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Commissioner Of Income-Tax v. Eicher Ltd.
Analytical Summary of the Opinion — Madan B. Lokur, J.
Factual and Procedural Background
The Revenue challenged an order dated 14 July 2005 of the Income-tax Appellate Tribunal, Delhi Bench “C” in I.T.A. Nos. 3966-67.Del/2002, relating to assessment years 1993-94 and 1994-95. This appeal concerned only assessment year 1993-94. The assessee filed its return on 27 December 1993 declaring a loss. The Assessing Officer (AO) completed the assessment under section 143(3) of the Income-tax Act, 1961 on 7 December 1995. On 30 March 2000 the AO issued a notice under section 148 seeking to reopen the completed assessment, purportedly to tax a waiver of interest which the Revenue alleged had not been offered to tax.
Background facts in the record show the assessee had financial difficulties and took term loans from banks/financial institutions and had not paid interest; the outstanding interest was later converted into a "Funded Interest Term Loan" (i.e., rescheduled and funded). For earlier assessment years (1988-89 to 1991-92) such outstanding interest had been treated as discharged and replaced by an equivalent loan and accounted for with a deduction under section 43B.
For 1993-94 the assessee had claimed in its return that the waiver of the funded interest loan was not taxable under section 41(1) and appended the remark: "Waiver of funded interest loan credited to the profit and loss account in the books not taxable as the same is a capital receipt." During original assessment proceedings the AO sent a questionnaire and the assessee replied by letter dated 8 November 1995 explaining the rescheduling, funding of arrears and that the arrears were treated as paid out of fresh interest-bearing loans. The AO did not treat the waived interest as the assessee's income in the original assessment order.
When the reopening notice under section 148 was issued, the assessee objected that the reopening amounted to a mere change of opinion and that all material facts had been disclosed. The CIT(A) allowed the assessee's appeal; the Revenue's appeal to the Tribunal was dismissed by the impugned order; the Revenue brought the matter to the High Court under section 260A of the Act.
Legal Issues Presented
- Whether an assessment completed under section 143(3) can be reopened under section 148 where the assessee had placed all material facts before the AO (including by a letter dated 8 November 1995) and the AO, in the original proceedings, accepted the assessee's position though he did not expressly record a finding in the assessment order?
- Whether the reopening in the circumstances constituted a permissible exercise of jurisdiction (i.e., a case of escaped income) or was impermissible because it amounted to a mere change of opinion by the AO or his successor?
Arguments of the Parties
Revenue's Arguments
- The Division Bench decision in Consolidated Photo and Finvest Ltd. v. Asst. CIT (2006) was relied upon: in principle a mere change of opinion applies only where the AO had taken a conscious decision on the matter; the doctrine would not apply where the assessment order does not record a finding on the aspect forming the basis for reopening the assessment.
- The Revenue also invoked a Gujarat High Court decision (Praful Chunilal Patel v. M.J. Makwana/Asst. CIT) supporting the view that absence of a recorded finding can justify reopening.
Assessee's Arguments
- The assessee contended that the reopening was based on a mere change of opinion and that it had fully and truly disclosed all material facts in the original proceedings, including by the letter dated 8 November 1995 which explained the rescheduling and funding arrangements.
- The assessee relied on the Full Bench decision in CIT v. Kelvinator of India Ltd. (2002), arguing that once an order under section 143(3) is passed a presumption arises that the AO applied his mind, supported by section 114(e) of the Indian Evidence Act; therefore, absence of an express finding in the assessment order does not justify reopening if the material was before the AO and accepted.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Consolidated Photo and Finvest Ltd. v. Asst. CIT, [2006] 281 ITR 394 (Delhi Division Bench) | Held that "mere change of opinion" principle applies only where AO had made a conscious decision; not applicable where assessment order does not record a finding on the aspect forming the basis for reopening. | The court noted this decision but declined to follow it because it conflicted with the Full Bench decision in Kelvinator; the High Court considered reliance on this Division Bench decision to be inconsistent with judicial discipline when a Full Bench decision stands to the contrary. |
| CIT v. Kelvinator of India Ltd., [2002] 256 ITR 1 (Full Bench) | Full Bench held that an order passed under section 143(3) gives rise to a presumption that the AO applied his mind; section 114(e) Indian Evidence Act supports a presumption that official acts are regularly performed. | The court followed the Kelvinator Full Bench view, treating the presumption of application of mind as persuasive and rejecting the contrary Division Bench view in Consolidated Photo. |
| Praful Chunilal Patel v. M.J. Makwana/Asst. CIT, [1999] 236 ITR 832 (Gujarat High Court) | Decision relied upon by Revenue (as noted in the opinion) to support reopening where the assessment order does not record an acceptance of the assessee's position. | The Full Bench in Kelvinator and the court in this matter were unable to accept the view propounded in the Gujarat High Court decision; the High Court in the present opinion declined to follow that reasoning. |
| KLM Royal Dutch Airlines v. Asst. Director of Income-tax, [2007] 292 ITR 49; 208 CTR 33 (Delhi Division Bench) | Considered the conflict between the Full Bench (Kelvinator) and the Division Bench (Consolidated Photo), and held that the Division Bench view could not be reconciled with the Full Bench; therefore the Division Bench view was not the correct law. | The present court followed KLM Royal Dutch Airlines and therefore adhered to the Full Bench decision in Kelvinator, treating Consolidated Photo as not laying down the correct law in light of the Full Bench precedent. |
| Hari Iron Trading Co. v. CIT, [2003] 263 ITR 437 (Punjab & Haryana High Court) | Observed that an assessee has no control over drafting of an assessment order and that issues accepted by the AO often do not find mention in the assessment order; therefore absence of mention does not mean the AO did not apply his mind. | The court relied on these observations to support the proposition that where material was before the AO and the AO applied his mind, lack of an express finding in the order does not justify reopening; the court agreed with this reasoning. |
Court's Reasoning and Analysis
The court first set out the factual matrix and the procedural history: completed assessment under section 143(3), a subsequent section 148 notice to reopen, and the assessee's prior communication (letter of 8 November 1995) explaining the rescheduling/funding of interest arrears. The Tribunal had concluded that all relevant material was before the AO at the time of the original assessment and therefore the reopening amounted to a mere change of opinion.
The High Court examined the conflicting authorities. It noted the Division Bench view in Consolidated Photo (which supported reopening where no express finding was recorded) but considered the Full Bench decision in Kelvinator to be authoritative. The court relied on Kelvinator's principle that an order passed under section 143(3) permits a presumption that the AO applied his mind to the material before him, drawing support from section 114(e) of the Indian Evidence Act. The court observed that to allow reopening simply because the assessment order does not record an express acceptance would reward an authority for its own drafting omission and would be objectionable.
The court further endorsed the observation in Hari Iron Trading Co. that the assessee has no control over how an order is drafted and that matters accepted by the AO may not be recited in the assessment order. Applying these principles, the court reasoned:
- If the assessee placed the relevant material before the AO and the AO applied his mind and accepted the assessee's view, mere absence of a recorded finding in the assessment order does not justify reopening under section 148.
- If, however, the AO did not apply his mind and committed a lapse, the assessee should not be penalised by permitting reopening; the rationale for reopening (escaped income) must be based on facts not previously disclosed or considered, not on the AO's omission to record a finding.
Applying this to the present case, the court found that the assessee had placed all material facts before the AO and had clarified doubts in the letter dated 8 November 1995. The AO's failure to record a specific finding in the assessment order did not mean that material was not before him; the subsequent reopening by the AO or his successor was therefore only a change of opinion, which cannot be a ground for reopening.
Holding and Implications
Holding: The High Court agreed with the Tribunal's conclusion that the reopening of the assessment amounted to a mere change of opinion and therefore did not justify reopening under section 148. The court accordingly held that the Revenue's appeal failed and that the appeal is dismissed.
Implications:
- Direct effect: The Revenue's appeal was dismissed and the Tribunal's order upholding the assessee's position was affirmed; the reopening under section 148 was held impermissible on the facts of this case.
- Broader precedent: The court followed the Full Bench decision in CIT v. Kelvinator of India Ltd. and KLM Royal Dutch Airlines (which preferred the Full Bench view), and rejected the Division Bench approach in Consolidated Photo insofar as it conflicted with the Full Bench. The decision reinforces the principle that an assessment under section 143(3) gives rise to a presumption of application of mind and that lack of an express finding in the assessment order alone does not justify reopening where material was before the AO and accepted. The opinion did not purport to lay down a novel rule of law beyond applying these established authorities.
Note: This summary is prepared solely from the provided opinion text. No information not contained in that text has been added.
Madan B. Lokur, J.:— The Revenue is aggrieved by an order dated July 14, 2005, passed by the Income-tax Appellate Tribunal, Delhi Bench “C” in I.T.A Nos. 3966-67.Del/2002 relevant to the assessment years 1993-94 and 1994-95.
2. In this appeal, we are concerned only with the assessment year 1993-94. The assessee had filed its return of income on December 27, 1993, and declared a loss. The Assessing Officer completed the assessment under the provisions of section 143(3) of the Income-tax Act, 1961, on December 7, 1995. Subsequently, he sought to reopen the assessment by issuing a notice dated March 30, 2000, under section 148 of the Act. The reason for reopening the completed assessment was to tax the waiver of interest allegedly not offered to tax by the assessee.
3. It appears that the assessee was facing some financial problems and, therefore, it had taken term loans from some banks and financial institutions. The assessee was unable to pay interest on these loans either to the banks or to the financial institutions. Since the assessee did not pay any interest to the banks and financial institutions, it did not claim any expenditure or any deduction on this account.
4. Subsequently, it appears that some negotiations took place between the assessee and the banks and financial institutions with the result that the outstanding interest amount against the loans taken by the assessee was converted into a “Funded Interest Term Loan”. This was, of course, in addition to the earlier amounts that were taken by the assessee as loans from the banks and financial institutions.
5. In respect of the assessment years 1988-89 to 1991-92, the interest outstanding was treated as discharged and replaced by an equivalent amount of loan. The amount was treated as a deduction under section 43B of the Act and necessary book entries were made in this regard.
6. For the assessment year 1993-94, as already mentioned, the assessee filed its returns which were accepted by the Assessing Officer but the assessment was sought to be reopened. It may be mentioned that in the original return filed by the assessee it had claimed that the waiver of the funded interest was not liable to tax under section 41(1) of the Act and the assessee had appended the following remark to the return:
“Waiver of funded interest loan credited to the profit and loss account in the books not taxable as the same is a capital receipt.”
7. When the assessee received a notice under section 148 of the Act, it raised an objection and contended that the reopening was based on a change of opinion by the Assessing Officer and not because the assessee had not fully and truly disclosed all material facts. In support of this submission, the assessee pointed out that in the original assessment proceedings, the Assessing Officer had sent a questionnaire to which the assessee had responded by a letter dated November 8, 1995. In that letter, the assessee had clearly pointed out that it had approached the banks and financial institutions for fresh loans to repay the arrears of interest and principal. The banks and financial institutions had agreed to the same and the principal and interest thereon were rescheduled and the interest arrears were funded and treated as a fresh interest bearing loan. It was submitted that as such the entire arrears of interest up to the relevant previous year were treated as having been paid to the banks and financial institutions out of the fresh interest bearing loans. According to the assessee, all these facts were before the Assessing Officer who chose not to give a finding on them, but accepted the contention of the assessee and did not treat the interest amount that had been waived as the income of the assessee.
8. The Assessing Officer rejected the contention of the assessee that this case was merely one of change of opinion on the same facts. Feeling aggrieved, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals) who allowed the appeal and thereafter the Revenue preferred an appeal before the Tribunal, which was dismissed by the impugned order and that is how the Revenue is before us under section 260A of the Act.
9. The Tribunal noted the fact that for the earlier assessment years 1988-89 to 1991-92, the Revenue had accepted the decision arrived at by the Assessing Officer. Adverting to the letter sent by the assessee on November 8, 1995, the Tribunal came to the conclusion that the assessee had disclosed all relevant material facts at the time when the original order of assessment was made and in the letter dated November 8, 1995, the assessee had explained its stand regarding non-taxability of the amount. Since there was a full and true disclosure by the assessee, there was no reason for the Assessing Officer to come to the conclusion that income chargeable to tax had escaped assessment. In other words, the Tribunal was of the view that the case was really one of change of opinion.
10. Learned counsel for the Revenue relied upon Consolidated Photo and Finvest Ltd. v. Asst. CIT, [2006] 281 ITR 394, wherein a Division Bench of this court considered the case law and came to the conclusion that in principle a mere change of opinion would be applicable only to a situation where the Assessing Officer had taken a conscious decision on the matter in issue. It was held that it would have no application where the assessment order does not record a finding on the aspect which formed the basis for reopening the assessment.
11. In response, learned counsel for the assessee drew our attention to CIT v. Kelvinator of India Ltd., [2002] 256 ITR 1, wherein the Full Bench of this court had taken a completely contrary view and it was submitted that the Division Bench did not follow the Full Bench. It was pointed out that the Full Bench held that when a regular order of assessment is passed in terms of section 143(3) of the Act, a presumption can be drawn that such an order has been passed on due application of mind. Reference was also made to section 114(e) of the Indian Evidence Act for drawing a presumption to the effect that judicial acts and official acts are performed in a regular manner. The Full Bench was of the view that if it be held (page 19):
“…. that an order which has been passed purportedly without application of mind would itself confer jurisdiction upon the Assessing Officer to reopen the proceeding without anything further, the same would amount to giving a premium to an authority exercising quasi-judicial function to take benefit of its own wrong.”
12. Before the Full Bench, a decision of the Gujarat High Court, namely, Praful Chunilal Patel v. M.J Makwana/Asst. CIT, [1999] 236 ITR 832, was relied upon by learned counsel for the Revenue and the Full Bench clearly stated that it was, with respect, unable to accept the view propounded in that judgment. Notwithstanding this, in Consolidated Photo and Finvest Ltd., [2006] 281 ITR 394 (Delhi), the Division Bench found itself in respectful agreement with the view of the Gujarat High Court.
13. Subsequently, a similar issue came up before another Division Bench of this court in KLM Royal Dutch Airlines v. Asst. Director of Income-tax, [2007] 292 ITR 49; 208 CTR 33 (Delhi). The Division Bench noted the conflict between the decision of the Full Bench and the Division Bench of this court and quite naturally concluded that since the view expressed by the Division Bench cannot be reconciled with the view of the Full Bench, it must be held that the Division Bench did not lay down the correct law. Following the view expressed in KLM Royal Dutch Airlines, [2007] 292 ITR 49 (Delhi) we are of the view that it would not be correct on our part to overlook the decision of the Full Bench in Kelvinator of India Ltd., [2002] 256 ITR 1 (Delhi) and rely upon the decision of the Division Bench in Consolidated Photo and Finvest Ltd., [2006] 281 ITR 394 (Delhi). That would be subversive of judicial discipline.
14. In Hari Iron Trading Co. v. CIT, [2003] 263 ITR 437, a Division Bench of the Punjab and Haryana High Court observed that an assessee has no control over the way an assessment order is drafted. It was observed that generally, the issues which are accepted by the Assessing Officer do not find mention in the assessment order and only such points are taken note of on which the assessee's explanations are rejected and additions/disallowances are made. We agree.
15. Applying the principles laid down by the Full Bench of this court as well as the observations of the Punjab and Haryana High Court, we find that if the entire material had been placed by the assessee before the Assessing Officer at the time when the original assessment was made and the Assessing Officer applied his mind to that material and accepted the view canvassed by the assessee, then merely because he did not express this in the assessment order, that by itself would not give him a ground to conclude that income has escaped assessment and, therefore, the assessment needed to be reopened. On the other hand, if the Assessing Officer did not apply his mind and committed a lapse, there is no reason why the assessee should be made to suffer the consequences of that lapse.
16. In so far as the present appeal is concerned, we find that the assessee had placed all the material before the Assessing Officer and where there was a doubt, even that was clarified by the assessee in its letter dated November 8, 1995. If the Assessing Officer, while passing the original assessment order, chose not to give any finding in this regard, that cannot give him or his successor in office a reason to reopen the assessment of the assessee or to contend that because the facts were not considered in the assessment order, a full and true disclosure was not made. Since the facts were before the Assessing Officer at the time of framing the original assessment, and later a different view was taken by him or his successor on the same facts, it clearly amounts to a change of opinion. This cannot form the basis for permitting the Assessing Officer or his successor to reopen the assessment of the assessee.
17. In sum and substance, this was the decision rendered by the Tribunal and we do not find any fault in the view taken. Consequently, we are of the view that since the case is one of a mere change of opinion, that does not justify the Assessing Officer's reopening the assessment of the assessee. No substantial question of law arises. The appeal is, therefore, dis missed.
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