CAPGEMINI INDIA PVT.LTD vs. ASST.COMMISSIONER OF INCOME-TAX, AND 2 ORS

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WP/1213/2015HC Bombay06 May 2015Author: HON'BLE SHRI JUSTICE S.C. DHARMADHIKARI, HON'BLE SHRI JUSTICE A. K. MENON17 pages
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What did the High Court hold?

The High Court allowed the writ petition. The Court found that the revenue had failed to adhere to the mandatory pre-conditions set out in the statute and judicial pronouncements. Specifically, the Court noted that the order dated February 12, 2015, rejecting the assessee's objections, was not communicated properly, and the subsequent assessment order dated February 27, 2015, was passed with undue haste, within a period shorter than the four weeks mandated by the Supreme Court in *GKN Driveshafts (India) Ltd.* and this Court in *Asian Paints*. The Court also found that the reasons recorded for reopening the assessment under Section 147 were not sustainable, as the material facts concerning the Section 10A deduction, including the profits and losses of different units, were available to the Assessing Officer during the original assessment. The revenue's attempt to reopen the assessment based on a different opinion on the allowability of the deduction was deemed impermissible. Consequently, the notice under Section 148 and all subsequent proceedings were quashed.

What were the facts?

The assessee, Capgemini India Pvt. Ltd., filed a writ petition challenging a notice under Section 148 of the Income Tax Act, 1961, an order dated February 12, 2015, and a reassessment order dated February 27, 2015. The notice was issued for Assessment Year 2007-08. The petitioner contended that the reassessment proceedings were initiated without proper adherence to legal procedures, specifically citing delays in communication of orders and the haste in passing the assessment order after the objections were rejected. The revenue argued that the reassessment was justified due to the assessee's failure to fully and truly disclose material facts necessary for assessment, particularly concerning the adjustment of losses from Unit IV against profits from eligible units for Section 10A deduction. The High Court noted a pattern of similar procedural lapses by the revenue.

What were the issues?

1. Whether the notice under Section 148 of the Income Tax Act, 1961, and the subsequent reassessment proceedings are valid, considering the alleged procedural irregularities in communication and adherence to judicial pronouncements regarding the period for passing assessment orders after objection rejection (turning on Section 147 and Section 148 of the IT Act). 2. Whether the Assessing Officer had valid reasons to believe that income chargeable to tax had escaped assessment, based on the assessee's disclosure of material facts concerning the claim for deduction under Section 10A of the Income Tax Act, 1961 (turning on Section 147 of the IT Act). Assessee's Contentions: The assessee argued that the revenue failed to follow the directions of the Supreme Court in *GKN Driveshafts (India) Ltd. vs. Income Tax Officer* and this Court in *Asian Paints vs. Deputy Commissioner of Income Tax*, by not allowing a four-week period after communicating the order rejecting objections before passing the assessment order. The assessee also contended that all material facts regarding the Section 10A deduction were disclosed during the original assessment, and the revenue was merely seeking to revisit a concluded issue. Revenue's Contentions: The revenue contended that the notice under Section 148 was justified because the assessee failed to disclose fully and truly all material facts necessary for the assessment, specifically regarding the adjustment of losses from Unit IV against profits of other eligible units for the purpose of claiming deduction under Section 10A.

Which sections of the Income-tax Act were involved?

Section 148,Section 147,Section 10A,Section 143(3),Section 144C(13)

AI-generated summary — verify with the full judgment below

WPL.944.2015.901.doc IN  THE  HIGH  COURT  OF  JUDICATURE  AT  BOMBAY ORDINARY ORIGINAL CIVIL JURI ICTION WRIT PETITION (L) NO. 944 OF 2015 Capgemini India Pvt. Ltd. } Petitioner versus Asst. Commissioner of Income Tax } Circle 14(1)(2), Mumbai and Ors. } Respondents Mr.   Percy   Pardiwalla­Senior   Counsel   with Mr.Jitendra   Jain   and   Mr.   P.   C.Tripathi   i/b. Mr.Atul K. Jasani for the Petitioner. Mr.   Anil   Singh­Additional   Solicitor   General with Mr. Suresh Kumar and Mr. Arvind Pinto for the Respondents. CORAM :­ S. C. DHARMADHIKARI & A. K. MENON, JJ. DATED :­ MAY 6, 2015 ORAL JUDGMENT :­ (Per S.C.Dharmadhikari, J.) This Writ Petition under Article 226 of the Constitution of India challenges the notice under section 148 of the Income Tax Act, 1961 (for short “the IT Act”), copy of which is at Annexure 'A' and the order dated 12th February, 2015 (Annexure 'AB') and reassessment order dated 27th February, 2015 (Annexure 'AC'). 2) On   the   earlier   occasion   we   had   extensively   heard  both sides.     We   have   also   heard  both   sides   today.     In   the   light   of   the agreement and consent of both sides, we dispose of this Writ Petition finally. CNR No : HCBM020090742015 WPL.944.2015.901.doc 3) Rule.  Respondents waive service. 4) On 21st  April, 2015, we had passed an order inviting the attention of the Respondents to the averments in the Writ Petition and particularly in para 12. Thereafter, we indicated to the Respondents that in view of authoritative pronouncements by this Court as also by the   Hon'ble   Supreme   Court   in   the   case   of  Asian   Paints   vs.   Deputy this   direction   of   the   Division   Bench   of   this   Court   and  the   Hon'ble Supreme   Court   has   not   been   followed,   we   had   called   upon   the Respondents' Counsel then appearing to take appropriate instructions and inform the Court as to whether that assessment order should be set aside by consent or appropriate corrective steps would be adopted. 5) The matter was placed today for passing orders, because we were not happy with the stand taken by the Respondents in the affidavit in reply.   We had also noticed that in several matters the WPL.944.2015.901.doc Respondents   have   been   adopting   similar   course.     There   could   be difficulties in meeting certain deadlines and particularly of 31st March, but that does not justify that in every case the Respondents defy the directions in the Judgments of the Hon'ble Supreme Court and of the Division Bench of this Court.   We could have appreciated a case of genuine difficulty and brought forward fairly and completely, but what we find in this case is that the notice under section 148 of the IT Act is dated 27th  March, 2014. That was served on the Petitioner, but the reasons which are said to be recorded, annexed to this notice, came to be furnished to the Petitioner on 29th  October, 2014. Thereafter, the Petitioner raised the objections on 12th  December, 2014. The order passed by the Respondents, rejecting these objections, is dated 12th February, 2015. The Respondents were obliged to abide by the above directions and not passed an order of assessment for a period of 4 weeks from the date of service of this order rejecting the objections.  In the instant case, if that order itself was served on 10th  March, 2015, then,   this   haste   in   passing   an   assessment   order   within   four   weeks cannot be justified.  If the notice is dated 27th March, 2014, then, the period till 27th March, 2015 was enough to conclude the steps and in accordance with law.  The Respondents having delayed the proceedings and at their own end, it would not be open for them to justify their conduct and complete disregard to the orders and directions which are WPL.944.2015.901.doc binding on them.  In such circumstances, we are not in agreement with the contention that the assessment order having now been passed, the Writ Petition should not be entertained and the Petitioner must be relegated to the statutory remedies.   We are of the firm opinion that having regard to the factual statements in para 12 of the Writ Petition and there being absolutely no reply thereto in the affidavit in reply, this contention of the Respondents cannot be accepted. 6) On the earlier occasion, the learned Additional Solicitor General had also assured us that corrective steps would be taken and hereafter none of the Assessees would be visited with the consequences that are faced by the present Petitioner.   We are informed today that appropriate   corrective   steps   have   been   taken   and   the   Principal Commissioner has issued clear directives to all Assessing Officers to abide by the law laid down by the Hon'ble Supreme Court in the case of assessment year 2007­08. The reasons for the same are recorded at page 198 of the paper book.  We have proceeded on the footing that these reasons have been recorded on 27th March, 2014 and they reflect the satisfaction of the Assessing Officer. 8) In the present case, the Assessing Officer has issued notice under  section   148   of  the  IT   Act   to   reopen   the   assessment   for  the assessment year 2007­08. Going by this admitted factual position, it is evident that the Assessing Officer could have reopened the assessment only on recording his satisfaction that the income chargeable to tax has escaped assessment for the relevant assessment year by reason of the failure of the Assessee to disclose fully and truly all material facts necessary for his assessment for that assessment year.   The reasons recorded and copy of which is at Annexure 198 of the paper book read as under:­ “ANEXURE M/s. Capegemini India Pvt. Ltd. Reason for issue of notice u/s 148 of the Income Tax Act, 1961 A. Y. 2007­08 In   this   case,   the   assessee   company   filed   its   return   of income  for  A.  Y. 2007­08  on  02.11.2007   declaring  income of Rs.2,76,74,434/­ under normal provision of the Act.   Then the case was selected for scrutiny and the assessment was completed WPL.944.2015.901.doc u/s 143(3) r.w.s. 144C(13) of the Act on 14.10.2011 assessing the total income at Rs.115,90,05,170/­. The   assessee   company   is   engaged   in   business   of development   and   export  of   software.     During   the  year   under consideration, it is seen that the assessee company had claimed deduction u/s 10A of the Act for its Unit II & III without setting off losses of Unit IV from the profits derived by the eligible units.  As per the provisions of section 10A of the Act, deduction u/s 10A of the Act is allowable on the net profit derived by the assessee company from eligible units after setting off of losses from other eligible units. I have therefore, reasons to believe that the failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment, within the meaning of the provisions of   section   147   of   the   Income­tax   Act,   1961,   income   of Rs.5,14,12,534/­ chargeable to tax has escaped assessment.  This is, therefore, a fit case for issue of notice u/s 148 of the I. T. Act, 1961.” 9) The Petitioner raised a specific objection by a letter dated 12th  December, 2014. The Petitioner pointed out that it had filed a return of income for assessment year 2007­08 on 2nd November, 2007. The   admitted   factual   position   was   that   it   declared   an   income   of Rs.2,76,74,434/­ under normal provision of the IT Act.  The case was selected for scrutiny and the assessment was completed under section 143(3) read with section 144C(13) of the IT Act on 14th October, 2011 assessing   the   total   income   at   Rs.115,90,05,170/­.     The   Petitioner company is engaged in the business of development and export of software.  The Petitioner pointed out that the return of income, which was furnished for the assessment reflected the deduction under section 10A of the IT Act.  There is a Pune Unit of the Petitioner and there is a WPL.944.2015.901.doc Hyderabad Unit.  The Petitioner pointed out that the deduction under section   10A   of   the   IT   Act   was   elaborated   in   Schedule   10A.     The deduction in  respect of Units located in Software Technology Park, namely Undertaking No. 1 and Undertaking No. 2 have been disclosed with   figures.     In   the   Schedule   'BP',   “Income   from   Business   or Profession”, the deduction under section 10A of the IT Act was disclosed and   it   was   pointed   out   that   during   the   course   of   assessment proceedings, there was a questionnaire and which was forwarded to the Petitioner Assessee.  This was attached to a notice under section 142(1) of the IT Act dated 14th  July, 2010. That raised a specific query in relation to the deduction claimed under section 10A of the IT Act.  The query is also reproduced in the Petitioner's letter dated 12th December, 2014. The response to this query is contained in the Petitioner's letter dated 22nd  November, 2010. The Petitioner stated that it filed three audit reports in Form 56F in respect of the three software units, which were eligible for deduction under section 10A.  The said audit reports are enclosed to this letter as Annexures 1 to 3. Thereafter, the relevant particulars in the audit reports were highlighted.  Thus, the Pune II Unit is known as Unit II and the claim is raised for the 6th  year, where as Hyderabad Unit is known as Unit III and the claim is raised for the 4th year.  Chennai Unit is known as Unit IV and the claim raised is in the 7th year in relation thereto.   The Petitioner company set off the losses of WPL.944.2015.901.doc Unit IV (Chennai) against the profits of Unit I, namely, the Unit of Pune. The Petitioner also pointed out that there was a draft assessment order under section 143(3) r.w.s. 144C(1) dated 31st  December, 2010. The paragraphs of the draft assessment order were reproduced.  Thus, the complete claim of deduction was reflected in all the documents.  The loss of the Chennai Unit has not been set off against the profits of Units II and III and therefore, impliedly the loss of Unit IV has been set off against the profits of Unit I, because that Unit has completed its 10 years of deduction under section 10A of the IT Act and therefore, not eligible for the said deduction.  The assertion of the Petitioner was that complete facts were before the Assessing Officer during the course of the original assessment.   They have been referred in the course of passing of the assessment order.  If there were no particulars nor was the disclosure complete, truly and fully pertaining to material facts, it would not have been possible for the Assessing Officer to make an assessment and pass an assessment order.  The Petitioner pointed out that though it has been called upon to comply with the notice under section 148(1) of the IT Act, it is incumbent upon the Respondents to deal   with   the   objections   and   pass   a   speaking   order   thereon.     The request to pass such an order was made on 23rd January, 2015. It was also brought to the notice of the Assessing Officer that the steps in furtherance of the impugned notice should not be taken so long as the WPL.944.2015.901.doc objections are pending and not dealt with by the speaking order.  The course of events are set out at page 215 of the paper book, which is a copy of the letter dated 9th February, 2015. Thereafter, the Petitioner pointed out on 2nd March, 2015 that it is not possible for them to waive their right to seek redressal against the order, which is stipulated by law, namely of dealing with their objections.  They, therefore, informed the Assessing   Officer   that   if   he   proceeds   and   passed   an   order   of reassessment in  furtherance of  the  impugned notice,  that   course  is impermissible.  He should first deal with the objections and in the event he is inclined to reject them, he shall not proceed further for a period of 4 weeks.  That is equally the communication at page 226 of the paper book. 10) However, we find that while the objections were dealt with, an order has been passed.  That order reads as under:­ “ GOVERNMENT OF INDIA MINISTRY OF FINANCE DEPARTMENT OF REVENUE OFFICE OF THE ASSISTANT COMMISSIONER OF INCOME TAX­CIRCLE 14(1)(1) & 14(1)(2), ROOM NO. 460, AYAKAR BHAVAN, MAHARSHI KARVE MARG, NEW MARINE LINES, MUMBAI – 400 020. TEL : (022) 22039131 EXTENTION 2460 No. ACIT/14(1)(1)/14(1)(2)/MUM/capegemini/2014­15        date : 12­02­2015 To, CAPEGEMINI INDIA PRIVATE LIMITED, SEP 2, GATE NO. 2, PHIROJSHA NAGAR, WESTERN EXPRESS HIGHWAY, VIKHROLI EAST, MUMBAI – 400 079 WPL.944.2015.901.doc Sir, Sub :  Removal of objections in your case for the A.Y. 2007­08 – reg. Ref  :

Your letter dated 09­02­2015

Please refer to the above. Vide   your   letter   dated   09­02­2015,   you   have   objected   to   the reassessment proceedings pending in your case for the A. Y. 2007­

08.

Your submission has been perused.  However, the objection is not acceptable.  In this regard, the objection is replied/removed as under:

1.

Regarding Exemption claimed under section 10A  :­ You have claimed full exemption under section 10A with respect to profits earned from Units II and III without setting off the losses of Unit   IV.     This   is   not   in   order,   following   the   decision   of   the Honorable Karnataka High Court in the case of Yokagawa India Private Limited dated 08­11­2011. Further, the Department is in appeal   before   the   Honorable  Supreme  Court  in  respect  of   the deduction claimed under section 10A in your own case for the Assessment year 2005­06. To keep the issue alive, the deduction claimed by you is not allowable for this year also.

2.

Amalgamation with M/s. Accurum India Private Limited :­ According to information received in this office; it is seen that M/s.Kanbay Software  (India) Private Limited  has amalgamated with M/s. Accurum India Private Limited in the year 2007 vide order of the High Court of Madras dated 23­03­2007 sanctioning the scheme of amalgamation with effect from the appointed date 01­04­2006 subject to approval of the scheme by the Bombay High Court   Vide   Bombay   High   Court   order   dated   08­02­2007;   the amalgamation date was 01­04­2006; which is the appointed date. Subsequently, M/s. Kanbay Software (India) Privte Limited has changed its name to M/s. Capegemini India Private Limited (the assessee).     You   were   asked   to   submit   complete   details   of   the amalgamation vide notice under section 142(1) dated 05­02­2015. However, you have failed to submit any details called for regarding this amalgamation.  As per the scheme of amalgamation, the whole of   the   undertaking   of   M/s.   Accurum   India   Private   Limited [Transferor   Company]   comprising   its   business   all   assets   and liabilities of whatsoever nature and wheresoever situated shall be transferred and vested in the Transferee company (yourself).  All the   profits   or   income   accruing   or   arising   to   the   Transferor Company or expenditure or losses arising to or incurred, including the effect of taxes by the Transferor Company with effect from the WPL.944.2015.901.doc appointed dated shall for all purpose and intents be treated and be deemed to be and accrue as the profits or incomes or expenditure or losses of Kanbay.  From the Balance sheet submitted by you for the period under consideration, there is no increase/change in the authorized share capital and in the issue, subscribed and paid up capital as on 31­03­2006 and as on 31­03­2007. The changes in the assets and liabilities could not be verified since no accounts of M/s. Accurum India P. Ltd. were made available by you.  However, it   is   also   seen   that   you   have   claimed   amalgamation   expenses totaling   to   Rs.22,01,126/­   for   your   amalgamation   with   M/s. Accurum India Limited.   Hence, an ad­hoc disallowance in this respect is proposed to be made.

3.

Regarding deduction claimed under section 35DD  : You have claimed deduction of professional expenses of Rs.2201126/­ incurred in connection with amalgamation with Accurum India Private   Limited   as   a   revenue   expense   citing   Supreme   Court judgment in the case of Bombay Dyeing & Manufacturing Co. Ltd. [219 ITR 521 SC 1996].  This is not in order, since the decision relied upon by the assessee is prior to the introduction of specific section 35DD which provide for amortization of such expenses and

therefore not applicable to the assessee.

4.

In your case, there is enough tangible material in the hands of the assessing Officer to reopen the assessment.   There being reasons to believe that income has escaped assessment, the same was reopened for scrutiny under section 147 of the Act.

5.

In the light of the above facts, the objections raised by the assessee is dismissed. [Jessie A. Ninan] Assistant Commissioner of Income tax, 14[1][2], Mumbai” 11) It is in the light of the above undisputed factual position that we have heard Mr. Pardiwalla –   learned Senior Counsel for the Petitioner   and   the   learned   Additional   Solicitor   General   for   the Respondents. WPL.944.2015.901.doc 12) Mr. Pardiwalla's contention is that the notice under section 148 is totally vitiated as the Assessing Officer has failed to record the reasons mandated by the proviso to section 147. That proviso mandates that in the event the assessment is sought to be reopened after 4 years, then, the satisfaction in terms of the proviso must be recorded.  That satisfaction must be reflected in the reasons accompanying the notice. Mr. Pardiwalla has invited our attention to the reasons to submit that far from indicating as to how the assessment already made can be faulted, the   Assessing   Officer   has   failed   to   even   record   the   mandatory satisfaction.  That is a pre­condition, inasmuch as, the reasons to believe cannot merely chant the words of the section.  It must be indicated as to how the Assessee failed to disclose fully and truly all material facts necessary for the assessment.   Mr. Pardiwalla criticised the reasons recorded by terming them as nothing but after thought or based on change   of   opinion.     The   Assessing   Officer   proposed   to   reopen   the assessment so as to deal with the return of income furnished and for the assessment year 2007­08 afresh insofar as the deduction under section 10A  of  the  IT  Act is  concerned.   Further,  it  is  alleged that  was  a deduction not allowable and permissible.  The Respondents, according to Mr. Pardiwalla, can take recourse to other legal provisions and in the very statute.  However, to revisit this deduction and based on a different opinion  is  clearly  impermissible in  law.   He  submits  that   once  the WPL.944.2015.901.doc deduction is allowed and which was otherwise also permissible in law, then, the impugned notice cannot be sustained.  It must be quashed and set aside for the failure to comply with the mandatory pre­condition. The reasons recorded did not reflect that there is any failure on the part of the Petitioner to disclose fully and truly all material facts necessary for the assessment.  Mr. Pardiwalla sought to justify the course adopted by the Petitioner/Assessee during the course of the original assessment of the Petitioner/Assessee to disclose truly and filly all material facts relevant to the assessment year. 15) Upon hearing both sides and perusing the Writ Petition and all Annexures thereto so also the affidavit in reply, we fail to understand as to how the Respondents justify the issuance of the notice under WPL.944.2015.901.doc section 148 of the IT Act and by referring to such details including of the claim of deduction under section 10A of the IT Act.  If these details and pertaining to deduction in question were not furnished and were not available with the Assessing Officer, then, one fails to understand as to from where the data and the computation has been taken and for reference by the Respondents themselves.  In the reasons recorded, it is clear that the Assessing Officer is aware that the Petitioner Assessee is engaged in the business of development and export of software.  The Assessing   Officer   was   aware   of   the   Units   set   up   by   the Assessee/Petitioner before us.  He has derived the figures of profits and losses from the relevant records and the information, some of which was   supplied   and   furnished   by   the   Petitioner   itself.     In   these circumstances and when material facts relevant to the assessment year were disclosed and were on record, then, one fails to understand as to why this notice has been issued.  From the reasons itself, it is apparent that it is issued to revisit this claim of deduction under section 10A of the   IT   Act   and   as   put   forward   by   the   Petitioner/Assessee.     If   the deduction under section 10A of the IT Act is allowable on the net profit derived by the Assessee company from eligible units, after setting off lossess   from   other   eligible   units,   then,   it   is   apparent   that   all   the particulars and profits were before the Assessing Officer at the time of the original assessment.  The Petitioner has, while disputing the reasons WPL.944.2015.901.doc recorded and raising objections thereto, pointed out in details as to how the relevant facts were before the Assessing Officer.  We do not find any material to the contrary and which falsifies the Petitioner's assertions in the letter dated 12th December, 2014 raising specific objections to the reasons recorded for reopening the assessment under section 147 of the IT   Act.     The   affidavit   in   reply   is   completely   silent   with   regard   to furnishing of these details and by the Petitioner.  From the affidavit in reply, we have taken specific paragraphs, where the Petitioner's version before the Assessing Officer in the original assessment though accepted by   the   Assessing   Officer,   he   is   faulted   for   not   having   taken   into consideration   certain   aspects   of   this   deduction.     If   the   Petitioner allegedly did not give information regarding the losses of the Unit IV and did not adjust the losses of Unit IV with the profits of other units and therefore the order in that behalf is termed as erroneous, then, this is a clear case of revisiting this claim.  Now, a different opinion is held by the Respondents and for which they want to reopen the assessment. Such a course is clearly impermissible. 16) Having   referred   to   the   undisputed   factual   materials   on record   and   finding   that   there   is   no   justification   for   reopening   the assessment that we have no alternative but to allow this Writ Petition. Once we find that the mandatory pre­condition and as set out in the statute has not been abided by, then, the notice under section 148 of the WPL.944.2015.901.doc IT Act and all steps in furtherance thereof cannot be sustained. 17) The Writ Petition is accordingly allowed.   Rule is made absolute in terms of prayer clause (a).  There would be no order as to costs. (A.K.MENON, J.)                       (S.C.DHARMADHIKARI, J.) Powered by TCPDF (www.tcpdf.org)

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