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Case Number

W.P (C) 4753/2011

Advocates

Mr. Ajay Vohra, Ms. Kavita Jha and Mr. Somnath Shukla, Advs.
Mr. Kamal Sawhney, Sr. Standing Counsel.

Judges

Justice R.V. Easwar
Justice Sanjiv Khanna

Acts

SECTION 148 INCOME TAX ACT 1961

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Smart Summary

Judgment Summary — Munjal Showa Ltd. (Oral) — SANJIV KHANNA, J.

Factual and Procedural Background

Munjal Showa Ltd. filed a writ petition seeking quashing of a notice dated 24.3.2011 issued under Section 148 of the Income Tax Act, 1961 for assessment year 2005-06.

The original assessment arose from a return of income filed on 29.10.2005 and was completed by an order under Section 143(3) dated 31.12.2008. The assessee's declared income of Rs. 10,83,61,920/- had been enhanced by that order to Rs. 33,49,73,994/-. The present petition does not challenge that addition itself but challenges the reassessment notice.

The Section 148 notice (24.3.2011) recorded reasons that, inter alia, royalty payments of Rs. 11,53,93,229/- paid to Showa Corporation (Japan) had been allowed as revenue expenditure but, on review of the profit & loss account and annual report, were said to be capital in nature (creation of an intangible asset) and therefore should have been capitalized; the notice concluded that income of Rs. 8,65,44,922/- had escaped assessment. The notice cited CIT v. Southern Switchgear Ltd. 232 ITR 359 and stated approval for issuance had been obtained from CIT-II, New Delhi.

Legal Issues Presented

Whether initiation of reassessment proceedings by notice under Section 148 (after four years from end of the assessment year) was valid in the absence of a finding that the case was not merely a change of opinion.
Whether there was a failure by the assessee to "fully and truly disclose" all material facts necessary for assessment, such as would justify reopening under Section 147/148.

Arguments of the Parties

Petitioner's Arguments

During the original assessment proceedings the assessee submitted (by letter dated 4.9.2008) the agreement related to royalty, approval of the agreement from the Ministry of Commerce and Industry, a royalty calculation certificate from the Chartered Accountant, and a detailed note on royalty; TDS had been deducted on the royalty. These documents were furnished in response to the Assessing Officer's call.
There was no failure to disclose material facts; the issue of royalty had been specifically considered in the original assessment proceedings.

Respondent's Position (as recorded in the notice / reasons)

The assessing authority recorded reasons asserting that the royalty expense of Rs. 11,53,93,229/- was essentially for creation of an intangible asset and should have been capitalized; depreciation should have been claimed and only depreciation allowed as deduction, leaving Rs. 8,65,44,922/- to be added back as income.
The notice relied on the view said to be upheld by CIT v. Southern Switchgear Ltd. 232 ITR 359 and stated the notice was issued after approval from CIT-II, New Delhi.
In a counter affidavit it was stated that the original Assessing Officer had given neither a positive nor negative finding in the assessment order on this issue (a point invoked in contesting whether the reassessment was a change of opinion).

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
CIT v. Southern Switchgear Ltd. 232 ITR 359	Relied upon by the Assessing Officer to support the view that the royalty expenditure was capital in nature and should be capitalized.	Cited in the reasons recorded for reopening; the court recorded that the Assessing Officer relied on this decision in forming belief that income had escaped assessment.
Commissioner of Income Tax v. Eicher Ltd. (2007) 294 ITR 310	Principle that if the assessee placed all material before the Assessing Officer and the Assessing Officer applied his mind and accepted the assessee's view, mere absence of that acceptance in the assessment order does not permit reopening; reopening cannot be based on mere drafting of the order.	The court applied this principle to hold that where the assessee had furnished the material and the Assessing Officer had not negatived the assessee's case in the order, reopening on the same material amounted to an impermissible change of opinion or was unjustified.
Hari Iron Trading Co. v. CIT [2003] 263 ITR 437	Observation that issues accepted by the Assessing Officer often do not find mention in the assessment order and that the assessee has no control over drafting the order.	Quoted in the judgment (as applied in Eicher) to support the proposition that absence of an express acceptance in the assessment order does not necessarily mean the Assessing Officer did not accept the assessee's explanations.

Court's Reasoning and Analysis

The court identified that because the reassessment notice was issued after four years from the end of the assessment year, two conditions were required to validate reopening:

It should not be a case of mere change of opinion; and
There should be failure by the assessee to fully and truly disclose all material facts necessary for the assessment.

The court examined the material placed in the original assessment proceedings: the assessee's letter dated 4.9.2008 expressly stated that copies of the royalty agreement, approval from the Ministry of Commerce and Industry, royalty calculation certificate from the Chartered Accountant and a detailed note on royalty were produced; it was also noted that TDS had been deducted. The Assessing Officer had called for these documents and they were furnished.

Applying the principles from Commissioner of Income Tax v. Eicher Ltd. and the observation quoted from Hari Iron Trading Co., the court reasoned that where the assessee had placed the entire material before the Assessing Officer and the Assessing Officer had applied his mind to that material and, effectively, accepted the assessee's view (even if the assessment order did not expressly record that acceptance), reopening based on the same material cannot be justified. The court found no allegation or material showing failure or omission by the assessee to furnish true and correct material facts.

The court further observed that the new Assessing Officer's conclusion amounted to drawing a legal inference or interpretation from the very same material facts that were before the original Assessing Officer; that, in the court's view, was impermissible as justification for reopening when no nondisclosure was shown.

Holding and Implications

CORE RULING: The writ of certiorari was issued and the notice issued under Section 148 of the Income Tax Act dated 24.3.2011, the order dated 24.3.2011 dismissing objections to the reassessment proceedings, and the reassessment order were quashed.

Consequences for the parties:

The Section 148 notice and consequential orders reopened by that notice have been quashed; the reassessment proceedings stand set aside as recorded in the judgment.
The writ petition was disposed of and the court awarded no costs.

The opinion does not discuss any broader precedent-setting implications beyond the application of the cited authorities; the decision effects the direct relief noted above.

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Munjal Showa Ltd. Petitioner v. Deputy Commissioner Of Income Tax

SANJIV KHANNA, J: (ORAL)

Munjal Showa Ltd. has filed the present writ petition for quashing the notice dated 24.3.2011 issued under Section 148 of the Income Tax Act, 1961 (‘Act’, for short) for the assessment year 2005-06.

2. It is an accepted case that the original assessment proceedings pursuant to return of income filed on 29.10.2005 were completed by an order under Section 143(3) of the Act dated 31.12.2008 The assessee had declared income of Rs. 10,83,61,920/- which was enhanced to Rs. 33,49,73,994/- by order dated 31.12.2008 We are not concerned with the said addition, which is the subject matter of challenge in the appellate proceedings.

3. On 24.3.2011 the respondent issued notice under Section 148 of the Act inter alia recording the following reasons:

“Return of income declaring income of Rs. 10,83,61,920/- was filed on 29/10/2005. Assessment was completed u/s 143(3) on 31/12/2008 at Rs. 33,49,73,994/- resulting in demand of Rs. 11,14,78,598/-.

Perusal of profit & Loss a/c reveals that assessee had claimed and was allowed the expenditure of Rs. 11,53,93,229/- as Royalty paid to M/s. Showa corporation of Japan, its majority shareholder for the license to manufacture its products and use its technical know-how. Also as per the annual report of company, the technology imported was being absorbed gradually by the assessee. Thus, the expenditure incurred was essentially for creation of intangible asset which would provide enduring benefit to the assessee. Hence, the expenditure of Rs. 11,53,93,229/- was to be capitalized and depreciation of Rs. 2,88,48,307/- @ 25% on it should have been claimed and allowed and balance amount of Rs. 8,65,44,922/- was to be capitalized and added in its income by the assessee. However, assessee has not capitalized the expenses of Rs. 11,53,93,229/-. This view has also been upheld by Hon'ble Supreme Court in the case of CIT v. Southern Switchgear Ltd. 232 ITR 359.

Therefore, I have reason to believe that income of assessee to the extent of Rs. 8,65,44,922/- has escaped assessment by way of wrong claim of expenditure which was not a revenue expenditure. Thus there is failure on the part of the assessee to fully and truly disclose true particulars of its income and the same is required to be reassessed and taxed which requires reopening of assessment by initiation of proceedings u/s 147 by issue of notice u/s 148. Therefore, notice u/s 148 is hereby issued. The notice is issued after obtaining approval from CIT-II, New Delhi vide her Letter no. F. No. CITII/Delhi/Notice 148/2010/3331 dated 18/03/2011.

Sd/- (A.S Nehra) Asstt. Commissioner of Income Tax,

Circle 5(1), New Delhi”

4. It is the accepted position that the re-assessment notice was issued after 4 years from the end of the assessment year. Therefore, two conditions are required for valid initiation of the reassessment proceedings. Firstly it should not be a case of change of opinion and secondly, there should be failure by the assessee to fully and truly disclose all material facts necessary for the assessment.

5. Ld. counsel for the petitioner has drawn our attention to the letter dated 4.9.2008 which was written by the petitioner-assessee during the course of the original assessment proceedings. In para 1 of this letter the petitioner had stated as under:

“Apropos to our discussion in the previous hearing held on 20.08.2008 we are producing/submitting the following information.

1. Copy of Agreement related to royalty, approval of the agreement from Ministry of Commerce and Industry, Royalty calculation certificate from Chartered Accountant and detailed note on Royalty for the financial year 2004-05 is enclosed. (Please refer Annexure-A). It may please be noted that the Company has deducted and deposited the TDS.”

6. It is clear from the aforesaid letter that at the time of the original assessment proceedings, the Assessing Officer had called for the copy of the agreement, approval of the agreement granted by Ministry of Commerce and Industry and royalty calculation-certificate of the chartered accountant. He had also called for and was furnished a detailed note on royalty. It is not disputed that the documents and details were finished. The petitioner had deducted TDS on the royalty paid.

7. Thus, the question of royalty was specifically considered in the original assessment proceedings. In the counter affidavit it is stated that the Assessing Officer had not given any positive or negative finding in the assessment order in this regard and therefore it is not a case of change of opinion. If an issue/aspect is raised by the Assessing Officer and the assessee furnishes reply, but no addition is made in the assessment order, the sequitor is that the Assessing Officer was satisfied with the reply and the stand of the assessee. In Commissioner of Income Tax v. Eicher Ltd. (2007) 294 ITR 310, it has been held: -

“15. 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.

16. 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.”

8. Moreover in the present case, the second condition is also not satisfied. The assessee had filed and furnished all details and particulars relating to the royalty payment including agreements, calculation and the approval. There was no failure on the part of the assessee to furnish true and correct all material facts. The facts were available before and were within the knowledge of the Assessing Officer. The new Assessing Officer as per the reasons recorded on the basis of the same facts, has observed that royalty payment should have been disallowed as it was capital in nature. This is a question of legal inference or interpretation which has been drawn from the same material facts on record. There is no allegation that there was failure or omission on the part of the assessee to furnish and state all material facts.

9. Writ of certiorari is accordingly issued and the notice issued under Section 148 of the Act and order dated 24.3.2011 dismissing the objections to the reassessment proceeding passed by the Assessing Officer are quashed. The re-assessment order is also quashed.

Writ petition is disposed of. No costs.

Munjal Showa Ltd. Petitioner v. Deputy Commissioner Of Income Tax

Judgment Summary — Munjal Showa Ltd. (Oral) — SANJIV KHANNA, J.

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Petitioner's Arguments

Respondent's Position (as recorded in the notice / reasons)

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Munjal Showa Ltd. Petitioner v. Deputy Commissioner Of Income Tax

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