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  • Hon'ble Mr. Justice Babulal Chandulal Patel
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Smart Summary

Structured Summary of the Opinion

Factual and Procedural Background

The petitioner is a public limited company which filed petitions under Article 226 of the Constitution seeking quashing of notices dated February 3, 1995, issued under section 148 of the Income-tax Act, 1961, for assessment years 1992-93 and 1993-94. The matters (Special Civil Application Nos. 1189 and 1190 of 1995) were heard together and disposed of by a common judgment.

For the assessment year 1992-93 (described in detail in the record), the company submitted its computation of income claiming various deductions, notably:

  • Rs. 2,96,04,082 as surplus on cancellation of forward exchange contracts (with a larger amount of Rs. 8,54,42,806 received on cancellation and allocations shown among plant & machinery, roll-over premium expense and profit & loss); and
  • Rs. 10,06,50,438 as excise duty paid on yarn, cloth and engineering components included in closing stock, claimed as deductible under section 43B.

The Assessing Officer (Deputy Commissioner P.K. Kedia) conducted the assessment on March 24, 1994, considered the parties' submissions and several judicial decisions, and reached conclusions accepting the assessee's contentions on the essential issues in that assessment order. Subsequently, a new incumbent Assessing Officer issued notices under section 148 dated February 3, 1995, reopening the assessments. The petitioner challenged the issuance of those section 148 notices by way of writ petitions under Article 226.

Legal Issues Presented

  1. Whether a notice under section 148 of the Income-tax Act can be validly issued where the original assessment officer had considered the claims and applied judicial authorities in an assessment order (i.e., whether a mere change of opinion by a successor officer suffices to reopen assessment).
  2. Whether the reasons recorded for issuing the section 148 notice (stating that incorrect claims were allowed and concluding that income has escaped assessment by reason of failure to disclose fully and truly) were sufficient and founded on information indicating escapement of income rather than a mere change of opinion.

Arguments of the Parties

Petitioner's (Assessee's) Arguments

  • The surplus arising on cancellation of forward exchange contracts does not amount to a "transfer" of a capital asset within the meaning of section 2(47) of the Act and, as a manufacturing company, the surplus is not liable to tax in the manner suggested by the Revenue (the company is not engaged in financing or dealing in foreign exchange but entered into forward contracts for hedging).
  • The excise duty paid on raw materials and included in closing stock (yarn, cloth, engineering components) is deductible under section 43B of the Act.
  • All relevant facts were disclosed fully and truly to the Assessing Officer during the original assessment proceedings; the assessment order demonstrates that the Assessing Officer considered and decided the matters after detailed discussion and reference to judicial decisions.

Respondent's (Revenue's) Arguments

  • The reasons placed on record for issuing the section 148 notice stated that the assessee had made "incorrect claims" which were allowed, and therefore it was concluded that income chargeable to tax had escaped assessment by reason of failure to disclose income truly and fully.
  • On the record before this Court, however, the Revenue (as represented at the hearing) did not point to any specific information or material showing that the assessee had concealed or failed to disclose relevant facts; learned counsel for the Revenue could not indicate any fresh information having come to the Assessing Officer's notice after the assessment order.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court / Assessing Officer
Commissioner Of Income Tax, Mysore v. Canara Bank Ltd. [1967] 63 ITR 328 Authorities on treatment of transactions involving foreign exchange/related principles (as considered by the Assessing Officer). The Assessing Officer "considered the law laid down" in this apex court decision while examining the surplus on cancellation of forward exchange contracts and applied relevant principles when making the assessment.
State Bank Of India v. Commissioner Of Income Tax, Ernakulam [1986] 157 ITR 67 Authority on similar issues relating to foreign exchange transactions (as considered by the Assessing Officer). The Assessing Officer considered the decision in assessing the effect of cancellation of forward exchange contracts.
Vania Silk Mills (P) Ltd. v. Commissioner Of Income-Tax, Ahmedabad [1991] 191 ITR 647 Another appellate decision relevant to the law applied on the forward contract issue (considered by the Assessing Officer). The Assessing Officer examined and relied on this decision in the assessment order when reaching conclusions on the forward contracts issue.
Cit, Bombay City v. Tata Locomotive & Engineering Co., Ltd. [1966] 60 ITR 405 Cited by the assessee to support the proposition that cancellation surplus does not amount to a taxable transfer. The assessee placed reliance on this decision in its submissions; the Assessing Officer and the assessment order reflect consideration of authorities cited by the assessee.
Universal Radiators, Coimbatore v. Commissioner Of Income Tax, Tamil Nadu [1993] 201 ITR 800 Cited by the assessee in support of its contention on the non-taxability of the surplus on cancellation of forward contracts. The assessee relied on this decision in its written submissions and before the Assessing Officer; it formed part of the material considered in the assessment order.
Lakhanpal National Limited v. ITO [1986] 162 ITR 240 (Guj) Cited in relation to the question of deduction of excise duty under section 43B. The Assessing Officer, after detailed discussion and having considered the decision, accepted the assessee's contention regarding the excise duty deduction.

Court's Reasoning and Analysis

The Court proceeded by examining the statutory requirement for issuing a notice under section 148: the Assessing Officer must record reasons showing that he has "reason to believe" that income chargeable to tax has escaped assessment. The Court reviewed the reasons recorded by the Assessing Officer who issued the section 148 notice and compared those reasons with the material on record, including the earlier assessment order passed by the previous Assessing Officer.

Key analytic steps the Court followed (as reflected in the opinion):

  1. The assessment order dated March 24, 1994, demonstrates that the original Assessing Officer considered the assessee's submissions, examined relevant facts and authorities, and passed a detailed order applying judicial decisions to the contested items (forward contract surplus and excise duty).
  2. The reasons recorded by the new Assessing Officer for issuing the section 148 notice were examined and found to state, in the operative language, that scrutiny had found "incorrect claims" allowed and therefore concluded that income had escaped assessment due to failure to disclose income truly and fully (the Court reproduced the operative language of the reasons).
  3. The Court observed that the record shows no indication of failure by the assessee to make a return or to disclose fully and truly all material facts in the original assessment. Nor did the Revenue identify any fresh information that had come to the Assessing Officer's notice after the original assessment which could justify reopening the assessment.
  4. The Court applied the established principle (as stated in the opinion) that an Assessing Officer cannot invoke section 148 merely because he forms a different opinion from his predecessor on the same set of facts; a mere change of opinion does not constitute escapement of income.
  5. Reading the reasons recorded by the Assessing Officer, the Court concluded that those reasons reflected a change of opinion rather than the presence of new information or evidence demonstrating escapement of income. Because the statutory requirement for a bona fide "reason to believe" that income had escaped assessment was not satisfied on the record, the reopening notices were held to be invalid.

Holding and Implications

Holding: The petitions were allowed. The notices issued under section 148 dated February 3, 1995 (annexure "D") in both special civil applications were quashed and set aside. The rule was made absolute with no order as to costs.

Implications:

  • Direct effect: The specific section 148 notices impugned in these petitions were invalidated; the reopening of assessment in these instances cannot proceed on the basis of the recorded reasons before the Court.
  • Legal principle applied: The Court reaffirmed that a mere change of opinion on the same material facts—without the emergence of fresh information or evidence indicating that income has escaped assessment—does not justify the issuance of a section 148 notice. The Court relied on this principle in setting aside the notices on the record before it.
  • Broader precedent: The opinion applies established principles to the facts of these petitions. The text of the opinion does not purport to lay down any novel legal doctrine beyond the application of the well-known rule that a change of opinion is not a ground for reopening assessments; therefore, the decision's practical effect is confined to the invalidation of the particular notices and the facts of these cases as presented in the record.

Note: This summary is compiled exclusively from the text of the provided opinion. No additional facts, citations or interpretations beyond those expressly contained in the opinion have been introduced.

Show full summary ...

    Garden Silk Mills Ltd. v. Deputy Commissioner Of Income-Tax (No. 2).

    1. The petitioner, a public limited company (hereinafter referred to as "the company" or "the assessee"), by filing these petitions under article 226 of the Constitution of India has prayed for issuance of a writ of certiorari or any other appropriate writ, order or direction to quash and set aside the notice at annexure "A" dated February 3, 1995, under section 148 of the Income-tax Act, 1961 (hereinafter referred to as "the Act").

    2. In Special Civil Application No. 1190 of 1995 for the assessment year 1993-94, notice vide annexure "D" dated February 3, 1995, came to be issued by the Assessing Officer under section 148 of the Act. The notice is issued on identical facts which are referred to in Special Civil Application No. 1189 of 1995. Except the change in figures, we find no changes. At the request of learned counsel, we have heard both the matters together and have disposed of them by a common judgment.

    3. The short facts of the case as they emerge from Special Civil Application No. 1189 of 1995 are as under :

    The company submitted the computation of income for the assessment year 1992-93, vide annexure - "A" and claimed deduction of various items including : (i) Rs. 2,96,04,082 being the surplus on cancellation of forward contracts, and (ii) Rs. 10,06,50,438 being excise duty paid on yarn, yarn used in cloth and engineering components included in closing stock. The Assessing Officer, during the course of assessment raised questions regarding the aforesaid items and the company was called upon to explain. The company, by its letter dated March 8, 1994, explained in detail as to how the amount was received. It was pointed out that the company has entered into forward exchange contracts and on cancellation of the same, an amount of Rs. 8,54,42,806 was received. Out of the aforesaid amount Rs. 4,68,36,094 came to be credited to plant and machinery account, Rs. 90,02,650 came to be credited to roll over premium expense account and Rs. 2,96,04,082 came to be credited to the profit and loss account. It was pointed out that the company being a manufacturer of textile fabrics, imports various machinery and equipment against loans in foreign currency. Against the instalments of loans payable and interest payable on such loans, the petitioner-company entered into contracts covering the foreign exchange contracts to guard against the fluctuation in the rate of foreign currency. In view of the policy, the Reserve Bank of India permits companies to enter into forward contracts for the foreign exchange to be drawn by the companies with a view to limit or regulate exposure of the Indian companies. It was specifically pointed out that the company is not engaged in financing business or dealing in foreign exchange.

    4. With regard to excise duty, it was pointed out that the petitioner-company has claimed deduction under section 43B of the Act in respect of excise duty with respect to closing stock of cloth and engineering components on the ground of payment of excise duty amounting to Rs. 10,06,50,438. It was pointed out that the petitioner-company has inventory of yarn of Rs. 20,73,76,667 cloth of Rs. 39,77,43,368 and of engineering components of Rs. 21,33,34,204 as on March 31, 1992. This inventory includes excise duty paid by the company on yarn purchased by the company and lying in the closing stock in the heading of yarn, of cloth and engineering components, respectively. It was pointed out that the excise duty paid on purchase of raw material would make the company entitled to get the deduction under the provisions of section 43B of the Act.

    5. Mr. P.K. Kedia, the then Deputy Commissioner of Income-tax (Assessment), Special Range-I, Surat, on March 24, 1994, considering the submissions assessed the company assessee. In paragraph 4.5 of the assessment order, the Assessing Officer has discussed in detail about the amount received by the assessee on cancellation of forward exchange contracts. It also clearly indicates that the Assessing Officer has considered the law laid down by the apex court in the case of Commissioner Of Income Tax, Mysore v. Canara Bank Ltd.. [1967] 63 ITR 328 and in the case of State Bank Of India v. Commissioner Of Income Tax, Ernakulam. [1986] 157 ITR 67, respectively. The Assessing Officer also considered the decision rendered by the apex court in the case of Vania Silk Mills (P) Ltd. v. Commissioner Of Income-Tax, Ahmedabad. [1991] 191 ITR 647. The assessee contended that the cancellation of forward exchange contracts does not involve "transfer" of a capital asset within the meaning of section 2(47) of the Act. The assessee also contended that surplus arising on cancellation of the forward exchange contracts in the case of a manufacturing company like the assessee-company would not be liable to pay tax on such surplus. The assessee placed reliance on the decision of the apex court in the case of Cit, Bombay City v. Tata Locomotive & Engineering Co., Ltd.. [1966] 60 ITR 405 and Universal Radiators, Coimbatore v. Commissioner Of Income Tax, Tamil Nadu. [1993] 201 ITR 800.

    6. In paragraph 4.8 of the assessment order, the Assessing Officer has, after considering the submissions made by the assessee and having gone through the decisions, held that the assessee is not a banking company and is not engaged in the business of purchasing foreign exchange or dealing in the same by entering into forward exchange contracts. After following the decisions of the apex court, the Assessing Officer held that there is no transfer of a capital asset on cancellation of the forward exchange contracts.

    7. Even with regard to the claim of the assessee for deduction of excise duty, in paragraph 4.10 of the assessment order, the Assessing Officer has considered the decisions pointed out by the assessee, and particularly, the case of Lakhanpal National Limited v. ITO [1986] 162 ITR 240 (Guj) and after a detailed discussion, has held that there is no difficulty in accepting the contention raised by the assessee. Thus, after considering the various decisions cited before him, the Assessing Officer passed an order of assessment.

    8. It appears that the new incumbent in place of the Deputy Commissioner of Income-tax (Assessment), Special Range-I, Surat, issued a notice under section 148 of the Act. Shah and Thakore, learned counsel, have taken us through the record and the decision referred to hereinabove and some other decisions to which reference need not be made. If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned. The Assessing Officer is required to record his reasons in every case before issuing a notice and accordingly, in the instant case, reasons recorded by the Assessing Officer are placed on record. There is nothing to indicate that there was failure on the part of the assessee to make a return of its income and to disclose fully and truly all the material facts necessary for his assessment. In the reasons, there is nothing to indicate that the Assessing Officer in consequence of information in his possession has reason to believe that the income has escaped assessment. It is well known that the Assessing Officer is entitled to act on information received after the original assessment. Such information may have been gathered from the record of assessment itself. The Assessing Officer cannot take any action under this section merely because he happens to change his opinion or to hold an opinion different from that of his predecessor on the same set of facts. From the assessment order, it clearly appears that the Assessing Officer applied his mind to the computation of income and, therefore, in a case like this, it would not be open for the Assessing Officer to issue a notice under section 148 of the Act. The reasons which are placed on record are perused by us. Learned counsel for the Revenue could not point out anything from the said reasons that after the order of assessment by the Assessing Officer considering all the decisions, any further information has been received by the Assessing Officer which could enable him to exercise the powers. Reading the reasons recorded by the Assessing Officer, it clearly transpires that there is no now information but there is a change of opinion. In the operative part of the reasons, it is recorded as under :

    "On scrutiny of records, it was found that the assessee had made incorrect claims and the same were allowed. Because of these incorrect claims, if is concluded that the income chargeable to tax has escaped assessment by reason of failure on the part of the assessee to disclose income truly and fully."

    9. If it had been the case that the facts were not disclosed fully and truly, then it could be said that by not disclosing the facts claims were made and were allowed. But the facts are mentioned by the assessee and with regard to the subject-matter, we find detailed discussion in the assessment order. The assessment order clearly indicates that the assessee was required to address with regard to the subject-matter before the assessment and the Assessing Officer was satisfied about factual and legal aspect and following the judgments of the apex court and of this court assessed the assessee. In reply, the respondent has not dealt with the specific contention raised by the assessee that it has fully and truly disclosed all the relevant facts. Even before this court it was not suggested by learned counsel for the Revenue that relevant facts for assessment have been concealed or have not been fully and truly disclosed.

    10. In our opinion, it is a mere change of opinion and that would not amount to escapement of income. On this ground, these petitions are required to be allowed and are hereby allowed. Notices issued under section 148 annexure "D" dated February 3, 1995, in both the special civil applications are hereby quashed and set aside. Rule made absolute accordingly with no order as to costs.

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    Comments

    Garden Silk Mills Ltd. v. Deputy Commissioner Of Income-Tax (No. 2).
    (Jun 26, 1996)