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2016 (10) TMI 96 - GUJARAT HIGH COURT

2016 (10) TMI 96 - GUJARAT HIGH COURT - TM - Reopening of assessment - assessee company had borrowed huge loans - Held that:- There is a thin line between the disclosure which disguises a material fact and therefore would be in terms of the proviso read with explanation 1 would amount to failure of disclosure and one where it would be the duty of the Assessing Officer on the basis of primary facts disclosed by the assessee to draw further inferences on facts and or in law. Significantly, explana .....

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ascertained for his satisfaction whether on such borrowings any interest was paid or not and had he done so, as is referred to in explanation 1 to Section 147, he would have discovered a material fact viz. of the company not paying interest on sizeable borrowings. In fact, the fact that the said two lenders were the Directors of the Company is not appearing in the annexures `D' and `E to the audit report where the figures of loans are mentioned. Thus, the assessing officer would have to correlat .....

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JJ. FOR THE PETITIONER : MR SN SOPARKAR, SENIOR ADVOCATE WITH MR B S SOPARKAR, ADVOCATE FOR THE RESPONDENT : MR NITIN K MEHTA, ADVOCATE ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE AKIL KURESHI) 1. The petitioner has challenged notice dated 31.3.2014 issued by the respondent- Assessing Officer to reopen the petitioner's assessment for the assessment year 2007-08. 2. The brief facts are as under: 2.1 The petitioner is a company registered under the Companies Act. It is engaged in business of ma .....

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s return was taken in scrutiny by the Assessing Officer. He passed the order of assessment under Section 143(3) of the Act on 29.5.2009 and computed assessee's total income of ₹ 14.61 crores. In other words, except for disallowance of a sum of ₹ 1.25 lacs under Section 14A of the Act, he accepted the assessee's other declaration of income as per the return. 2.2 To reopen such assessment, the Assessing Officer issued the impugned notice. In order to do so, he had recorded the .....

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ounting to ₹ 40,74,91,927/-. The assessee has been claiming deduction u/s10B since AY 2007-08. It was noticed during the assessment proceedings in the case of the assessee for AY 2011-12 that the directors/shareholders Shri Navnitbhai M Shah and Smt.Chandrikaben N Shah have advanced huge amounts of interest free funds to the assessee company running into crores of rupees since beginning of the production in the eligible unit. By not charging interests, the eligible unit's profit has be .....

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ot incurred by the assessee and in doing so artificially inflated its tax-exempt profits. Furthermore, it was noticed that the assessee had claimed income of ₹ 1,24,000/- in relation to FDR interest as exempt u/s10B. Such income was not eligible for exemption u/s10B and was wrongly claimed by the assessee. It is seen that during the course of original assessment proceedings u/s143(3) for AY 2007-08, there was failure on the part of the assessee to furnish unit-wise accounts and all the det .....

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4 In the reasons recorded, the Assessing Officer has mentioned two grounds for reopening. First is with regard to the sizeable amount of loans advanced by two of the Directors of the Company without charging interest. According to the Assessing Officer, in the process, the profit of the eligible unit under Section 10B of the Act was artificially inflated. The second ground is of the claim of exemption of ₹ 1.24 lacs of FDR interest as exempt under Section 10B of the Act. According to the o .....

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t of the assessee's return and accompanying documents. If the Assessing Officer during the assessment, was of the opinion that it cannot form part of exemption under Section 10B of the Act, the same could have been disallowed. However, reopening beyond four years would not be permissible on such ground. (3) Regarding non-charging of interest by the Directors, the counsel submitted that full facts were placed on record. The fact that two directors had advanced sizeable loans to the company fo .....

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, in case of the assessment for the assessment year 2011-12, the Assessing Officer could detect the possible tax implication. The same could have been done during the scrutiny assessment for the assessment year 2007-08. This would show that there was no fresh material available to the Assessing Officer to reopen the assessment. (5) Counsel lastly submitted that there is no compulsion in law for the company to pay interest on the funds borrowed from the directors. It is not the case of the revenu .....

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was charged did not form part of the record. The assessee therefore cannot contend that there was true and full disclosure. Counsel drew our attention to Sub-section (7) of Section 10B read with Sub-section (10) of Section 80IA of the Act to contend that when the assessee-company claiming deduction under Section 10B of the Act did not pay interest on sizeable borrowings from the directors, it would be open for the Assessing Officer to assess the profit of the company by making necessary adjustm .....

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pal claim of the assessee and that claim was examined by the Assessing Officer during original assessment is beyond doubt. Beyond a period of four years at least and perhaps even within a period of four years, it may not have been possible for the Assessing Officer to reopen the assessment on such ground. 6. The other reason however needs a closer scrutiny. We may recall that the Assessing Officer while carrying out the assessment of the company for the assessing year 2011-12, noticed that two o .....

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r the assessment year 2007-08 was close to ₹ 46.65 lacs. According to him, therefore by not paying interest on borrowed funds, the profit of the eligible unit under Section 10B of the Act was artificially inflated. 7. Before adverting to the issue of true and full disclosure in the context of the notice for reopening beyond the period of four years, we may deal with the petitioner's contention of no compulsion to pay interest on borrowed funds by the company. Section 10B of the Act per .....

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80IA shall so far as may be applied in relation to the undertaking referred to in the present section as they apply for the purpose of undertaking referred to in Section 80IA. Thus, by reference, the provisions of sub-section (8) and sub-section (10) of Section 80IA are made applicable to Section 10B of the Act also. 8. Section 80IA pertains to deductions in respect of profits and gains for industrial undertakings or enterprises engaged in infrastructure development etc. Sub-section (10) of Sec .....

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its and gains of such eligible business for the purposes of the deduction under this section, take the amount of profits as may be reasonably deemed to have been derived therefrom. 9. In terms of this provision therefore where it appears to the Assessing Officer that owing to close connection between the assessee carrying on eligible business and any other person, the course of business is so arranged that the business transacted between them produces to the assessee more than the ordinary profi .....

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oan balance during the said period was ₹ 1.51 crores. Likewise, Mr.N.M.Shah the other director of the company had advanced a sum of ₹ 2.71 crores during the same period with a maximum loan balance of ₹ 5.12 crores. Since the directors were closely connected with the petitioner-company, sub-section (10) of Section 80IA would certainly apply allowing the Assessing Officer to modulate the profit of the company for the purpose of exemption under Section 10B of the Act appropriately .....

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y was the nature of the record produced by the petitioner. The petitioner had filed the return of income in the prescribed format. Along with the return, the petitioner had also filed audit report. This audit report contained several annexures one of them being Annexure D' which contained particulars of each loan or deposit of amount exceeding the limit prescribed under Section 269ss and read as under: Name Loan accepted Squared Up Max.Balance Accepted by cash 1 Mr.Amit N Shah 30,60,000 No 3 .....

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o 3 Mrs.C.N.Shah 2,16,564 1,51,44,081 No 4 Nital N Shah 3,49,951 65,39,411 No 5 Zeenita A Shah 1,32,327 48,59,171 No 12. From the above materials, one can notice the fact that the assessee company had borrowed sizeable funds from Mr.N.M.Shah and Mrs.C.N.Shah and that at the end of the year also, much of these loans remained unpaid was part of the record. What was however not part of the record was that whether on such borrowings, the assessee company had paid interest to them or not. 13. Section .....

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e chargeable to tax escaping assessment for the failure of the assessee to disclose truly and fully all material facts. Explanation 1 to Section 147 reads as under: Explanation 1 - Production before the Assessing Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of the foregoing proviso. 14. In the context of such provisions, interestingly but .....

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ble to tax had been under assessed. Second was that he must also have a reason to believe that such underassessment had occurred by reason of either (1) omission or failure on the part of an assessee to make a return of his income or (2) omission or failure on the part of an assessee to disclose fully and truly all material facts necessary for his assessment for that year. Both these conditions are conditions precedent to be satisfied before the Income Tax Officer can have jurisdiction to issue .....

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awn. It was not the duty of the assessee to tell the Assessing authority what inferences whether of facts or law should be drawn. 15. In case of Shri Krishna Pvt.Ltd. Etc. V/s Income-Tax Officer and Others, reported in 221 ITR 538, the Supreme Court touched upon two aspects of the matter of reopening - one was regarding sufficiency of reasons for the Assessing Officer to form a belief that income chargeable to tax had escaped assessment. It was observed that since such belief is that of the Asse .....

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the assessee of the obligation of making true and full disclosures. 16. In case of Dishman Pharmaceuticals and Chemicals Limited V/s Deputy Commissioner of Income-Tax (OSD) (No.1), reported in [2012]346ITR 228 (Guj), the Division Bench of this Court examined the requirement of true and full disclosures in the context of explanation 1 to Section 147 of the Act. Referring to large number of judgments cited before it, following general principles were culled out: From the above judicial pronounceme .....

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his income for that assessment year, or to disclose fully and truly all material facts necessary for assessment of that year; (ii) both the above conditions are conditions precedent and must be satisfied simultaneously before the Income-tax Officer can assume jurisdiction to reopen the assessment beyond four years of the end of the assessment year; (iii) such reasons must be recorded and if the reasons recorded by the Assessing Officer do not disclose satisfaction of these two conditions, reopen .....

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be conclusive. Nor absence of any such statement would be fatal, if on the basis of reasons recorded, it can be culled out that there were sufficient grounds for the Assessing Officer to hold such beliefs;.... 17. In Zohar Siraj Lokhandwala V/s M.G.Kamat and others, reported in 210 ITR 956, the Division Bench of Bombay High Court observed as under: There is no doubt, as observed by the Supreme Court in Calcutta Discount Co.Ltd. v.ITO [1961] 41 ITR 191, that the duty of disclosing all the primary .....

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nce have been discovered by the Incometax Officer will not necessarily amount to disclosure within the meaning of section 147. In view of this Explanation, it will not be open to the assessee to say, for example- I have produced the account books and the documents : You, the Assessing Officer, examine them, and find out the facts necessary for your purpose: My duty is done with disclosing these account books and the documents. His omission to bring to the assessing authority's attention thos .....

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tion gives a quietus to all such contentions; and the position remains that so far as primary facts are concerned, it is the assessee's duty to disclose all of them-including particular entries in the accoount books, particular portions of documents, and documents and other evidence which could have been discovered by the assessing authority, from the documents and other evidence disclosed. In other words, the mere production of evidence before the Assessing Officer is not enough and there m .....

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.P.Ltd. v.CIT [1986] 159 ITR 624 (SC)). 18. The contention of true and full disclosures would have to be appreciated bearing in mind the above judicial pronouncements. Such requirement flowing from the provisions of Section 147 would have to be appreciated bearing in mind explanation 1 which as noted provides that production before the Assessing Officer the account books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not .....

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