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TMI Blog2011 (3) TMI 1756X X X X Extracts X X X X X X X X Extracts X X X X ..... audited statement of account for the relevant assessment years along with the report of the statutory auditors under the Companies Act, Tax Audit Report under section 44-AB of the Act and statement showing computation of income were filed by the petitioner. Subsequent thereto, notices for reassessment for these two years were issued by the Assessing Officer on the ground that the income has escaped assessment to tax. In response to the notice, returns of income have been filed. A copy of the reasons recorded by the Assessing Officer was served on the petitioner. The present petitions have been filed questioning the legality and validity of the initiation of reassessment proceedings on the ground that there is no sufficient material on the record to form a reason to believe that income of the petitioner has escaped assessment. 3. In the counter affidavit, the Department has sought to justify its stand. The claim of the petitioner that it is 100% EOU and is covered under the provisions of Section 10 B of the Act has been disputed. 4. Heard Shri S.K.Garg along with Shri Ashish Bansal learned counsel for the petitioner and Shri Ashok Kumar, learned counsel for the respondent. 5. Sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt books have not been maintained as per requirements of the Act and therefore, it is reasonable to believe that the income of the petitioner has escaped assessment. 8. Considered the respective submissions of the counsel for the parties. So far as the first point is concerned, it will not detain us any further. On a perusal of copy of the notice dated 13.5.2003 it would show that the said notice was perfectly in order except that it did not contain the rubber stamp of the Assessing Officer. In all material respects there was no defect in it. However, an objection was raised by the petitioner vide objection dated 6.6.2003 that in the said notice the designation of issuing authority has not been mentioned and as such the notice is in complete and bad in law. 9. Realising the defect pointed out by the assessee, with a view not to join on this issue, the assessing officer rightly thought it fit to issue a fresh notice by removing the defect which was there in the earlier notice. Every quasi judicial authority has power to rectify a mistake. 10. The objection of the petitioner is not that the assessing officer could not issue the second notice. The objection is that on the reasons r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see has not taken into account the CST paid by it on purchases of raw materials while valuing the closing stock. It has paid a sum of Rs. 61,68,000/- as CST. Secondly, the excise duty amount has not been included while valuing the closing stock. A sum of Rs. 21,35,000 was paid as excise duty. The assessee has not correctly valued their closing stock and it has under valued it by excluding the CST and the excise duty paid there on, its income has escaped assessment. The English version of reasons as done by the petitioner, in the written arguments for the assessment year 2000-2001 is reproduced below: "Assessment year 2000-01 Ginni Filaments Ltd. Mathura Road, Chata, Mathura Reasons for initiating proceedings under section 147 Dt.12.5.2003 Assessee has filed the return for the assessment year 2001-2002 on 21.11.2000 showing a loss of Rs. 6,53,73,867. From a perusal of column no.12(a)(b) of the Audit Report as has been referred to in the return form, it is evident that the assessee has made following mistakes in valuation of closing stocks under section 145 of the Act- a- In the valuation of raw materials, CST which has been paid on purchases, has not been included. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0000. The assessee has not included this incurred excise duty in the valuation of closing stock of finished goods. In this manner assessee's income has been assessed at a figure lesser by Rs. 21350000". 14. Challenging the initiation of reassessment proceeding that these reasons are not valid reasons objection was filed before the assessing officer which has been rejected by the impugned order dated 28.6.2004. The court was taken through the order dated 28.6.2004. We were also taken through the other documents to show that the petitioner being 100% EOU will get reimbursement of CST by Development Commissioner and NEPZ, Noida. Similarly, the petitioner will get back excise duty paid by it on the finished goods exported outside India. 15. The very fact that the petitioner is 100% EOU as mentioned herein above has been disputed in the counter affidavit. For the purposes of the present case it is not necessary to enter into the controversy whether the petitioner is a 100% EOU or not. The said issue is not the subject matter of the writ petition. For the purposes of the disposal of the writ petition, we assume that the petitioner is a 100% EOU as presently entirely a different con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ide that in addition to the method of accounting regularly employed by the assessee, the amount of tax, duty etc. actually paid or incurred by the assessee to bring the goods to the place of its location has to be included. The Explanation further clarifies the position that any tax, duty, cess etc. shall be included notwithstanding any right arising as a consequence to such payment. 20. An Explanation is at time appended to explain the meaning of words contained in the section. It becomes a part and parcel of the enactment. Sometime, its purpose and object, is relevant to construe it. An Explanation, normally should be so read as to harmonize with and clear up any ambiguity in the main section and should not be construed so as to widen the ambit of the section. See Bihta Co-operative Development and Cane Marketing Union Ltd. and another versus Bank of Bihar AIR 1967 SC 389. The relevant observation is reproduced below: " The Explanation must be read so as to harmonize with and clear up any ambiguity in the main section and should not be construed so as to widen the ambit of the section. " 21. In Sundoram Pillai versus Pattabiraman, Fazal Ali J, culled out from earlier cases th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion is not required to pay the same by virtue of it being an 100% EOU in view of notification No. 125/84-CE dated 26.5.1984. The liability for excise duty is neither incurred nor required to be paid. 25. The aforesaid objection of the petitioner have been rejected by the impugned order and in our view rightly so in view of Section 145-A of the Act. 26. On a plain reading of Section 145-A, the aforesaid arguments are untenable in law. 27. In view of Section 145-A, there is no justification for not including the excise duty in the closing stock on the ground that the excise duty is refundable by the Central Government under a scheme if the finished goods are exported outside India. Suffice it to say that as per the provisions of the Central Excise Tariff Act, 1995, the duty is on excisable goods which are manufactured or produced in India. In Shinde Brothers v. Deputy Commissioner, AIR 1967 SC 1512, it has been held that the excise duty imposed on goods, and the taxable event for the levy is manufacture or production of goods. A duty of excise is a tax upon the goods and not upon sales or proceeds of sale of goods in terms of Entry 84, List I of Seventh Schedule to the Constituti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of their purchase, so that the cancelling out of the entries relating to the same stock from both sides of the account would leave only the transactions on which there have been actual sales in the course of the year showing the profit or loss actually realised on the year's trading..." 29. Ultimately it concluded in the following manner: "Any system of accounting which excludes, for the valuation of the stock-in-trade, all costs other than the cost of raw materials for the goods-in-process and finished products, is likely to result in a distorted picture of the true state of the business for the purpose of computing the chargeable income. Such a system may produce a comparatively lower valuation of the opening stock and the closing stock, thus showing a comparatively low difference between the two. In a period of rising turnover and rising prices, the system adopted by the assessee, as found by the Tribunal, is apt to diminish the assessment of the taxable profit of a year. The profit of one year is likely to be shifted to another year which is an incorrect method of computing profits and gains for the purpose of assessment. Each year being a self-contained unit, and the ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to examine whether the reasons for the belief have a rational connection or a relevant bearing to the formation of the belief and are not extraneous or irrelevant to the purpose of the section. To this limited extent, the action of the Assessing Officer in starting proceedings under section 147 is open to challenge in a court of law as held in S.Narayannappa versus CIT (1967) 63 ITR 219 (SC): Kantamani Venkata Narayana and Sons versus First Additional ITO (1967) 63 ITR 638 (SC); Madhya Pradesh Industries Ltd. Versus ITO(1970) 77 ITR 268 (SC); Sowdagar Ahmed Khan verus ITO (1968) 70 ITR 79 (SC); ITO v.Lakhmani Mewal Das (1976) 103 ITR 437 (SC); ITO versus Nawab Mir Barkat Ali Khan Bahadur (1974) 97 ITR 239 (SC); CST v. Bhagwan Industries (P) Ltd. (1973) 31 STC 293 (SC) and State of Punjab v.Balbir Singh(1994) 3 SCC 299. 33. There is no quarrel to the above proposition that the assumption of jurisdiction under section 147 must be on the existence of materials before the authority. It will not depend on the mere whim or fancy of the Assessing Officer. The existence of the materials therefore, must be real. Secondly, there must be nexus between the materials as well as the belief of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The decision in the case of Vipan Khanna Vs.CIT reported in (2002) 255 ITR page 220 relied upon by the petitioner is misplaced one. It is distinguishable on facts as entirely a different controversy was involved therein. There the issue was when a reassessment notice has been given on the ground that the assessee has claimed excessive depreciation, the jurisdiction of the Assessing Officer is restricted only to the portion of the escaped assessment in respect of depreciation or he could consider other items of income which may have escaped assessment. The issue on hand was not at all involved therein and was not addressed too. 40. The other decisions relied upon by the counsel for the petitioner Sesa Goa Ltd. Versus JCIT reported in (2007) 294 ITR 101; P.R.Prabhakar versus CIT reported in (2006) 284 ITR 548; and CST vesus J.H Gotla reported in (1985) 156 ITR 323 are besides the point involved herein. They do not advance the case of the pettioner any further. 41. The decision in the case of Assistant Commissioner of Income Tax versus D & H Secheron Electrodes Pvt. Ltd. (2008) 173 taxman 188 prima facie supports the contention of the petitioner. But on deeper scrutiny it would app ..... 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