(Prayer: Writ Petition filed under Article 226 of the Constitution of India, to issue Writ of Certiorari, to call for the records on the file of the First Respondent and quash the impugned notice in PAN: AAACD3312M dated 27.03.2019 issued under section 148 of the Income Tax Act for the Assessment Year 2012-13 in Notice No.ITBA/AST/S/148/2018-19/1015453338(1) along with the consequential order in LTU1/AAACD3312M/2012-13 dated 01.08.2019.)
1. The petitioner is a company assessed under the provisions of the Income Tax Act, 1961 (in short 'Act') on the file of R1. The challenge of the petitioner is to proceedings for re-assessment for assessment year (AY) 2012-13, on the specific ground that the impugned reassessment is barred by limitation.
2. A return of income had been filed enclosing all required annexures including financials and audit report. The petitioner had received notices under Section 143(2) and questionnaires under section 142(1) of the Act setting out various issues that the Assessing Authority sought clarifications in regard to.
3. The range of issues, upon which clarifications were sought were wide and the petitioner has drawn my attention to specific queries in the questionnaires touching upon the very issues that figure in the reasons for re-assessment. After considering the detailed submission of the petitioner, an order of assessment dated 24.03.2016 came to be passed under Section 143(3) read with Section 92CA of the Act, at the first instance.
4. Insofar as the petitioner had engaged in international transactions, the transfer pricing officer had also engaged in the determination of arms’ length price, and passed a transfer pricing order dated 24.03.2016.While this is so and matters had rested thus, a notice had been under Section 148 on 27.03.2019, four days shy of the last date for limitation, being six years from the end of the relevant assessment year.
5. The petitioner filed a response to the notice, complying to the direction to file a return and sought reasons for reopening. The reasons that had been supplied read as follows:
1.)As seen from the Profit & Loss account, schedule 26 other expenses, towards effect of exchange diff on translation of forward contract, the assessee has debited a sum of Rs.1694,783,234/- as realised and Rs.12345,571.747 as unrealised. As per Note 32(c), the assessee has marked to market all the outstanding forward contracts which are on account of firm commitment/ highly probable forecast transaction and has recognised the net loss in the profit and loss account.
In this connection, it may be noted that as per CBDT circular No.3 of 2010, dtd. 23.3.2010, MTM losses on forex derivatives is a notional loss and is contingent in nature and therefore not allowable in computing the taxable income, this wherever such MTM losses have resulted in reduction of book profit, the same is to be added back. In the instant case, the losses debited to the P&L Account which are relevant to the forward contracts marked to the Market have not been disallowed.
2.)During the year the assessee claimed deduction u/s 10AA, which was recomputed in the Assessment order. Deduction of Rs.1732,61,17,117 has been allowed. The assessee owned totally 25 eligible units out of which 13 units earned profits and balance 12 units incurred loss (Rs.51,66,44,921). The assessee had adjusted the loss of eligible units against non eligible units. In the Asst. Order, this has been disallowed and the assessee has been allowed to carry forward the loss of eligible units. In this connection, it may be noted the CBDT Circular No.7/2013 dtd 16th July 2013 has clarified that despite their continued placement in Chapter III, section 10A/10AA/10B, they are tax holidays by way of 'deduction' under chapter VIA. Further it has been clarified that income/loss from various sources (eligible and ineligible units) of income under the same head has to be aggregated first. This implies that loss/profit of eligible units to be aggregated separately and loss/profit of non eligible units to aggregated separately for the purpose of arriving at the income/loss under the same head.
In the instant case, the loss of 12 units amounting to Rs.51,66,44,921 to be aggregated with the income of other eligible units of Rs.1732,61,17,117. If this is done, the assessee will be eligible for 10AA deduction to the extent of Rs.1680,94,72,196/-. Though there may not be tax implication for the current year, as the amount was already disallowed, the carry forward of loss of Rs.51,66,44,921 may be withdrawn.
3) As seen from schedule 26- details of Other expenses debited to the P&L account, the assessee has debited a sum of Rs.674,43,445 towards cost of software licences. As software forms part of intangible assets as per Income tax Act and eligible for depreciation at 25% allowance of entire expenses needs to be reconsidered. The excess allowance of expenditure amounts to Rs.505,82583.
4.) During the year the assessee claimed deduction u/s 10AA, which was recomputed in the Assessment order. Deduction of Rs.1732,61,17,117 has been allowed.
In as much as treatment of amalgamation as share transfer arrangement, it will result in withdrawal of exemptions allowed u/s 10AA in respect of units transferred from MIPL/CIPL.
The conditions prescribed for claiming deduction u/s 10AA are:
(i)It is formed of a business already in existence
(ii)It is not formed by transfer of old plant and machinery (more than 20%)
As the above conditions u/s 10AA could not be fulfilled in the case if MIPL/CIPL units, hence deduction allowed has to be withdrawn. In the instant case the unit Gurgaon MRX SEZ has been transferred from MIPL in respect of which deduction of Rs.476,46,271 has been claimed.
5)While making the assessment, disallowance u/s 14A was made to the extent if Rs.193,08,187. The average investment for the purpose of 14A was taken as Rs.386,12,32,399/-. However as seen from Note 37 of the Note on account, the average investments, income from which does not form part of total; income works out to Rs.331,82,715/-.
However, as per rule 8D(iii) Rs.193,06,162 only has been disallowed. Balance of Rs.138,76,553 is to be disallowed.
6)As seen from the details of provisions made during the year, the assessee has stated that provisions for customer rebate and reserves billed receivable has been created to the extent of Rs.113,22,376. However this provision has not been added back in the computation statement.
In view of the above, the assessee company had not disclosed all the material facts fully and truly before the tax authorities for the purpose of assessment for AY 2012-13. Hence, I have reason to believe that income chargeable to tax has escaped assessment and accordingly, the assessment needs to be reopened u/s 147 of the Income-tax Act.
6. The petitioner in line with the procedure for re-assessment set out in the judgment of the Supreme Court in the case of GKN Driveshafts (India) Vs. Income Tax Officer [259 ITR 18], challenged the assumption of jurisdiction by the assessing officer. The challenge is premised upon the bar of limitation, as set out under the proviso to Section 147, that reads as follows:
Section 147: If any income chargeable to tax, in the case of an assessee, has escaped assessment for any assessment year, the Assessing Officer may, subject to the provisions of sections 148 to 153, assess or reassess such income or recompute the loss or the depreciation allowance or any other allowance or deduction for such assessment year (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 ed 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 material facts necessary for his assessment, for that assessment year.
7. In normal circumstances, the limitation set out for re-assessment is four years, extendable to six years in cases where a scrutiny assessment has been made at first instance and where the assessing officer is in a position to establish that the alleged escapement of tax has been occasioned on account of failure on the part of the assessee to disclose fully and truly all material facts necessary in the assessment for that assessment year.
8. The ambit of the phrase ‘full and true disclosure’ has been discussed in extenso by the Hon’ble Supreme Court in the celebrated case of Calcutta Discount Co. Vs. Income Tax Officer [41 ITR 191] to conclude that it would only be primary facts that the assessee would have a responsibility to disclose, and no more. Any facts in addition thereto, or over and above the primary facts, would have to be culled by the assessing officer himself by way of enquiry and verification.
9. In the present case, the petitioner, in support of its submission that the proceedings were barred by limitation, filed a detailed tabulation comparing the reasons for re-assessment with the identification of the issue at the time of original assessment. It also interalia, detailed the documents that had been annexed to the return and furnished at the time of original assessment in response to the queries raised by the assessing officer, relating to the very same issued sought to be re-assessed.
10. The following admitted sequence of dates, events and evidences would clearly and categorically reveal that:
(i) each and every issue proposed for re-assessment, had been noticed at the time of original assessmentby the officer;
(ii) Specific queries had been raised by the officer in regard to all the issues vide notices and questionnaires;
(iii) petitioner had duly responded, furnishing details and supporting evidences in regard to each of the issues.
It is relevant to note, that there is no dispute in regard to the sequence of events, dates or documents, as set out below, and learned standing counsel would agree that the same represent a faithful representation of the facts, circumstances and events as they had transpired.
(10.1) The first reason is that the Mark-to-market loss on restatement of outstanding forward contracts is a notional loss and not allowable as a deductible expenditure, as laid down in Instruction No. 3 of 2010 dated 23 March 2010.
(10.1.1) Notice under Section 142 (1) of the Act dated 30 November 2015 had specifically sought information with respect to 'Details of Mark to Market of any foreign currency exposure' and 'Details of loss from foreign currency fluctuation', at point Nos.12 and 14 thereof. Petitioner, vide submission filed on 10.03.16, provided a detailed explanation on the allowability of mark-to-market losses on outstanding forward contracts as a deduction in computing income under the head 'profits and gains of business or profession' and also under section 115JB of the Act. The said submission specifically addresses the non-applicability of Instructions No. 3 of 2010.
(10.1.2) Interalia, the petitioner also furnished the unit-wise break-up of the said mark to market losses at Annexure 3(a) and copies of the forward contracts entered into with the banks on sample basis at Annexure 3(b). Thus, a true and full disclosure of all material facts had been made prior to passing of order under section 143(3) of the Act and the officer proceeds on the basis of materials sought for, and supplied by the petitioner at the original instance. Moreover, the officer, in the reasons, refers to the disclosure made in Schedule 26 to the financial statements and Note No. 32(C) of the Notes to accounts, both available on record.
(10.2) Losses incurred by units located in Special Economic Zones ('SEZ') which were set-off against other taxable income by the Company were initially disallowed in the order passed under section 143(3) of the Act and allowed to be carried forward. The officer proposes, in the reasons, to restrict the carry-forward of losses andset-off of losses, thereby restricting the deduction under section 10AA of the Act, following CBDT Circular No.7 of 2013 dated 16 July 2013.
(10.2.1) The petitioner had advanced detailed submissions on the eligibility to set-off of losses incurred by SEZ units against the other taxable income and, in Annexure 5 to its submission dated 10 March 2016, a detailed tabulation of the losses incurred by the SEZ units and the manner of its set-off against other taxable income had been provided. In fact, in Annexure 5 of submission dated 10 March 2016, there had been reference to Circular No 7 of 2013 by the petitioner and thus, the Circular had very much been a part of the records of assessment.
(10.2.2) Paragraph 2.4 of the said submission contains a detailed justification in regard to the petitioner’s stand as to the priority for set-off of losses, now sought to be revisited in re-assessment. The submissions of the petitioner have also been duly considered and detailed reasoning advanced at paragraph of the assessment orderto deny the set-off of losses.Thus, in my considered view, there has been a true and full disclosure of all material facts by the petitioner on this account as well.
(10.3) Cost of software licenses debited to the profit and loss account amounting to INR 674,43,445 in Schedule 26: “Other Expenses” to the financial statements ought to be treated as intangible assets eligible for depreciation at the rate of 25% and the excess expenditure ought to be disallowed.
(10.3.1) The Petitioner, in Note No 2(e) to its Financial statements has disclosed the accounting policy with respect to capitalizing intangible assets such as computer software licenses, wherein it had clearly explained its stand that software licenses, having an enduring benefit, had been capitalized as fixed assets. In fact, the audited financial statements had been filed in response to a direction in that regard under point (c) of notice under section 142(1) dated 7 August 2013.
(10.3.2) Further, the officer had, vide notice under section 142(1) of the Act dated 30 November 2015, specifically, requested information to be furnished by the petitioner in respect of 'Details of revenue expenditure claimed during the year, which is having enduring benefits or more than one year is attributable and the expenditure is amortized over a period in the books but claimed as current expenditure'.
(10.3.3) It was in response thereto, that the petitioner had clarified that it had not claimed an expenditure in the return of income which has otherwise been amortized in the books of account for a period of more than a year vide point No. 13 of the submission filed on 14 January 2016. Separately, the officer had sought details of 'List of software license acquired during the year, details of the block of assets in which the same was included and the depreciation rate' as point 3 of the notice under section 142(1) dated 30 November 2015.
(10.3.4) The petitioner, had, in its letter dated 10 March 2016 provided the break-up of amounts capitalized towards computer software and reiterated its earlier explanations in annexure 6 to the submission dated 27 July 2015 for claim of depreciation on computer software at 60 percent. Thus, the assessment had thus been completed under scrutiny, after due consideration to the treatment accorded by the petitioner towards software licenses.
(10.4) Deduction claimed under section 10AA of the Act by the Gurgaon MrX SEZ unit amounting to INR 476,46,271 is sought to be withdrawn. The officer states that treatment of the amalgamation of MarketRx India Private Limited ('MIPL') and Cognizant India Private Limited ('CIPL') with the Assessee as a share transfer arrangement will result in withdrawal of deduction under section 10AA of the Act. No specific reason is assigned as to why the amalgamation is sought to be treated as a 'share transfer arrangement' in order to withdraw the deduction allowed under section 10AA of the Act for the Gurgaon MrX SEZ unit.
(10.4.1) The questionnaire under section 142(1) of the Act dated 07.08.2013 had sought for the audited financial statements wherein the amalgamation of MarketRx India Private Limited and Cognizant India Private Limited with the petitioner had been disclosed as follows:
(a) Note No. 1 on Corporate Information contains a detailed explanation of the amalgamation of MIPL and CIPL with the petitioner
(b) Note No. 3 on the Share capital has detailed explanation on the shares issued pursuant to the amalgamation, along with the accounting treatment followed for the amalgamation. The shareholding pattern of the petitioner pre, and post amalgamation were also set out therein.
(c)Note No 43 has details of assets and liabilities accounted for as a result of the amalgamation.
(d) The Petitioner had filed a copy of the order of the Madras High Court approving the scheme of amalgamation.
(e) Specific questions raised in relation to issue of shares and expenses allowable under section 35D of the Act in connection with the amalgamation during the course of assessment that had been responded to vide submissions dated 01.03.16 and 11.03.16.
(f) The provisions of section 10AA (5) of the Act permit deduction in terms of section 10AA by the successor company upon amalgamation and this stand of the petitioner has been duly disclosed and accepted in the original assessment.
(10.4.2) In fine, the amalgamation of MIPL and CIPL with the petitioner was duly disclosed in the financial statements and submissions made in connection with the claim of deduction under section 10AA of the Act in respect of the Gurgaon MrX SEZ unit.
(10.5) The reasons next proceeded on the basis that the disallowance effected in terms of section 14A of the Act ought to be enhanced as the average value of investment has been taken at a lower sum. In Point No. 11 of the notice issued under section 142(1) of the Act dated 30 November 2015 specific information with respect of 'details of exempted income received/claimed during the year and application of section 14A read with Rule 8D had been sought. Details of any investment in respect of which no income was received was also directed to be furnished.
(10.5.1) The petitioner had furnished a detailed submission as to why disallowance under section 14A of the Act was not liable to be made in computing the income under the head 'profits and gains from business or profession' as well as section 115JB of the Act vide its submission filed on 27.07. 2015 and 14.01.2016. Detailed explanations had been made in regard to the investments in shares and mutual funds and appropriate disallowance made under section 14A of the Act in the original assessment.
(10.5.2) The order of assessment passed under section 143(3) of the Act had provided detailed reasons at paragraph no.6, in support of a disallowance made under section 14A of the Act read with Rule 8D of the Rules. Thus, the issue of disallowance under section 14A of the Act had been duly taken note of even at the first instance and there has been no suppression or furnishing of untrue particulars. It appears quite clear that the officer is merely attempting to reappreciate existing materials to arrive at a different conclusion.
(10.6) The last issue addressed in the reasons, relates to the provision for customer rebate and billed receivables, that, according to the officer, is to be added back to the computation of income. No specific reasons have been assigned for the proposed disallowance.
(10.6.1) This issue, as others, had been raised by the Assessing officer even at the time of original assessment. Point 8 of questionnaire dated 30.11.15 seeks specific information with respect to 'Details of all provisions made towards item of expenditures like bad debt, warrant etc made during the year'. In response, a detailed break-up of expenditure in the nature of provisions had been furnished as Point 2 and Annexure 2 of submission dated 10.03.16. The amounts debited to profit and loss account towards provisions for customer rebate and receivables were duly disclosed as sl nos. 7 & 8 of Annexure 2.
(10.6.2) Thus, this issue had duly engaged the attention of the officer prior to passing of the order of assessment under section 143(3) of the Act. There has thus, and admittedly, been complete disclosure and in fact, even the officer does not allege non-disclosure or suppression of materials. The reasons proceed merely on the disclosures in the financials and hence the attempt is clearly to re-appreciate materials available on record that is impermissible.
11. Mr. Srinivas, fairly, does not dispute the above facts, dates or sequence of events. Simply put, all issues as sought to be dealt with in the impugned proceedings, have not just been noted at the time of assessment, but the officer has put pointed queries to the petitioner and sought details that have been furnished and it is only thereafter that an order of scrutiny has come to be passed.
12. His argument is premised on the position that the order of assessment passed on 24.03.2016 does not specifically set out/reveal any discussion in regard to these issues. A perusal of the order of assessment, which runs between pages 71 and 141 of typed set dated 08.08.2019 would show that the assessing authority has captured therein, all primary issues that had engaged his attention, where he is not in agreement with the petitioner.
13. The petitioner is located in a special economic zone, and the claim of deduction under Section 10AA has been a specific issue dealt with under original assessment. So too the disallowance under Section 14A that was addressed by the officer at the first instance. As far as the other issues are concerned, though there may be no specific mention in the order of assessment, the very fact that the issues had been raised at the time of assessment and responses solicited, that the petitioner had duly furnished, would make it clear that these issue had not escaped the attention of the assessing authority.
14. As observed in the case of Asia Net Star Communications P Ltd. Vs. ACIT, W.P.No.2532 of 2018 dated 16.04.2019, in an order of assessment the assessing authority would discuss only those issues on which there is a divergence of opinion with the assessee. It is not practical for the assessing authority to refer to and discuss every matter that has engaged his attention prior to formulation of the order as such an order of assessment would run to several reams.
15. Thus, an order of assessment to be crisp and effective has to only detail those issues on which he disagrees with the petitioner and if a query had been raised in regard to a particular issue, that would suffice to demonstrate application of mind in that regard.
16. Mr.Srinivas relies upon the following judgments:
(i) Indi-Aden Salt Mfg. & Trading Co. (P.) Ltd. V. Commissioner of Income tax [(1986) 25 Taxman 356 (SC)];
(ii) A.L.A. Firm Vs. Commissioner of Income Tax[ (1991) 55 Taxman 637 (SC)];
(iii) Phool Chand Bajrang Lal Vs. Income Tax Officer [(1993) 69 Taxman 627];
(iv) Sri Krishna (P.) Ltd. V. Income Tax Officer, [(1996) 87 Taxman 315 (SC)];
(v) Jayaram Paper Mills Ltd. Vs. Commissioner of Income
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Tax, Chennai, [(2010) 191 Taxman 38 (Madras)]; (vi) Ester Industries Ltd. V. Union of India and Others, [WP(C). No.7482 of 2011] 17. Since we are, in this particular case, concerned with the bar of limitation under the proviso to Section 147, the citations in regard to A.L.A. Firm (supra), Jayaram Paper Mills Ltd (supra), Ester Industries Ltd. (supra) are not adverted to as they deal with the re-assessments initiated within four years where the bar of limitation was not at issue. 18. As far as other cases are concerned, that is, Indi-Aden Salt Mft. & Trading Co. (P.) Ltd. (supra), Phool Chand Bajrang Lal (supra) and Sri Krishna (P.) Ltd. (supra), the re-assessment proceedings have been upheld, the respective courts finding that there were materials that had come to the knowledge of the assessing officer post scrutiny assessment that would justify the re-assessment even beyond four years. Thus, it is only in cases where the original disclosure was held to be incomplete and untrue that this Court has interfered. 19. In the present case and in light of the admitted position that the issues featuring in reasons for re-assessment had been taken up for assessment originally but not pursued by the officer, the assessing officer being convinced by the explanation furnished by the petitioner, I am of the view that the petitioner has made a full and true disclosure originally, and the impugned proceedings are barred by law. There is also no material has been found by the officer post the original assessment. Thus, the impugned proceedings are barred by limitation and are not sustainable on any account. 20. In this connection, I may refer to the conclusion of the Hon’ble Supreme Court in the case of Parasuram Pottery Works Co. Ltd. Vs. Income Tax Officer (1977 AIR 429). The Bench states that assessment proceedings must have a finality at some point, for a society to be referred to as civilized. Revisiting jaded issues time and again, without allowing them to rest would be contrary to the above dictum. 21. All the more in a case such as the present where there is not even an allegation that the assessee/petitioner has supressed income and made an incomplete and untrue disclosure. In fact, the reasons proceed wholly on the basis of the materials furnished by the petitioner originally as well as on Instructions issued by the Central Board of Direct taxes that have been cited by the petitioner and noticed by the officer. 22. On the basis of the discussion as above, the impugned proceedings are quashed and this writ petition is allowed. Connected miscellaneous petition is closed. No costs.