INDIAN RARE EARTHS LTD.,MUMBAI vs. DCIT, CIR. 1 (2)(1), MUMBAI

On verification case record seen that the assessee had debited village development expenses of Rs. 1,69,32,218/- under the head other expenses and the same was allowed in the scrutiny assessment. AO has failed to examine that the expenditure relative to village development is no way connected to the business activity of the assessee co. As this expense is not related to the business activity of the assessee, the same is not allowable while computing the business income of the assessee. This resulted in escaped of business income by Rs.1,69,32,2 18/- 3. i. The assessee has also debited following capital expenses to P & L A/c and the same were incorrectly allowed – 1. Land acquisition expenses: Rs. 43,53,406/- 2. Write off of CWIP/advances etc: Rs. 4,24,094/- ) ii. Further it is also seen that the assessee had provided for pay revision a sum of Rs. 2937.82 lakh on estimated basis (vide point 4 under notes to accounts) and the same was added back while computing the income. However, as seen from the cash flow statement for operating activities, salary provision for revision created was at Rs. 3810.92 lakh. AO has failed to examine as to why Rs. 2937.82 lakh was only added back instead of Rs. 3810.92 lakh. Hence, there is escapement of income to the turn of Rs. 873.10 lakh. In view of the above fact, I am satisfied that there is return that an amount of Rs. 10,90,19,718/- chargeable to tax has escaped assessment and it is a fit case for re- opening the assessment u/s. 147 of the I.T.Act. Therefore proceeding u/s. 147 is initiated. Issue notice u/s. 148 of the I.T.Act accordingly. Sd/- (P.D.CHOUGULE) Dy. Commissioner of Income tax-1(2) Mumbai.

Assessment year: 2010-11 Page 3 of 10 Ref: IRE/HO/FIN/IT AY 2010-11/120 Date: 11th November 2014. Dy. Commissioner I.Tax, Range 1(2), Room No.535, Aayakar Bhavan MK Road Mumbai-400020. Dear Sir, Sub: Notice u/s 148 of the I T Act for A.Y.2010-11 With reference to the subject, your notice dated 16/10/2014 was received by us on 21/10/2014. In this regard we would like to mention that no income has escaped assessment, as all the required details were furnished to the assessing officer during the course of assessment, details are as follows: During the course of assessment company, vide letter IRE/HO/FIN/ITIA Y 2010- 11/120 dated 23 October 2012 made a detailed submission with respect to the information calied for in the questionnaire given, wherein details of other expenses covering 'Village Development Expenses, Land Acquisition Expenses and Write-off CWIP/Advances' were provided. The said issues were discussed during the assessment proceedings and accordingly allowed as business expenditure by the assessing officer (copy of the said submission attached for ready reference). The company during the year had debited Rs.12133.09 lakh as Salary, Wages and Allowances, which is evident from the schedule 12 of our Annual Report. The said figure includes Rs. 2937.82 lakh being the provision created by the company towards wage revision arrear payable to workmen. This was added back while computation of tax liability, as the settlement with unions had not taken any final shape during the year. Purpose of preparing Cash Flow statements is to assess the ability to generate cash and cash equivalents and the need to utilize those cash flows. So cash flow statement and computation of total income are under different footing. While preparing the operating profit amount for Cash-flow statement for the year provision created in earlier years with respect to executive pay revision was taker, instead of taking only current years workers pay revision provision figure which was debited to the Profit & Loss Account. The earlier year‟s provisions were offered for tax in the respective years and hence there is no abnormality. (Copy of the previous year‟s annual report notes are attached for reference) In the light of the above explanation and evidence produced, we request your to drop the notice served u/s. 148.

5. None of these submissions however, impressed the Assessing Officer. He rejected these submissions and observed as follows:-

Assessment year: 2010-11 Page 4 of 10 4. The objection raised by the assessee to drop the notice served u/s 148 of the I T Act is duly considered but not found to be acceptable for the reason stated as under: 4.1 With effect from 01.04.1989 i.e FY 1989-90 only condition before issue of notice u/s. 148 is that the Assessing Officer should have reason to believe that income chargeable to tax has escaped assessment, irrespective of any failure on part of the assessee. It does not require that at the very outset there should be an established factum of escapement. At the stage of issue of notice only question is whether the material prima facie shows escapement. Whether the material would conclusively prove the escapement, is not the concern at this stage. 4.2 The Honourable Supreme Court of India in the case of Assistant Commissioner of Income Tax Vs. Rajesh Jhaveri Stock Broker Pvt. Lid. delivered on 23 May 2007 has stated as under: "The word reason in the phrase reason to believe would mean cause or justification. If the Assessing Officer has cause or Justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment. The expression cannot be read to mean that AO should have finally ascertained the fact by legal evidence or conclusion. The Function of the Assessing Officer is to administer statute with solicitude for the public exchequer with and inbuilt idea of fairness to taxpayer.” "At the Initiation stage, what, is required is reason to believe, but not the established fact of escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief. Whether the materials would conclusively prove the escapement is not the concern at that stage." "If the AO for whatever reason has reason to believe that income has escaped assessment it confers jurisdiction to reopen the assessment." 4.3 In this case the AO has very elaborately recorded the reasons before issue of notice u/s. 148 which has been duly supplied to you. The AO has clearly narrated the facts and material on which the belief that income has escaped assessment is based. The belief is based on relevant material and reasons were formed in good faith. 4.4 As the formation of 'reason to believe' is a prerequisite to enable the AO to invoke S. 147, let us touch upon the meaning of this phrase. The Allahabad High Court in the case of Ganga Prasad Maheshwari, 139 ITR 1043 dissected the phrase and made some noteworthy observations. It noted that Reason means cause or justification whereas Believe means accept as 'true' or to have faith in it must have justification. The reasons recorded or the documents available must show nexus that in fact they are germane and relevant to the subjective opinion formed by the Assessing Officer regarding escapement of income. At the same time, it is not the requirement that the Assessing Officer should have finally ascertained escapement of income by recording conclusive findings as alleged by the assessee. The final ascertainment takes place when the final or reassessment order is passed. It is enough if the Assessing Officer can show tentatively or prima facie on the basis of the reasons recorded and with reference to the documents available on record that income has escaped assessment.

Assessment year: 2010-11 Page 5 of 10 4.5 Recently the Allahabad High Court in Desh Raj Udyog V/s ITO (318 ITR 6) while dealing with the question of validity of issue of notice under section 148 of the Act held as under: "At the stage of issue of notice under section 148 of the Income Tax Act, 1961 the notice can challenge the existence of the reason to believe that income has escaped assessment. The question as to whether the material is sufficient for making the assessment u/s 147 could not be gone into at the time of issuance of notice. The A.O. while reassessing has to decide the matter in the light of the material already in his possession as well as fresh material procured as a result of the enquiry which may be considered necessary". (underlined for emphasis) The reasons for initiating the proceedings u/s 147 as discussed above are unquestionably sufficient. The Hon'ble Supreme Court in the case of Raymond Woollen Mills Limited. Vs. Income-Tax Officer And Others (236 ITR 34) held that _ _ _ “We have only to see whether there was prima facie some material on the basis of which the Department could reopen the case. The sufficiency or correctness of the material is not a thing to be considered at this stage. We are of the view that the court cannot strike down the reopening of the case in the facts of this case. |It will be open to the assessee to prove that the assumption of facts made in the notice was erroneous. The assessee may also prove that no new facts came to the knowledge of the Income- tax Officer after completion of the assessment proceeding. We are not expressing any opinion on the merits of the case. The questions of fact and law are left open to be investigated and decided by the assessing authority. The appellant will be entitled to take all the points before the assessing authority."

6. It was in this backdrop that the reassessment was carried out. Aggrieved inter alia, of the very reopening of the impugned reassessment proceedings, assessee carried the matter in appeal before the CIT (A) but without any success. Learned CIT (A) upheld the reopening of assessment and observed as follows:-

Assessment year: 2010-11 Page 6 of 10 5. I have considered the assessment order made u/s. 143(3) of the Act dated 05.02.2013, the reassessment order u/s. 143(3) rws 147 of the Act dated 29.03.2016, the submissions made by the appellant and the decisions cited. 5.1 The appellant has contended that issue of notice cannot be held to be valid since in this case appeal proceedings in respect of first assessment u/s143(3) were pending before the ITAT. This contention is found to be without any merit, in view of third proviso below section 147 of the Act, as appeal was not pending before the ITAT on any of the matters in respect of which the assessment has been reopened. 5.2 The appellant has further contended that this reopening is not valid as it amounts to change of opinion since it had furnished the details called for by the AO in respect of Other expenses vide letter dated 23.10.2012 and AO has passed the assessment order u/s 143(3) after considering those details, which included details of a) Capital WIP written off, b) Landacquisition expenses and c) Village Development expenses. It has been submitted that the details of cash flow was submitted as part of the audited accounts. 5.2.1 In this regard, I find that during the course of original assessment proceedings, the AO had asked the appellant company to furnish details with supporting documentary evidence in respect of seven points i.e. details of disallowance u/s.14A, Loss on non-moving stores, TDS on rent and commission, details of other expenses, profit on sale of fixed assets, provision for income tax and for wealth tax, profit on sale of fixed assets. The appellant submitted a reply on 23.10.2012 and has enclosed a write up on details of disallowance u/s14A as Annex 1, a write up on details of loss on non-moving stores in Annex 2. However, in respect details of other expenses it has submitted annexure 3 in three pages which only contain a break up of various head wise expenses under 17 heads and over 110 sub-heads. The assesse has not given details of the nature of these expenses, or the supporting evidence, as called for by the AO. Thus, the claim of the appellant that AO had passed the assessment order after forming an opinion On the nature and admissibility of the claims under the head a) Capital WIP Written off, b) Land acquisition expenses and c) Village Development expenses is found to be not tenable. To form an opinion on such claims it is necessary to consider the details of such claim, which prima facie appear be not related to business of assesse or of capital in nature. Assessee has not furnished supporting evidence or details of these expenses by way their ledger accounts with narration, Thus, while the AO has considered the write up on 14A and non-moving stores and has made some disallowance in the first assessment order he seems to have overlooked the above said three expenses, which prima facie appear to be not allowable, out of a list of over 110 expenses. As per the provisions of the Act, assesse has to justify the Claim of its expenses. It is also a fact that no specific query was raised by the AO in respect of the above said three expenses and no discussion has been made by the AO in the assessment order. 5.3. Thus, the decisions cited by the appellant are distinguishable on its peculiar facts. In the case of Aroni Commercial Ltd 393 ITR 673, the AO had asked a specific question on the claim of capital gains which was considered by the AO in that case. In the case of SBI vs ACIT, WP No. 271 & 278 of 2018 in the High Court of Bombay, the claim for deduction in respect of provisions was qualified in the noted to accounts that it was made in accordance with the RBI guidelines. Thus, in my considered opinion, the facts of this case is more like the case of i) Export Credit Guarantee Corporation vs Additional CIT 350 ITR 651 where in the AO had overlooked/ignored a particular claim and ii) the case of Kalyanji Mavji & Co. 102 ITR 287 (SC) where the case was reopened on the basis of material already on record. In the Assessment year: 2010-11 Page 7 of 10 present case, the AO, after going minutely through the details of the other expenses, was of prima facie view that the expenditure relating to village development expense cannot be said to be related to business of the assesse which was engaged in the business of mineral separation and processing of rare earth. Similarly, it was noted that that the expenses claimed under the head Land acquisition and write off of Capital work in progress/advances was capital in nature. The appellant had not disclosed the supporting evidence and details of these expense, although in the query letter dated 16.10.2012, AO had called for supporting documentary evidence also. The AO also noted a difference of Rs.873 lacs between the provision for pay revision added back in computation of income and in the provision reported in flow of funds. Thus, the reopening of thee assessment, after duly recording the reasons is found to be in order and it cannot be said to be a case of change of opinion. The additional ground (Ground No. 5) is hereby dismissed.

9. Let us now look at the reasons recorded for reopening the assessment. So far as land acquisition expenses of Rs. 43,43,406/- and write off of CWIP/advances of Rs. 4,24,094/-, these issues are covered by decisions of co-ordinate benches, in assessee’s own case, for the preceding years, and that is the basis on which relief has been granted by the learned CIT(A) which is not even called into question. It is thus ex facie incorrect to say that these expenses were “incorrectly allowed”. So far as alleged income escapement of Rs. 873.10 lakhs, on account the fact that “salary provision created was Rs. 3,810.92 lakhs, the AO has failed to examine why Rs. 2937.82 lakhs was added back instead of Rs. 3,810.92 lakhs”, assessee has duly explained that Rs. 2,937.82 lakhs was added back as the settlement did not fructify, and as for Rs. 3,810.92 lakhs it was already offered to tax in earlier year. This position was duly explained while objecting to reopening the assessment the Assessing Officer did not fault the explanation and yet proceeded to reopen the assessment. What was added back (i.e. Rs. 2,937.82 lakhs) was precisely what was debited for provision (i.e. Rs 2,937.82 lakhs) and it has no connection whatsoever with Rs. 3,810.92 lakhs which had no role in the profit and loss account. An amount picked up from cash flow statement can have no bearing on “adding back” the amount debited in the profit and loss account but not claimed as deduction in computation of income. It is only elementary that the reasons recorded for reopening the assessment are to be read as they exist and nothing can be added to and deleted from the same, as held by Hon’ble jurisdictional High Court in the case of Hindustan Lever Ltd vs R. B. Wadkar [(2004) 268 ITR 332 (Bom)]. Suffice to note, therefore, that the reason recorded did not lead to the inference that income has escaped assessment. That leaves us with the alleged escapement of income of Rs. 1,69,32,218/- on account of village development expenses. The material on record before the Assessing Officer clearly showed that these expenses were incurred as a responsible corporate citizen and in furtherance of bonafide business interests as also implementation of the directions of the Government from time to time. All the details were before the Assessing Officer and it was a conscious call of the Assessing Officer not to disallow the expenditure in question. The limitation on allowability of expenses incurred on corporate social responsibility, even if it be so treated, was not in existence in this assessment year. In case allowance of deduction for such expense is not alien to income tax Assessment year: 2010-11 Page 8 of 10 jurisprudence as evident from the following observations in a co-ordinate bench decision in the case of Hindustan Petroleum Corp Ltd vs DCIT [(2005) 96 ITD 186 (Mum)]:- 7. We find that as held by Hon‟ble Karnataka High Court in the case of Mysore Kirloskar Ltd. v. CIT [1987] 166 ITR 8361, while „the basic requirements for invoking sections 37(1) and 80G are quite different‟, „but nonetheless the two sections are not mutually exclusive‟. Thus, there are overlapping areas between the donations given by the assessee and the business expenditure incurred by the assessee. In other words, there can be certain amounts, though in the nature of donations, and nonetheless, these amounts may be deductible under section 37(1) as well. Therefore, merely because an expenditure is in the nature of donation, or, to use the words of the CIT(A), „promoted by altruistic motives‟, it does not cease to be an expenditure deductible under section 37(1). In Mysore Kirloskar Ltd.‟s case (supra), Their Lordships have observed that even if the contributions by the assessee is in the forms of donations, but if it could be termed as expenditure of the category falling in section 37(1), then the right of the assessee to claim the whole of it as a deduction under section 37(1) cannot be declined. What is material in this context is whether or not the expenditure in question was necessitated by business considerations or not. Once it is found that the expenditure was dictated by commercial expediencies, the deduction under section 37(1) cannot be declined. As to what should be relevant for examining this aspect of the matter, we may only refer to the observations of Hon‟ble Supreme Court in the case of Sri Venkata Satyanarayna Rice Mill Contractors Co. v. CIT [1997] 223 ITR 1012: *. . . any contribution made by an assessee to a public welfare fund which is directly connected or related with the carrying on of the assessee‟s business or which results in the benefit to the assessee‟s business has to be regarded as an allowable deduction under section 37(1) of the Act. Such a donation, whether voluntary or at the instance of the authorities concerned, when made to a Chief Minister‟s Drought Relief Fund or a District Welfare Fund established by the District Collector or any other fund for the benefit of the public and with a view to secure benefit to the assessee‟s business, cannot be regarded as payment opposed to public policy. It is not as if the payment in the present case had been made as an illegal gratification. There is no law which prohibits the making of such a donation. The mere fact that making of a donation for charitable or public cause or in public interest results in the Government giving patronage or benefit can be no ground to deny the assessee a deduction of that amount under section 37(1) of the Act when such payment had been made for the purpose of assessee‟s business.

8. In the case of CIT v. Madras Refineries Ltd. [2004] 266 ITR 1701, Hon‟ble Madras High Court has upheld deductibility of the amount spent by the assessee even on bringing drinking water to locality and in aiding local school. While doing so, Their Lordships observed as follows: The concept of business is not static. It has evolved over a period of time to include within its fold the concrete expression of care and concern for the society at large and the locality in which business is located in particular. Being a good corporate citizen brings goodwill of the local community as also with the regulatory agencies and society at large, thereby creating an atmosphere in which the business can succeed in a greater measure with the aid of such goodwill . . . .

Assessment year: 2010-11 Page 10 of 10 10. Quite clearly, therefore, the reasons recorded for reopening the assessment were incorrect and contrary to the scheme of the Act. In any event, in the garb of reopening the assessment, one cannot review his own orders, without there being any fresh material or input, and for this reason also, the reassessment proceedings cannot be judicially approved. We, therefore, quash the reassessment proceedings. As ground of appeal number 1, challenging reopening of assessment, stands allowed, all other grounds of appeal are rendered academic and infructuous.

11. In the result, the appeal is allowed in the terms indicated above. Pronounced in the open court today on the 02nd day of November, 2021.