARIA9 pages
AI SummaryAllowed

What did the High Court hold?

The High Court held that the impugned notice should be quashed solely on the ground that it was issued beyond a period of four years from the end of the relevant assessment year, and there was no suggestion on record of any failure on the part of the assessee to disclose truly and fully all material facts. Additionally, the Court commented that the issue of disproportionate bifurcation of expenditures between eligible and non-eligible units, cited as a reason for reopening, pertained to the assessee's claim for deduction under Section 10B. Since this claim was examined by the Assessing Officer during the original assessment proceedings, as noted in the previous judgment, it would not be open for him to re-examine it, even if on another aspect or element, through reassessment proceedings. The Court noted that the Assessing Officer had raised multiple queries regarding the claim during the original assessment, and the assessee had provided a detailed reply with supporting documents, including audit reports and unit-wise statements of income, which demonstrated the computation of profits and the allocation of expenses. The Court found that the assessee had complied with the conditions for claiming deduction under Section 10B.

What were the facts?

The petitioner, E-Infochips Limited, a company engaged in IT-enabled services and software business, challenged a notice dated March 31, 2018, issued by the Assistant Commissioner of Income Tax under Section 148 of the Income Tax Act, 1961, for reopening its assessment for Assessment Year 2011-2012. The original assessment order under Section 143(3) was passed on February 28, 2014. A previous notice for reopening, issued on March 28, 2016, concerning the eligibility for deduction under Section 10B, was quashed by the High Court on June 12, 2017, as the issue had been examined during the original assessment. The current notice was issued more than four years after the end of the relevant assessment year, and the reasons cited pertained to the apportionment of common administrative expenses and losses from sales units, which the Assessing Officer believed led to escaped income.

What were the issues?

1. Whether the impugned notice under Section 148, issued beyond four years from the end of the relevant assessment year, is bad in law, given the absence of an allegation of failure to disclose material facts truly and fully? (Question of law) 2. Whether the Assessing Officer is barred from re-examining the assessee's claim for deduction under Section 10B, which was already examined during the original scrutiny assessment, thereby constituting a change of opinion? (Question of mixed law and fact) Assessee's contentions: - The notice is bad in law as it was issued beyond four years and there is no allegation of failure to disclose material facts fully and truly. - Re-examining the Section 10B deduction claim amounts to a change of opinion, as it was already scrutinized during the original assessment. - The principle laid down in the previous High Court judgment quashing a similar notice should apply, as both notices pertain to the Section 10B claim. - The reasons for reopening are based on a wrong footing, as the audit report did provide a break-up of expenditures between eligible and non-eligible units. Revenue's contentions: - The questions were not at issue in the original assessment. - The assessee had claimed exaggerated expenditure. - The break-up of expenditure in relation to the non-eligible unit was not given in the audit report.

Which sections of the Income-tax Act were involved?

Section 148,Section 143(3),Section 10B,Section 147

AI-generated summary — verify with the full judgment below

Cause title — parties, addresses and appearances
C/SCA/13566/2018 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/SPECIAL CIVIL APPLICATION NO. 13566 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 ? ========================================================== E-INFOCHIPS LIMITED Versus ASST. COMMISSIONER OF INCOME TAX CIRCLE 2(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 : 15/10/2018

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

1.

The   petitioner   has   challenged   a   notice   dated   31.3.2018 issued by the respondent ­ Assessing Officer under section 148 of the Income Tax Act, 1961 (“the Act” for short) for reopening   the   assessment   of   the   petitioner   for   the assessment year 2011­2012. 2. Brief   facts   are   as   under.   The   petitioner   is   a   limited company   and   is   engaged   in   I.T.   Enabled   Services   and Software  business. For the assessment year 2011­2012, the petitioner had filed return of income on 29.11.2011 declaring total income of Rs.34.08 lacs (rounded off). Such return was taken in scrutiny. The Assessing Officer passed order under section 143(3) of the Act on 28.2.2014 making certain additions to the income of the assessee. To reopen such assessment, the Assessing Officer had issued a notice dated 28.3.2016. The reasons cited for issuing such notice pertained to the petitioner's eligibility for deduction under section 10B   of the Act. The petitioner challenged such notice   before   the   High   Court   mainly   arguing   that   the petitioner's claim for deduction under such provision was examined   by   the   Assessing   Officer   during   the   original assessment. Same cannot be made the subject matter of reexamination   under   reassessment   proceedings.   High Court allowed the petition by judgment dated 12.6.2017 holding that :

“8. It can thus be seen that  the Assessing Officer was acutely   conscious   of   the   assessee's   claim   of   deduction under   section   10B   of   the   Act   during   the   original assessment. To verify such claim, the Assessing officer had raised certain queries and asked the assessee to provide complete details with respect to such a claim. It was in response  to these  queries that  the assessee  supplied a detailed   reply,   as   noted   above.   Along   with   the   reply, assessee had annexed documents giving further details. It was after undertaking such exercise, the Assessing Officer by   his   order   of   assessment   dated   28.02.2014,   made   a minor disallowance of a sum of Rs. 10,40,714/­ out of the claim of deduction made by the assessee under section 10B of the Act. “

3.

Once   again   the   impugned   notice   came   to   be   issued   in which the following reasons were recorded by the Assessing Officer : “i) The assessee company is engaged in the business of software development and information technology enabled services and production of EVM and VBS board, filed its return of income for AY 2011­12 on 29.11.2011 declaring returned loss at Rs 34,08,157/­. The case was finalized u/s 143(3) of the Act on 28.02.2014 determining loss at Rs. 22,31,544/ ii) 0n perusal of the records, it is seen that the assessee company had claimed deduction u/s 108 amounting to Rs 1.1,22,56,604/­   from   2   units   at   Pune   and   Kandla. However,   huge   losses   from   Head   Office   and   Sales   unit amounting to Rs 94.52 lacs and 31.41 lacs were shown, because of which there was net business loss. I have gone through the specific audit reports furnished by the assessee in respect of 10B claim but it has not given any details as to how the income of 10B units and non­lOB units had been computed, especially the apportionment of common administrative expenses. It is further seen that the assessee had debited Head Office with huge amount of administrative expenses which is much more than what has been debited to other units in spite of the fact that these 10B units were having much higher turnovers. in the audit report also, the assessee has not disclosed as to in what  manner such  general and administrative  expenses have been bifurcated amongst various units. Because of which it is seen that much less general and administrative expenses have been apportioned to the 10B units so as to inflate the claim u/s 108 and thereby claiming losses in operations   from   Head   Oflice.   If   we   take   proportionate amounts in all units, there will be considerable taxable income from Head Office rather than loss. Thus, taxable income has escaped assessment. Further, the assessee has claimed huge losses from sales unit, which by the name Itself would be an adjunct and cost centre of all the units and, therefore, the cost of sales units   should   have   been   apportioned   amongst   all   units which has not been done. Looking at all these facts, I have reason to believe that income has escaped assessment and that too because of assessee's failure to disclose truly and fully all material facts necessary for assessment. Accordingly, it is a fit case for re­opening of the assessment by invoking the provision of section 147 of the Income Tax Act, 1961. Accordingly, notice U/s 148 of the Act is issued.”

4.

After raising the objections to the notice of reopening, the petitioner has filed this petition.

5.

Appearing for the petitioner, learned counsel Shri Soparkar raised the following contentions : 1)   Impugned notice has been issued beyond a period of four years from the end of relevant assessment year. There is no allegation that the assessee had failed to disclose truly and fully all material facts necessary for assessment. Impugned notice is therefore, bad in law. 2)   The entire claim of deduction under section 10B was examined   by   the   Assessing   Officer   in   original   scrutiny assessment. Any attempt on part of the Assessing Officer to   reexamine   this   issue   would   be   based   on   change   of opinion. 3)   In the previous round, High Court had quashed such notice.   Reasons   recorded   by   Assessing   Officer   in   the present case may be different from those cited in previous instances, nevertheless, both pertained to the assessee's claim of deduction under section 10B of the Act. The High Court in earlier judgment held that the assessee's claim of deduction under section 10B was examined in the original assessment   and,   therefore,   reexamination   would   not   be permissible. The same principle would apply in the present case also. 4)   Counsel lastly contended that the reasons proceed on wrong   footing.   Contrary   to   what   is   suggested   by   the Assessing   Officer   in   such   reasons,   in   the   audit   report, break­up of claim of expenditures between the two units of assessee being one which is eligible for deduction under section   10B   and   other   which   is   not   eligible   had   been provided.

6.

On  the  other   hand,  learned  counsel  Mrs.  Mauna   Bhatt opposed   the   petition   contending   that   in   the   original assessment   these     questions   were   not   at   issue.   The assessee had claimed exaggerated expenditure. In relation to the non eligible unit, break­up of the expenditures was not given in the audit report.

7.

As noted, the impugned notice has been issued beyond a period of four years from the end of relevant assessment year.  There is not even a suggestion on record that there was any failure on part of the assessee to disclose truly and fully all material facts. Only on this ground, impugned notice should have been set aside. Nevertheless, there are additional grounds on which we would like to make few comments. We have recorded the reasons. In such reasons, the Assessing Officer principally alleges is disproportionate bifurcation   of   expenditures   between   eligible   and   non eligible units. He is obviously hinting at inflated profit of eligible   unit   and   deflated   profit   of   non   eligible   units. Nevertheless, entire issue pertained to assessee's claim of deduction under section 10B of the Act. In the previous judgment, the High Court had noted that this claim was examined   by   the   Assessing   Officer   in   the   original assessment proceedings. It would therefore, not be open for him to reexamine the claim, may be on another aspect or element of the claim being raised through reassessment proceedings. In the present case, yet another element of the   claim   being   cited   as   a   ground   for   reopening   the assessment.   We   have   noticed   that   during   the   original assessment,   the   Assessing   Officer   had   raised   multiple queries   with   respect   to   this   claim.   In   response   to   that Assessing Officer had given the following reply : “Furnish   complete   details   with   respect   to   the   claim   of exemption u/s. 10B. (Para 35 of notice): We   have   enclosed   two   Audit   Reports   in   Form   56G   in support of our claim u/s 10B for our Pune Unit and Kasez Unit (Anneure'P'). Please note that we have claimed the deduction u/s 10B as under : Unit name Consecutive year of claim Deduction Rs. Pune Unit 7th 10.66.05.096 Kasez Unit 4th 56.51.508 Similar claims of deductions have been allowed in all the earlier years. The details party wise foreign currency sales and receipts are enclosed in a chart form (AnnexureP­1) It will be found that in the Audit Report in form 56G, the auditor has given details unrealized sales Bills. We give in the table below the details of subsequent  receipts non­ receipts   of   the   said   outstanding   sales   Bills.   We   have enclosed   herewith   Annexure   P­2,   the   copies   of   FIRC (Foreign Inward Remittance certificates) issued by Indian Bank in respect of realization of such Bills. In the chart enclosed (Annexure P­3). We have given the details of subsequent realization which is within the time of   six   months   (and   further   extended)   from   the   date   of Invoice as per Reserve Bank of India guidelines. However, we are unable to realize value of following invoices as a

result of which amount of deduction will be reduced by Rs.10,40,714/­ as calculated below : Amount of Total Export Turnover : Rs.19,45,07,450/­ Amount   of   Export   as   reduced   by   unrealized   amount Rs.19,26,08,605/­   Total   Profits   of   the   Business Rs.10,66,05,096/­ Amount   of   Deduction   as   Claimed   in   Form   56G   : Rs10,66,05,096/­ Revised Amount of Deduction Rs.19,26,08,606/­ ­­­­­­­­­­­­­­­­­­­­­­   X Rs.10,66,05,096 = Rs10,55,64,382/­ Rs.19,45,07,450/­ Please note the business of both the Pune and Kasez Units is the same as in earlier years i.e. computer software (as defined in section 10B) and Hardware. The sales Invoices are produced before Your Honour of both the periods in support of the above. We have also enclosed the Unit wise statement of Income (Annexure­P­4) The unit wise Statement of Income shows the computation of Profits of the business each Unit separately. It will be found that MD salary etc has been allocated over all units in equal proportion. The unit wise Profits and Gains of business has been arrived after deducting the allocated MD salary. The unit wise Profits and Gains of Business arrived   at   has   been   considered   for   computing   the deduction u/s 10B (4). The   computation   of   deduction   has   to   be   made   as   per section 10B(4) i.e. Profits of the business of unit x Export Turnover ­­­­­­­­­­­­­­­­­­­­­­ Total Turnover The computation of Export Turnover and total Turnover has been given in the Audit Report u/s 56G. The Audit Report carries the computation of deduction as per section 10B(4). We have claimed the deduction u/s 10B as per the amount mentioned in Audit Report in Form 56G. As such we comply with all the conditions mentioned in section 10B. In view of the above, our claim of deduction u/s 10B is justified   to   the   extent   of   the   amount   realized   from   the seller.”

8.

Thus the claim having been examined by the Assessing Officer during the assessment proceedings, it would not be open for reopening on such grounds.

9.

The   impugned   notice   is   therefore,   quashed.   Petition   is allowed and disposed of. (AKIL KURESHI, J) (B.N. KARIA, J) Raghu

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