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2017 (7) TMI 538 - GUJRAT HIGH COURT

2017 (7) TMI 538 - GUJRAT HIGH COURT - Tmi - Reopening of assessment - reason to believe - disallowance u/s 35D and Section 14A - Held that:- What is apparent on seeing the records of the present case is that during the scrutiny assessment, the claims of the petitioner were thoroughly scrutinized and an Assessment Order was accordingly passed on 21.12.2010. From the communications on record which were exchanged inter se between the assessee and the Revenue, it is apparent that on being satisfied .....

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Income Tax Act only under the pretext of ‘Change of Opinion’. Accordingly, the notice dated 26.03.2013 issued under Section 148 of the Income Tax Act and the consequential Assessment Order dated 27.01.2014 passed by the respondents is quashed and set aside. - Decided in favour of assessee. - SPECIAL CIVIL APPLICATION NO. 323 of 2014 - Dated:- 6-7-2017 - MR. AKIL KURESHI AND MR. BIREN VAISHNAV, JJ. For The Petitioner : Mr Sn Divatia, Advocate For The Respondent : Mrs Mauna M Bhatt, Advocate ORAL .....

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e petitioner filed, first revised return on 31.03.2009 and second revised return on 17.02.2010, showing an income of ₹ 13,88,33,290/2.2 2.2 The return of the petitioner - assessee was selected for scrutiny after regular assessment held under Section 143(3) of the Income Tax Act, 1961. Pursuant to such scrutiny held, an Assessment Order was issued on 21.12.2010 for the Assessment Year in question i.e. 20082009. The Revenue issued notice under Section 148 of the Income Tax Act on 26.03.2013. .....

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iled its return of income for A.Y. 2008-09 on 19.01.2009 declaring total income of ₹ 14,40,91,411/, which was revised on 31.3.2009 by retaining same total income. The return was again revised on 17.2.2010 declaring total income at ₹ 13,88,33,290/The case was completed under scrutiny manner on 21.12.2010 determining total income at ₹ 15,09,03,666/- 1 On verification of the case records, it is seen that assessee has charged the profit and loss account with IPO expense written off .....

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d not qualify for deduction under Section 35D of the Act for the reason that, at the time of incurring expenses on issue of public offer of shares, assessee is already engaged in hotel (accomodation and catering) business at Ahmedabad. Thus, assessee had already commenced business at the time of public issue of shares. Thus, the expense incurred was for the purpose of expansion of its existing business and was therefore, not covered by Section 35D(1)(i) of the Act. Secondly, assessee s business .....

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n off is irregular and disallowable. 2 As per section 14A of the I.T.Act, 1961, expense incurred for earning income which does not form part of total income shall be disallowed. The disallowance shall be made in terms of Rule 8D. On verification of the case records, it is seen that an amount of ₹ 8,71,250/being 0.5 percent of the average investments in accordance with Rule 8D(2)(ii) was disallowed in respect of exempt dividend income of ₹ 97,28,550/However, proportionate interest exp .....

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revised returns as per Goetz (India) Ltd vs. CIT [2006] 157 Taxman 1(SC). The method for determining disallowable expenses was introduced vide Rule 8D w.e.f. A.Y. 2008-09. In view of these facts, the disallowance of expenses under section 14A of the Act required to be determined in terms of Rule 8D prescribed in the Income Tax Rules. It has led to escapement of ₹ 18,45,734/- In light of the above, I am of the view that this is a fit case for income escaping assessment under Sec. 147 of the .....

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im relief was granted that the respondents may proceed with the assessment but no final order be passed. However before the interim relief was granted, an Assessment Order dated 27.01.2014 was passed. The interim relief therefore was modified restraining the respondents from carrying out coercive action. Therefore even the Assessment Order dated 27.01.2014 is also a subject matter of challenge in this petition. 3 The notice under Section 148 of the Income Tax Act, 1961, was issued within a perio .....

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pense for its Surat Project. In the opinion of the Assessing Authority it was also observed that such expenses were incurred for setting up a new hotel at Surat. According to the authority, such IPO expenses incurred by the assessee was in the nature of capital expenditure and did not qualify for deduction under the head as income from profits and gains of business or profession . According to the Revenue, such expenses did not qualify for deduction under Section 35D of the Act in view of the fa .....

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tion under the provisions of Section 35D(1)(ii) was not available to the assessee. (iii) The third ground on which it was thought fit for the Revenue to reopen the assessment was that the authority was of the opinion that an amount of ₹ 8,71,250/being 0.5 percent of the average investments was disallowed in respect of exempt dividend income of ₹ 97,28,550/. According to the Revenue, the proportionate interest expense of ₹ 18,45,734/was not disallowed in accordance with Rule 8D( .....

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me Tax Act, and that during the exercise of such scrutiny the authorities were communicated explanations and details relating to various points including the point in issue for which exercise of reopening the reassessment is undertaken, it was not open for the Revenue to reopen the assessment in exercise of powers under Section 148 of the Income Tax Act. 4.1 According to Mr Divatia, learned advocate for the petitioner, as is evident from reading the reasons supplied by the Revenue, the first two .....

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.08.2010. By this communication, in compliance of reference to the scrutiny assessment, the assessee had in detail pointed out the working of the deduction under Section 35D. Calculation is shown in ledger accounts of the preliminary expenses, proof of stamp duty and filing fees etc were produced during the course of scrutiny. (B) By communication dated 29.11.2010, once again details of calculation for the amount of deduction that have been worked out under Section 35D of the Income Tax Act were .....

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owability of Deduction u/s. 35D The Company had gone for IPO during the relevant Assessment Year to startup its new ambitious 5 Star Hotel Project at Surat. The main agenda behind the IPO was to setup the new Hotel and expand the business to better levels. Since the All the IPO and enhancement of equity capital related statutory fees paid to ministry of Corporate Affairs or any other Statuary liabilities, were directly correlated with new project at Surat, hence such expenses should not be disal .....

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tion was offered with this communication to show that an amount of ₹ 8,70,520/was offered as administrative charges at the rate of 0.50% of the average investments for tax. Calculation were so categorically pointed out in compliance of Rule 8D(2) (ii) of the Income Tax Rules. 5 In other words, it was the contention of the learned advocate for the petitioner that once the exercise of scrutiny assessment is undertaken under Section 143(3) of the Income Tax Act and once having been satisfied .....

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35D of the Income Tax Act and on the question of disallowance under Section 14A of he Act. Relevant paragraph of the Assessment Order are reproduced hereunder: 5 Expenses for increase in Authorized Share Capital 5.1 It is seen that the authorized share capital of the assessee company has increased from ₹ 30Crores to ₹ 50 crores. Accordingly, the assessee was requested to explain where the expenses for increase in authorized share capital recorded in its books of account. In this rega .....

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ction u/s. 35D as it does not fall within the nature of expenses specified in 35D(2). Even otherwise, relying on the jurisdictional High Court decision reported in M/s. Vareli Textiles Ltd 284 ITR 238(Guj), which has followed the decision of Supreme Court reported in 225 ITR 798 (SC) in Brooke Bond India vs CIT holding the said expenditure as capital in nature and is not allowable as expenditure u/s. 37(1). Accordingly, a sum of ₹ 2,10,000/is disallowed and added to the income. Penalty u/s .....

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ng of the exempt income be not disallowed u/s.14A. 6 Mrs Mauna Bhatt, learned advocate for the Revenue has opposed the petitioner and contended that the powers under Section 148 of the Income Tax Act were exercised bonafide. According to Mrs Mauna Bhatt, there was enough tangible material before the authorities to come to a conclusion or reason to believe that the income for the Assessment Year in question has escaped the assessment. According to Mrs Bhatt, once the exercise of reopening the ass .....

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e by the learned advocate for the respective parties, that we need to decide whether the Revenue had exercised the power to reopen the assessment under Section 148 of the Income Tax Act within the parameters of law. 8 As has been reproduced herein above, primarily, the reasons for reopening of the assessment or reasons to believe , or which the authorities have thought it fit to reassess the income on the ground that the income has escaped the assessment has been essentially on two grounds: (i) .....

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tionate interest expense of ₹ 18,45,734/was not included for disallowance, and therefore, as such the income to that extent had led to escapement of income. 9 Question that needs to be answered is that if during the exercise of scrutiny and consequential assessment order under Section 143(3) of the Income Tax Act when there was an extensive exchange of communications and production of records, which ultimately led to the satisfaction of the authority for passing of order under Section 143( .....

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ively, with ledger accounts explained the working out of the assessee s deductions under Section 35D of the Income Tax Act. A note on liability of deduction under Section 35D explaining how the figure of 1,17,14,943/towards 1/5th written off expenses for the IPO expenses was extensively explained in such communications. Even on the question of section 14A of the Income Tax Act, in the communications, particularly, in communication dated 14.12.2010, the assessee had in compliance of Rule 8D(2)(ii .....

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fered 0.5% of the average investment as disallowance under Section 14A amounting to ₹ 8,71,250/The Assessment Order further records that considering the details, the disallowance offered by the assessee during the assessment proceedings is accepted and disallowance of ₹ 8,71,250/is made u/s.14A. 12 Perusal of the reasons to believe indicate that the exercise of reopening the assessment under Section 148 is on the same grounds, and therefore, it is nothing but an exercise carried out .....

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on came up for consideration before the Court. The Delhi High Court observed as under: 13 It is, therefore, clear from the aforesaid position that: (1) Reassessment proceedings can be validly initiated in case return of income is processed under Section 143(1) and no scrutiny assessment is undertaken. In such cases there is no change of opinion. (2) Reassessment proceedings will be invalid in case the assessment order itself records that the issue was raised and is decided in favour of the asses .....

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he assessee. He forms an opinion. The reassessment will be invalid because the Assessing Officer had formed an opinion in the original assessment, though he had not recorded his reasons. 14 In the observation of the High Court, the reassessment proceedings would be invalid in a case where the Assessment Order itself records that the issue was raised and was decided in favour of the assessee. In the opinion of the Court, in such a case, the proceedings would be hit by principle of change of opini .....

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0 ITR 266 (Gujarat), the Division Bench of this Court considering the question of reassessment under Section 148 of the Act under similar circumstances found that, during the course of original assessment, the Assessing Officer had raised several queries with respect to certain claims. Detailed replies were furnished by the assessee. The Court on facts found that when an Assessment Order is framed and the claim of the assessee is examined and found to have been in compliance of the provisions, m .....

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see, thereafter in what manner such claim should be treated in the final order of assessment, is an issue on which the assessee would have no control whatsoever. Whether the Assessing Officer allows such a claim, rejects such a claim or partially allows and partially rejects the claim, are all options available with the Assessing Officer, over which the assessee beyond trying to persuade the Assessing Officer, would have no control whatsoever. Therefore, whileframing the assessment, allowing the .....

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olve large number of complex claims, voluminous material, numerous exemptions and deductions. If the Assessing Officer is burdened with the responsibilityof giving reasons for several claims so made and accepted by him, it would even otherwise cast an unreasonable expectation which within the short frame of time available under law would be too much to expect him to carry. Irrespective of this, in a given case, if the Assessing Officer on his own for reasons best known to him, chooses not to ass .....

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opinion is thus complete. Merely because he chooses not to assign his reasons in the assessment order would not alter this position.It may be a nonreasoned order but not of acceptance of a claim without formation of opinion. Any other view would give arbitrarypowers to the Assessing Officer. 43. We are, therefore, of the opinion that in a situation where the Assessing Officer during scrutiny assessment, notices a claim of exemption, deduction or such like made by the assessee, having some prima .....

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as a case wherein assessment previously framed under section 143(3) of the Act was sought to be reopened within a period of four years from the end of the relevant assessment year. The case concerned assessment year 1993-94 and therefore, the amended section 147 of the Act was applicable. On certain claims of the assessee which were not rejected by the Assessing Officer in the scrutiny assessment, the court held that in cases where the Assessing Officer has not made an assessment of any item of .....

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view of the explanation 2 to section 147 of the Act, power to make assessment or reassessment within four years would be attracted even in cases where there has been complete disclosure of all material facts. 16 Judgment of the Gujarat Power Corporation (Supra), has been followed in the case of Spunpipe and Construction Co. vs. Assistant Commissioner of Income Tax, reported in 362 ITR 559, this Court also considered the question as to whether it was open for the Assessing Authority to reopen the .....

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aid sum was treated as capital gain. According to the Assessing Officer in terms of section 28 of the Act, it was the petitioners business income. His second contention was that in any case the deduction under section 54G of the Act was not allowable. The petitioner filed detailed replies on 21.12.2010 and on 22.12.2010. Insuch replies, he tried to persuade the Assessing Officer on both counts, that is, on the question of treating the income as capital gain and simultaneously justifying thepetit .....

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he gave no reasons for not treating the income as a business income instead of capital gain but gave detailed reasons why petitioners further claim for deduction under section 54G of the Act should be rejected. 12. From the above, it clearly emerges that the Assessing Officer had a full innings of complete scrutiny of the question and the manner in which the income should be taxed. He initially held a belief that such income was a business income of the assessee. This is precisely why he called .....

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