DELL INDIA PVT LTD vs. THE JOINT COMMISSIONER OF INCOME TAX

IN THE HIGH COURT OF KARNATAKA AT BENGALURU

DATED THIS THE 23RD DAY OF MARCH, 2015

BEFORE

THE HON’BLE MR.JUSTICE ARAVIND KUMAR

WRIT PETITION NO.8901/2015(T-IT)

BETWEEN: DELL INDIA PVT. LTD., DIVYASHREE GREENS, NO.12/1, 12/1A, KORAMANGALA INNER RING ROAD, DOMLUR, BENGALURU-560071 REPRESENTED HEREIN BY ITS TAX DIRECTOR, MR. AMIT GUPTA ..PETITIONER

(BY SRI.PERLY PARDIWALLA, SENIOR COUNSEL ALONG WITH SRI.SURYANARAYANA T., ADVOCATE)

AND:

1.THE JOINT COMMISSIONER OF INCOME TAX LARGE TAX PAYERS UNIT :(LTU) JSS TOWERS, 100 FEET RING ROAD, BANASHANKARI III STAGE, BENGALURU- 560085

2.THE COMMISSIONER OF INCOME TAX - II R

2 LARGE TAX PAYERS UNIT (LTU) JSS TOWERS, 100 FEET RING ROAD, BANASHANKARI III STAGE, BENGALURU-560085 ..RESPONDENTS

(BY SRI.K.V.ARAVIND, PANEL ADVOCATE)

THIS WRIT PETITION IS FILED UNDER ARTICLE 226 OF CONSTITUTION OF INDIA PRAYING TO:

DECLARE THAT THE IMPUGNED PROCEEDINGS INITIATED BY THE R-1 UNDER SECTION 147 READ WITH SECTION 148 OF THE ACT ARE WITHOUT JURISDICTION

QUASH THE NOTICE DATED 27.03.2014 VIDE ANNEXURE- K, ISSUED BY THE R-1 UNDER SECTION 148 READ WITH SECTION 147 OF THE ACT FOR THE ASSESSMENT YEAR 2009-10

QUASH THE ORDER DATED 24.02.2015 VIDE ANNEXURE-P PASSED BY THE R-1 REJECTING THE PETITIONER'S PRELIMINARY OBJECTION AS TO HIS JURISDICTION IN RESPECT OF THE ASSESSMENT YEAR 2009-10

THIS WP COMING ON FOR DICTATING ORDERS THIS DAY, THE COURT MADE THE FOLLOWING:

ORDER

Joint Commissioner of Income tax (LTU), Bengaluru sought to reassess the petitioner in respect of its income for the Assessment Year 2009-10 under section 147 of the

3 Income Tax Act, 1961 (for short referred to as `Act’), by issuing of notice under section 148 of the Act. Petitioner has challenged the notice issued for reassessment and order passed by first respondent holding that there is no error of jurisdiction. In order to examine the issue involved in this present petition facts relevant for the said purpose requires to be noticed which are as under.

4 confirmed the proposed addition to the income of the petitioner on the basis of which order under section 143(3) read with Section 144C of the Act came to be passed on 31.01.2014, Annexure-H. Being aggrieved by the same petitioner is said to have filed an appeal and same is filed before first appellate authority and same is pending.

Petitioner by communication dated 15.04.2014 Annexure-L intimated the first respondent that return of income filed on 30.09.2009 be

5 treated as the return of income filed in response to notice issued under section 148 of the Act. At the same time petitioner also called upon the first respondent to furnish reasons for initiating reassessment proceedings. Pursuant to the same, Assessing officer namely first respondent intimated the petitioner by communication dated 25.04.2014 Annexure- M, reasons for reopening indicating thereunder that deferred revenue totaling `216,89,00,773/- which was deferred in the assessment year 2009-10 was not added while computing total income for the relevant assessment year and petitioner ought to have admitted said revenue in the assessment year 2010-11 and having not offered same to tax in the subsequent assessment year i.e., assessment year 2010-11. Similarly reconciliation between sale of goods as per sale tax return and sale of goods as per Income Tax return had been requested which was furnished and on examination it was noticed that smart debits deferred revenue amounting to `216,89,00,773/- for the assessment year 2009-10 was not admitted for sales in the assessment year 2010-11. On this

6 ground also Assessing officer had opined that he had reason to believe that income of `216,89,00,773/- assessable to tax has escaped the assessment for the year 2009-10 and as such he proposed to reassess the income of petitioner under section 147 of the Act. Said reason assigned by the Assessing officer on being furnished came to be replied by petitioner- assessee by challenging the same on the grounds indicated in reply dated 09.05.2014 Annexure-N. Assessing officer after considering the said reply rejected the contentions raised for the reasons indicated in the communication dated 24.02.2015 Annexure-P which reads as under:

“1. It was seen that amount deferred in the AY 2009-10 totalling Rs.216,89,00,773/- was not offered to tax in subsequent year i.e., AY 2010-11. In your submission you have not been able to convincingly demonstrate that the above said amount was offered to tax in AY 2010-11. The table in the submission does not show it.

7 but is based on the fact an amount of Rs.216,89,00,773/- which was deferred in AY 2009-10 has not been offered in the subsequent assessment year.

8 T.Suryanarayana, for petitioner and K.V.Aravind, learned panel counsel appearing for respondents.

9 from assessment and there should be existence of reasons on which a belief can be entertained by Assessing officer that income has escaped assessment and mere belief being in existence without backed by reasons would not be sufficient to reopen the assessment. He would also contend that reasoning provided by first respondent for reopening the assessment for the year 2009-10 is that petitioner in the assessment year 2010-11 did not offer to tax the revenue which was deferred in the assessment year 2009-10 and said ground can only amount to reason to suspect but it cannot be reason to believe escapement of income to tax or such reasons would not be a ground to suspect the return of income filed by the petitioner at the first instance to re-open the assessment. On facts he would contend that petitioner which is engaged in the sale of computer hardware and related products has offered to its customers installation and warranty service which does not necessarily come to end in the year of sale but may be spread over a period of two or more accounting years and as such petitioner recognizes the

10 said revenue proportionately over the period of service contract and offers to tax in the subsequent assessment years when the obligation to render services arises. He would also elaborate his submission by contending that entire sale price for sale of products together with warranty and installation are invoiced in a given year and service/sales tax as the case may be are discharged, the obligation to provide services in that respect and the outflow of resources would happen only in the subsequent years and that therefore, in line with the revenue recognition principles, the revenue from such services would have to be recognized over the period of providing services. He would also contend that revenue to be so recognized in the subsequent years is accounted under the head `other liabilities’ in the balance sheet of the petitioner company and this policy is consistently being followed by the petitioner which is in para materia with the accounting pattern and system formulated by Institution of Chartered Accountant of India. He would draw the attention of the court to assessment order for the assessment year 2009-10

11 whereunder the Assessing officer had an occasion to particularly examine the accounting policy adopted by petitioner and after noticing the explanation offered by the petitioner, Assessing Officer had accepted the same for the said year with regard to detailed break up of deferred revenue relating to a total amount of `216,89,00,773/- and no disallowance came to be made by the Assessing Officer on account of revenue itself recognizing the accounting policy followed by petitioner and same came to be accepted. He would also submit that subsequently for the assessment year 2010-11 Assessing officer took a different view and has held that there was no concept of deferred revenue under the Act. By virtue of such change of view the assessment order for the assessment year 2009-10 is sought to be reopened by invoking section 147 and issuing notice under section 148 of the Act which is based purely on the changed opinion and change of opinion would not be a ground for re-opening of the assessment. He would draw the attention of court to section 147 which has undergone change by Direct Tax Laws

12 Amendment (1989) with effect from 01.04.89 whereunder for the words `for reasons to be recorded by him in writing, is of the opinion’ came to be substituted by the words `has reason to believe’ and as such change of opinion would not be a ground for reopening the assessment. In support of his submission he has relied upon the following Judgments:

(2010) 320 ITR 561 (SC)– Commissioner of Income Tax Vs (1)Kelvinator of India Ltd., (2)Eicher Ltd.

(2007) 295 ITR 333 (Bom) – Siemens Information System Ltd. Vs Assistant Commissioner of Income Tax and others

(1997) 95 Taxman 579(P & H) – Commissioner of Income tax Vs Punjab Tractors Co-op. Multipurpose Society Ltd.

(1980) 121 ITR 551 – T.T. Pvt. Ltd., Vs Income Tax Officer, Company Circle-III, Bangalore.

13 7. He would also contend that in anticipation of the probable contention that revenue may raise with regard to maintainability of writ petition namely petitioner ought to have approached the appellate authority and as such petitioner cannot question the issuance of notice issued under section 148 in writ jurisdiction and to preempt such contention being raised or urged and in reply to the same he would submit this court in exercise of power under Article 226 has power to examine as to whether the notice issued is one without jurisdiction or not and for this proposition he has relied upon the Judgment of Division Bench of this court in the case of T.T. Pvt. Ltd., Vs Income Tax Officer, Company Circle-III, Bangalore reported in (1980) 121 ITR 551 and contends that writ petition is maintainable and same cannot be dismissed on the ground of alternate remedy. Hence, he prays for allowing the writ petition and seeks for quashing of the impugned notice and prays for setting aside the reasons assigned by the respondent for sustaining the notice which is at Annexure-P.

14 8. Per contra, Sri.K.V.Aravind, learned counsel appearing for respondents would support the impugned notice issued to the petitioner and contends that the petitioner having adopted the policy of deferred revenue on the ground that it would be amenable to taxation only after warranty claim arises is not a procedure provided under the Income Tax Act, 1961 or the issue of deferred revenue is not provided under the Income Tax Act, 1961 and contends that petitioner company having received the amounts by way of warranty from its customers and having not established as to when the said amounts received had been offered to tax, Assessing officer had reason to believe that it has escaped assessment and as such Assessing Officer had called upon the petitioner to prove that such income in respect of which petitioner has declared in the return of income as deferred revenue having suffered tax with details thereof and contends that inspite of several particulars being given it was not furnished and as such assessing officer had reason to believe

15 that deferred payment had escaped assessment and for purposes of reassessment impugned notice has been issued.

16 Annexure-J and as such the assessing officer had reason to believe that deferred revenue had escaped assessment and thereby he had issued the impugned notice for re-opening the assessment which does not suffer from any infirmity whatsoever and as such he prays for dismissal of the writ petition. In support of his submission he has relied upon the following Judgments:

17 court is of the considered view that following points would arise for consideration:

“1. Whether impugned notice dated 27.03.2014 issued by 1st respondent under section 148 of the Income Tax Act, 1961 suffers from any jurisdictional error calling for exercise of extraordinary jurisdiction by this court?

“147. If the Assessing Officer has reason to believe that any income chargeable to tax has escaped

18 assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year):

Provided that where an assessment under sub- section(3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section(1) of section 142 or section 148 or to disclose fully and truly all

19 material facts necessary for his assessment, for that assessment year.

Provided further that nothing contained in the first proviso shall apply in a case where any income in relation to any asset (including financial interest in any entity) located outside India, chargeable to tax, has escaped assessment for any assessment year.

Provided also that the Assessing Officer may assess or reassess such income, other than the income involving matters which are the subject matters of any appeal, reference or revision, which is chargeable to tax and has escaped assessment”.

20 01.04.89 the words `for reasons to be recorded in writing, is of the opinion’, came to be substituted for the words `has reason to believe’. In other words the assessing officer had to base his reasons for such re-opening of the assessment and mere change of opinion could not form the basis for re- opening of such concluded assessment under section 148 of the Act. A notice is required to be issued by the Assessing officer to reopen the assessment, if has reason to believe that any income chargeable to tax had escaped assessment at the time of passing the assessment order. In other words there should be relevant material available before the Assessing officer upon which he reasonably or rationally can form belief that any income chargeable to tax has escaped assessment. The formation of belief by the Assessing officer is essentially within his subjective satisfaction at the stage of issuing notice under section 148. The only question is whether there was sufficient material on which a man of reasonable prudence could have formed such belief or not. As to whether commencement of re-assessment proceedings is valid or not

21 can be considered when questioned in a court by examining it from the point of view of an Assessing officer namely as to whether there was prima facie `reasonable belief’ entertained by the Assessing officer prior to issue of such notice or it is only because of change of opinion. Sufficiency of such material cannot be a ground which can be examined by the court while examining a plea, attacking such notice issued under section 148 read with section 147. For this proposition judgment of Hon’ble Apex Court in the case of Raymond Woollen Mills Ltd., Vs ITO reported in (1999) 236 ITR 34 (SC) can be looked up.

22 chargeable to tax had escaped assessment which confers upon him jurisdiction under section 147 to re-open the assessment. Hon’ble Apex Court in the case of Commissioner of Income Tax Vs Kelvinator of India Ltd., reported in (2010) 320 ITR 561 (SC) which has been very heavily relied upon by Learned Senior Counsel appearing for petitioner has held that power to reopen or reassess post 01.04.1989 is much wider than the pre 1989 amendment. It has been held that assessing officer has power to reopen the concluded assessment provided there is `tangible material’ before him to come to a conclusion that there is escaping of income chargeable to tax. It has also been held that the reasons have nexus or link to the formation of belief. It has been held by Apex Court in said Judgment to the following effect:

“6. On going through the changes, quoted above, made to section 147 of the Act, we find that, prior to the Direct Tax Laws (Amendment) Act, 1987, reopening could be done under the above two conditions and fulfillment of the said conditions alone conferred jurisdiction on the Assessing

23 Officer to make a back assessment, but in section 147 of the Act (with effect from 1st April, 1989), they are given a go-by and only one condition has remained, viz., that where the Assessing Officer has reason to believe that income has escaped assessment, confers jurisdiction to reopen the assessment. Therefore, post -1st April, 1989, power to reopen is much wider. However, one needs to give a schematic interpretation to the words “reason to believe” failing which, we are afraid, section 147 would give arbitrary powers to the Assessing Officer to reopen assessments on the basis of “mere change of opinion’, which cannot be per se reason to reopen”.

(P) Ltd., reported in (2007) 291 ITR 500(SC) while examining the issue as to what constitutes an assessment order namely as to whether the quantum notice issued under section 143(1)(a) would also be treated as an order passed under section 143(3) has held in the negative and in this process,

24 scope and effect of sections 147 and 148 also came to be examined. While so examining it has been held by the Apex Court that expression `reason to believe’ cannot be read to mean that Assessing officer should have ascertained the fact by legal evidence or conclusion. It has been held by Apex Court as under: “16. Section 147 authorises and permits the Assessing Officer to assess or reassess income chargeable to tax if he has reason to believe that income for any assessment year has escaped assessment. 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 the Assessing Officer should have finally ascertained the fact by legal evidence or conclusion. The function of the Assessing Officer is to administer the statute with solicitude for the public exchequer with an inbuilt idea of fairness to taxpayers. As observed by the Delhi High Court in

25 Central Provinces Manganese Ore Co. Ltd. v. ITO (1991) 98 CTR (SC)161:(1991) 191 ITR 662 (SC), for initiation of action under section 147(a) (as the provision stood at the relevant time) fulfillment of the two requisite conditions in that regard is essential. At that stage, the final outcome of the proceeding is not relevant. In other words, 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. This is so because the formation of belief by the Assessing Officer is within the realm of subjective satisfaction (see ITO v. Selected Dalurband Coal Co. Pvt. Ltd. (1996) 132 CTR (SC) 162: (1996) 217 ITR 597 (SC); Raymond Woollen Mills Ltd. v. ITO (1999) 152 CTR (SC) 418: (1999) 236 ITR 34 (SC).

26 also sections 148 to 152 are substantially different from the provisions as they stood prior to such substitution. Under the old provisions of section 147, separate clauses (a) and (b) laid down the circumstances under which income escaping assessment for the past assessment years could be assessed or reassessed. To confer jurisdiction under section 147(a) two conditions were required to be satisfied firstly the Assessing Officer must have reason to believe that income profits or gains chargeable to income tax have escaped assessment, and secondly he must also have reason to believe that such escapement has occurred by reason of either (i) omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for his assessment of that year. Both these conditions were conditions precedent to be satisfied before the Assessing Officer could have jurisdiction to issue notice under section 148 read with section 147(a) But under the substituted section 147 existence of only the first condition suffices. In other words if the Assessing Officer for whatever reason has reason to believe that income has escaped assessment it confers jurisdiction to

27 reopen the assessment. It is however to be noted that both the conditions must be fulfilled if the case falls within the ambit of the proviso to section 147. The case at hand is covered by the main provision and not the proviso.

28 was further added as service income not included in the VAT return. On this various adjustments were made to reach the net revenue of `3110,85,96,000/-. One of the reduction which was claimed was in a sum of `216,89,00,773/- as smart debits deferred revenue account in the schedule of other liabilities as smart debits deferred revenue account. In the reasons furnished by 1st respondent for reopening the assessment vide reply dated 25.04.2014 Annexure-M it has been noticed by the Assessing officer that deferred revenue in the reconciliation statement and the deferred revenue in the balance sheet –other liabilities were more or less same. It was noticed by Assessing officer that petitioner-assessee in the schedule of other liabilities, had indicated further break-up of smart debits deferred revenue account was as under: Deferred revenue account – Short term deferred revenue warranty - Rs.58,23,47,873

SnP deferred revenue ST-Short term deferred revenue - Rs.31,97,04,229 Deferred revenue –Long term deferred revenue - Rs.90,75,75,789

29 SnP deferred revenue LT- Long term deferred revenue - Rs.35,95,76,044

As noticed earlier petitioner-company is engaged in the sales of computer hardware and related products by offering to its customers warranty services for different period the details of which is not available before this court and nor it

30 was made available by the assessee before the Assessing officer.

31 of which the assessee had claimed as deferred revenue had been factually offered in the subsequent year/s. Though Sri.Perly Pardiwalla, Learned Senior Counsel for petitioner was correct in contending that in respect of warranties which has been issued for two years would not arise immediately in the next financial year that by itself would not be a ground to reject the notice issued for reopening the assessment and it would be always open to the assessee to place all such material in support of its contention before the Assessing officer to establish as to when and how and in what mode such warranty which is claimed by it as deferred revenue would accrue as its income which has been treated as deferred revenue and same having been offered to tax in the subsequent year/s.

32 in his domain at that stage to conclusively prove the escapement of such income to tax and if there is subjective satisfaction for issuance of notice for such reopening it would be fully within his domain to issue such notice. Hence, it would not be necessary for him to arrive at any conclusion at that stage particularly when there is no material whatsoever available before him to accept the contention of the assessee. As such, if Assessing Officer has reason to believe income having escaped to tax it would give him the power to reopen the assessment and change of opinion would not.

33 the subsequent assessment year/s and if so, the details thereof with the break up, which the Assessing Officer had called for at the first instance. In that view of the matter, it cannot be held that the reasons assigned by the Assessing Officer by communication dated 25.04.2014 vide Annexure-M for reopening the assessment for the year 2009-10 suffers from any jurisdictional error. Reply to notice issued under Section 148 of the Act which has been furnished by the petitioner-assessee to 1st respondent on 09.05.2014 vide Annexure-N has been examined by the Assessing Officer to reject the said contention for the reasons indicated in the communication dated 24.02.2015 Annexure-P. It has also been specifically made clear thereunder by 1st respondent that deferment of revenue has not been accepted even by the DRP and what has been stated in the said communication is that reply submitted by petitioner does not demonstrate or establish that total amount of `216,89,00,773/- had been offered to tax in the assessment year 2010-11. The issue involved is the escapement of income to tax for the

34 assessment year 2009-10. As such, the burden is on the assessee to demonstrate that said deferred revenue totaling to `216,89,00,773/- has been offered to tax in the assessment year 2010-2011 or in any subsequent year/s. In that view of the matter, I do not find any jurisdictional error having been committed by the Assessing Officer to reopen the assessment for the assessment year 2009-10 by issue of impugned notice and also over-ruling of objections raised by the petitioner- assessee to such notice. For these myriad reasons, it has to be held that impugned notice dated 27.03.2014 (Annexure-K) and reasons assigned in the endorsement issued by 1st respondent to reopen the assessment for the assessment year 2009-10 dated 24.02.2015 (Annexure-P) does not suffer from any jurisdictional error or infirmity and said notice issued is in consonance with Sections 147 and 148 of the Income Tax Act, 1961.

35 writ petition on the ground of petitioner having alternate and efficacious remedy available under law, this court is not inclined to accept the said contention inasmuch as in catena of Judgments, this Court as well as the Hon’ble Apex Court has held that exercise of extraordinary jurisdiction is available where the petitioner assails action of the authorities on the following grounds: i) without jurisdiction, ii) violation of principles of natural justice, iii) without authority of law, iv) validity or vires of the statutory provision being under challenge.

36 ITR 551 has held that availability of alternate remedy under the Act would not be a bar for this Court to examine the notice issued under section 148 of the Income Tax Act, 1961, if it is challenged on the ground of jurisdictional error. In that view of the matter, the contention raised by Sri.K.V.Aravind cannot be accepted with regard to maintainability of the writ petition and same stands rejected.

It is made clear that no opinion is expressed on the merits of the claim and discussion made hereinabove is limited only for the purpose of examining the correctness or otherwise of the notice issued under Section 148 of the Act for reopening the assessment under Section 147 of the Act, and the reasons given by the Assessing Officer to reject the reply submitted by the petitioner to the notice for reopening is just and correct.

For the reasons aforesaid, I proceed to pass the following:

37 ORDER

(i) Writ Petition is hereby dismissed. (ii) No order as to costs.

Ordered accordingly.

Sd/- JUDGE

SBN/AP