Per Kapadia S.H, J.:— Rule. Respondents waive service.

2. By consent, writ petition is taken up for final hearing.

3. Heard learned Counsel on both sides.

4. In this case, arguments were heard by us on 24-7-2003. After hearing the arguments, the following order was passed:

“For the reasons to be given subsequently rule is made absolute in terms of prayer Clause (a) with no order as to costs.”

5. Accordingly, we propose to give reasons for allowing the petition.

REASONS

6. By this petition under Article 226 of the Constitution, petitioner seeks to challenge impugned notice dated 22-1-2003 issued under section 148 of the Income Tax Act, 1961 for accounting year ending 31-3-1997 corresponding to the relevant assessment year 1997-1998.

FACTS:

7. Petitioner is engaged in the business of manufacture of P.V.C Sheets and Industrial Laminates. The petitioner filed its return of income for the assessment year 1997-1998. This was on 28-11-1997. The return was initially processed under section 143(1)(a). This was on 17-12-1997 accepting the returned loss. Thereafter, the A.O issued notice under section 143(2) calling upon the petitioner to give certain details. Thereafter, he completed the assessment vide order dated 31-1-2000 made under section 143(3) of the Act and assessed the petitioner to a total loss of Rs. 6.39 lacs. Subsequently, by the impugned notice dated 22-1-2003 issued under section 148, the A.O stated that he had reason to believe that the petitioner's income chargeable to tax for the assessment year 1997-1998 had escaped assessment and the A.O called upon the petitioner to file its return of income within 30 days. By letter dated 14-2-2003, the petitioner-asses see called upon the A.O to furnish copy of reasons in order to enable the assessee to furnish return of income. These reasons were not furnished, inter alia, on the ground that the petitioner had failed to file its return of income after receipt of the impugned notice. In the circumstances, the present petition came to be filed on 6-3-2003. Since reasons were not given, the petitioner assumed the alleged reasons for issuing impugned notice. However, the department has now filed its affidavit dated 15-7-2003 disclosing reasons for reopening assessment under section 147 of the Act. As per the said reasons, it is stated that on the A.O going through the case records, he had observed escapement of income amounting to Rs. 34.92 lacs. According to the A.O, as per the case records, an amount of Rs. 194 lacs had been shown by the petitioner as capital work-in-progress and also interest payment on account of borrowed funds. According to the A.O, proportionate interest expenditure relating to capital work-in-progress should have been capitalized to the cost of assets and the said expenditure should have been disallowed. That, since it was not disallowed, there has been an escapement of income amounting to Rs. 34.92 lacs on this count. Secondly, according to the A.O, on his going through the balance sheet, it was detected that the assessee had received a subsidy of Rs. 20 lacs during the accounting year ending 31-3-1997 relevant to the assessment year in question which amount has not been used to reduce the cost of assets and, therefore, the said amount should have been taxed as revenue receipts. Thirdly, on going through the case records, the A.O found that an amount of Rs. 3.42 lacs pertaining to provident fund, which amount was disallowed during the earlier assessment year 1996-1997, had been allowed during the assessment year in question and, therefore, according to the A.O, this issue was also required to be looked into. At this stage, it may be noted that if one goes through the reasons annexed to the affidavit, there is no clear prima facie finding that the petitioner had failed to make true and full disclosure of the material facts. The A.O merely states that certain issues need to be looked into. This aspect is important because we are concerned with assessment year 1997-1998 and the reopening is sought to be made beyond a period of four years from the end of the assessment year 1997-1998.

ARGUMENTS:

8. Mr. Pardiwala, learned Counsel for the petitioner contended that, in this case, the A.O seeks to reopen the assessment after a period of four years from the end of the assessment year and in view of the judgment of this Court in the case of (Ipca Laboratories Ltd. v. Gajanand Meena, Deputy Commissioner of Income-Tax)1, reported in 251 I.T.R 416, the A.O cannot act in the matter of reopening of assessment beyond four years, unless he has reason to believe that income has escaped assessment by reason of the failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. He submitted that a bare reading of the reasons show that reopening is sought to be effected only on the basis of the case records. He submitted that on two out of three points mentioned in the reasons, the A.O merely states “that the issue needs to be looked into”. That, on those two issues regarding subsidy and provident fund being disallowed, the A.O does not even say that there is escapement of income from assessment. He therefore submits that the proviso to section 147 is not attracted. That, on the said two points, there is nothing to indicate escapement of income. That, on the said two points, there is nothing to indicate failure on the part of the assessee to disclose fully and truly all material facts. That, on these two points, there is nothing to show as to on what basis the A.O has formed his belief regarding escapement of income from assessment. Mr. Pardiwala submits that on the face of the given reasons, there is total non-application of mind on the part of the A.O In this connection, he pointed out that the A.O has sought to reopen the assessment by stating that the assessee has received cash subsidy of Rs. 20 lacs which should have gone to reduce the cost of assets and since it has not been used to reduce the cost of the assets, it should be taxed as revenue receipts. However, it is pointed out that the amount of Rs. 20 lacs was received in the earlier accounting year ending 31-3-1996 and not in the accounting year ending 31-3-1997 relevant to the assessment year in question (see page 41 of the paper book under the caption “Reserves and Surplus”). This point is important in view of certain contentions which have been raised by the department which has placed heavy reliance on the judgment of the Supreme Court in the case of (GKN Driveshafts (India) Ltd. v. Income-Tax Officer)2, reported in 259 I.T.R 19. Even on the question of allowance, in respect of provident fund paid by the petitioner-assessee, it was pointed out by the learned Counsel for the petitioner that no reasons have been given as to why the provident fund paid by the assessee amounting to Rs. 3.42 lacs should be disallowed. In this connection, he pointed out that in the accounts of the assessee a provision was made for provident fund dues for March, 1996 but the payment was made on 20-4-1996 and, therefore, the then A.O had disallowed the payment under section 43-B on the ground that the payment was not made during the accounting year ending 31-3-1996 corresponding to assessment year 1996-1997. However, payment was made during the accounting year commencing after 1-4-1996 corresponding to assessment year 1997-1998 which is in the assessment year in question and, therefore, the said amount of Rs. 3.42 lacs has been allowed as deduction in the assessment year in question. Hence, he contended that there was no reason for reopening the assessment on this count. Mr. Pardiwala next contended that one of the reasons for reopening the assessment given by the A.O was that on amount of Rs. 34.92 lacs had escaped assessment as it represented interest expenditure (financial cost) relating to capital work-in-progress and, therefore, it should have been capitalized to the cost of assets. He contended that this alleged ground was on pure assumption that the borrowings had financed the capital work-in-progress. He submitted that, in this case, on facts, the borrowings did not finance the capital work-in-progress. In this connection, he invited our attention to the schedule attached to the balance sheet (at page 44 of the paper-book) which indicates absence of any addition to the capital work-in-progress. He contended that if the borrowings had funded the capital work-in-progress then the net book value as on 31-3-1997 would have increased above Rs. 433.92 lacs (representing cost as on 31-3-1996 corresponding to the assessment year 1996-1997) whereas, in fact, the net book value during the assessment year in question has fallen from Rs. 433.92 lacs to Rs. 194.02 lacs which indicates that the borrowings did not finance the capital work-in-progress and, therefore, the assumption of the A.O was erroneous. In the alternative, Mr. Pardiwala contended that even assuming for the sake of argument that the A.O was right in his conclusion that the borrowings had financed the capital work-in-progress even then the assessee was entitled to claim deduction under section 36(1)(iii) because for the purposes of applicability of section 36(1)(iii) (as it stood at the material time), the nature of expenditure, whether capital or revenue, was not relevant. Mr. Pardiwala further pointed out that in the accounts of the assessee, interest was capitalized and although the assessee, for tax purposes, could have claimed deduction under section 36(1)(iii), in fact, assessee has not even claimed deduction for the interest which has been capitalized. Hence, question of disallowance of the proportionate interest expenditure did not arise. He further pointed out that under the accounting policy of the petitioner-assessee, all costs including financial cost till commencement of commercial production were capitalized. However, the borrowings were used only for working capital requirement and not for capital work-in-progress. Lastly, it is submitted on behalf of the petitioner that all these facts were put on record and deductions have been given in the original order of assessment. That, even the reopening is sought to be done only on the basis of the case records and, therefore, there is nothing to indicate as to on what basis the A.O has concluded escapement of income from assessment. That, in any event, there is failure on the part of the petitioner-assessee to disclose fully and truly all material facts necessary for the assessment in respect of the accounting year ending 31-3-1997.

9. Mr. R.V Desai, learned Senior Counsel appearing on behalf of the department, on the other hand, contended that the petition is premature and no interference is called for at this stage. He contended that when a notice under section 148 is issued, the proper course of action for the notice is to file the return if he seeks reasons and on receipt of reasons the noticee is entitled to file objections to the issuance of notice and, thereafter, the A.O has to dispose of those objections by passing a speaking order. He contended that, in this case, on receiving the impugned notice, the petitioner failed to file the return. Hence, no interference is called for under Article 226 of the Constitution. In this connection, Mr. Desai has placed reliance on the judgment of the Supreme Court reported in 259 I.T.R 19 (supra). Mr. Desai contended that the petitioner should be directed to file the return and to seek reasons and, thereafter, the petitioner assessee should be directed to file objections which objections would be disposed of by the A.O by passing a speaking order and it is only thereafter in the event of any adverse order being passed then the writ petition may Lic. He contended that in view of the judgment of the Supreme Court in 259 I.T.R 19 (supra), this writ petition should be dismissed in limine. He contended that, at this stage, all the arguments on merits advanced on behalf of the petitioner were not required to be considered. That, the issues raised by the petitioner, on merits, would be gone into by the A.O after the petitioner files the return and after the petitioner files its objections to the issuance of notice. He contended that in view of the judgment of the Supreme Court in 259 I.T.R 19 (supra), there is no question of this Court, at this stage, going into the merits as the petition is premature.

FINDINGS:

10. In the case of GKN Driveshafts (India) Ltd. (supra), the facts were as follows: A notice under section 148 was issued to the assessee read with section 143(2) of the Income Tax Act, 1961 calling upon the assessee to give certain details in connection with the return of income filed by the assessee. In that case, notice under section 143(2) was issued as the department wanted further information and, therefore, the Delhi High Court took the view that the petition was premature (257 I.T.R 702)3. Being aggrieved, the assessee went in appeal. In appeal, the Supreme Court stated that there is no reason to interfere with the order under challenge. However, the Apex Court added a clarification to the effect that when a noticee under section 148 is issued, the proper course of action for the notice was to file a return and seek reasons and the A.O was thereafter bound to furnish reasons within reasonable time. That, on receipt of reasons, the noticee has to file objections to the issuance of notice and thereupon the A.O has to dispose of the same by passing a speaking order. It is true that the assessee should have filed its returns pursuant to the notice under section 148 and, on that basis, the assessee should have sought reasons for issuing such notices as laid down by the Supreme Court in the above judgment reported in 259 I.T.R 19. That was not done. We would have rejected the petition on this ground. However, in the peculiar facts and circumstances of this case, we are not inclined to dismiss the petition in limine because the reasons now disclosed by the A.O, on the face of it, show that there is nothing in the reasons to indicate failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. In the case of Ipca Laboratories Ltd. (supra), this Court has held that in view of proviso to section 147 of the Income Tax Act, no action for reopening after four years could be taken unless the A.O has reason to believe that income has escaped assessment by reason of failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. Admittedly, the period of four years has expired. Hence, we are not inclined to dismiss the petition in limine. Further, as stated above, even the reasons do not disclose a finding viz. that the petitioner had failed to disclose fully and truely all material facts necessary for assessment. In fact, the reasons show that from the case record itself certain conclusions are sought to be drawn. Hence, we are not inclined to dismiss the petition in limine. We may clarify that this judgment should not be read to mean that the assesses are entitled to reasons without filing a return pursuant to notice under section 148. However, in this case, the Court finds ex facie that A.O has sought to reopen the assessment on certain erroneous assumptions. As stated hereinabove, the assessee has not even received cash subsidy of Rs. 20 lacs during the accounting year ending 31-3-1997 relevant to the assessment year in question and, therefore, there was no question of utilising the said amount to reduce the cost of the assets as suggested by the A.O in his reasons. Similarly, as stated above, the assessee had paid provident fund for March, 1996 in April 1996 and, therefore, it was disallowed as an item of deduction for assessment year 1996-1997 but it was allowed under section 43-B in the assessment year in question as the provident fund was paid in April, 1996. Therefore, there was no question of escapement of income from the assessment. Lastly, with regard to capitalization of interest expenditure, the A.O has come to the conclusion that a sum of Rs. 34.92 lacs had escaped assessment as the said amount should have been capitalized to the cost of the assets. However, this reason is also based on an assumption that the assessee had utilized the borrowings for capital work-in-progress. Further, the petitioner had not claimed any deduction under section 36(1)(iii) during the assessment year in question for the interest which was capitalized and, therefore, the question of disallowance did not arise. In the circumstances, we are not inclined to dismiss the petition.

11. For the reasons given hereinabove. Rule is made absolute in terms of prayer Clause (a) with no order as to costs.

12. Petition dismissed.