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M/S. Mahavir Spinning Mills Ltd. v. Commissioner Of Income-Tax-I, Ludhiana .

Punjab & Haryana High Court

May 29, 2004

Judgment

CaseIQ

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Factual and Procedural Background

The petitioner is a public limited company regularly assessed to income tax. It filed its return of income for Assessment Year 1995–1996 on 28.11.1995 (later revised on 16.7.1996). In that return the petitioner claimed exemption under Section 10‑B for profits from a 100% Export Oriented Unit (Annant Spinning Mills Unit‑I) of Rs. 4,64,51,545 and a deduction under Section 80‑HHC of Rs. 5,51,59,320. Assessment under Section 143(3) was completed in March 1998 (the opinion records both 16.3.1998 and 18.3.1998 in different places) and the Assessing Officer allowed the Section 10‑B exemption but reduced the Section 80‑HHC deduction. The assessee appealed to the Commissioner of Income Tax (Appeals), who allowed certain deductions; further appeals to the ITAT were pending.

On 30.3.2001 the Assessing Officer issued a notice under Section 148 (initiating proceedings under Section 147) for AY 1995–1996 on the ground that income chargeable to tax had escaped assessment. The assessee complied by filing a return on 10.8.2001 and requested a copy of the reasons recorded for initiating proceedings under Section 147 so that it could file objections. The Assessing Officer did not supply the reasons despite reminders, and the assessee filed the present writ petition seeking quashing of the notice under Section 148.

The respondent filed a written statement and enclosed a copy of the reasons recorded (Annexure R‑1). The Court examined those reasons and the parties' submissions and ultimately quashed the impugned notice under Section 148 and allowed the writ petition, with no order as to costs.

Legal Issues Presented

Whether the notice issued under Section 148 (initiating reassessment under Section 147) for Assessment Year 1995–1996 was valid where proceedings were initiated after the expiry of four years from the end of the relevant assessment year, and whether the reasons recorded showed the required satisfaction that the escapement of income was due to failure by the assessee to disclose fully and truly all material facts.
Whether a writ petition under Article 226 challenging a notice under Section 148 is maintainable when the legality of the notice is alleged to be apparent on the face of the notice and the reasons recorded, in light of competing authorities on availability of alternative remedies (notably GKN Driveshafts).

Arguments of the Parties

Petitioner's Arguments

When assessment had been completed under Section 143(3) and reassessment proceedings are initiated after the expiry of four years, the Assessing Officer must not merely entertain a reason to believe that income escaped assessment but must record satisfaction that the escapement resulted from the assessee's failure to disclose fully and truly all material facts necessary for assessment. The recorded reasons must contain that satisfaction.
The reasons recorded (Annexure R‑1) contain no finding or satisfaction that the escapement was due to failure to disclose fully and truly all material facts; the absence of such a finding renders the action without jurisdiction.
Relied on this Court's decision in CWP 4516 of 2003 (Duli Chand Singhania v. Asstt. Commissioner of Income Tax, Phagwara) and the Supreme Court's decision in Commissioner of Income‑tax v. Foramer France (2003 (264) ITR 566) to support the contention that the statutory pre‑condition was not satisfied.
Also relied on Ajanta Pharma Ltd. v. Assistant Commissioner of Income Tax (Bombay High Court, 2004 (267) ITR 200) to contend that a writ petition is maintainable where absence of jurisdiction is apparent on the face of the notice/reasons.

Respondent's Arguments

The writ petition is not maintainable against a notice under Section 148 because the assessee has the full opportunity to raise all legal objections before the Assessing Officer; the proper course is to raise objections before the AO.
Relied primarily on the Supreme Court judgment in GKN Driveshafts (India) Ltd. v. Income Tax Officer (2003 (259) ITR 19) to support the proposition that alternative statutory remedies must ordinarily be availed.
Substantively, the respondent contended that the assessee had claimed "double deductions" — exemption under Section 10‑B as well as deduction under Section 80‑HHC in respect of the same export sales of the 100% EOU — which, the Revenue says, indicated that the assessee had failed to disclose truly and fully all material facts and justified reassessment proceedings.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Duli Chand Singhania v. Asstt. Commissioner of Income Tax (CWP 4516 of 2003, decided 20.12.2003)	Absence of a recorded satisfaction that escapement resulted from failure to disclose fully and truly all material facts renders the Assessing Officer's action under Section 147/148 without jurisdiction.	The Court relied on this decision to hold that because the reasons recorded contained no such satisfaction, the notice under Section 148 was without jurisdiction and thus quashed.
Commissioner of Income‑tax v. Foramer France, 2003 (264) ITR 566	Relied on by the petitioner (citation relied upon to support legal submissions regarding reassessment procedure).	The opinion records the petitioner's reliance on this Supreme Court authority; the Court took note of the reliance as part of the petitioner's submissions.
GKN Driveshafts (India) Ltd. v. Income Tax Officer, 2003 (259) ITR 19	Authority cited by the Revenue to argue that a writ petition against a notice under Section 148 is not maintainable because the assessee should raise objections before the tax authorities (availability of alternative remedy).	The Court considered this authority but, in light of other precedents (notably Ajanta Pharma), accepted that GKN does not bar a petition under Article 226 where absence of jurisdiction is apparent on the face of the notice/reasons; the Court agreed with the view in Ajanta Pharma that the writ jurisdiction may be invoked in such cases.
Ajanta Pharma Ltd. v. Assistant Commissioner of Income Tax, 2004 (267) ITR 200 (Bombay High Court)	Holds that GKN does not oust writ jurisdiction where exercise of power under Section 148 is ex facie without jurisdiction; mere availability of alternative remedy is no bar when authority acts without jurisdiction.	The Court expressly stated its agreement with the observations in Ajanta Pharma and relied on them in concluding that this writ petition was maintainable because the illegality of the notice was apparent on the face of the reasons recorded.
Calcutta Discount Co.'s case (Constitution Bench) — (referenced in Ajanta Pharma)	Principle (as quoted in Ajanta Pharma): mere availability of an alternative relief cannot be a bar to exercise of writ jurisdiction when authorities seek to assume jurisdiction they do not possess or act in a totally arbitrary manner.	This principle, cited within the Ajanta Pharma judgment and quoted in the opinion, underpins the Court's willingness to exercise writ jurisdiction where absence of jurisdiction is apparent on the face of the record.

Court's Reasoning and Analysis

The Court examined the reasons recorded by the Assessing Officer (as reproduced in Annexure R‑1). The recorded reasons explained that during assessment of AY 1998–1999 it was observed that the assessee had been claiming exemption under Section 10‑B for income of the 100% EOU (Annant Spinning Mills Unit‑I) and simultaneously claiming deduction under Section 80‑HHC in respect of export sales of that unit, resulting in what the Assessing Officer described as "double relief." The Assessing Officer concluded that the deduction under Section 80‑HHC had been allowed wrongly in respect of the export turnover of the 100% EOU and therefore believed that excessive deduction had been allowed which resulted in income escaping assessment for AY 1995–1996; permission was sought to issue notice under Section 148 read with Section 150(1).

The Court's analysis focused on a specific statutory pre‑condition applicable where reassessment is proposed after the expiry of four years from the end of the relevant assessment year: the Assessing Officer must not only have a reason to believe that income has escaped assessment but must also record satisfaction that such escapement resulted from the assessee's failure to disclose fully and truly all material facts necessary for assessment. The Court found that the reasons recorded contained no such recorded satisfaction or allegation that the escapement was due to failure to disclose fully and truly all material facts; the reasons spoke only to the Assessing Officer's belief that excessive deduction had been allowed.

Relying on Duli Chand Singhania (as relied upon by the petitioner), the Court held that the absence of the necessary finding renders the Assessing Officer's action wholly without jurisdiction. The Court further considered the question of maintainability of a writ petition under Article 226 in the light of GKN Driveshafts and Ajanta Pharma; it accepted the reasoning in Ajanta Pharma that GKN does not bar a writ petition where the absence of jurisdiction is apparent on the face of the notice and the reasons recorded. Because the illegality in the present case was apparent from the reasons themselves, the Court held that requiring the petitioner to first approach the Assessing Officer would only prolong the proceedings and was unnecessary.

Holding and Implications

Holding: The impugned notice under Section 148 of the Income‑tax Act is quashed and the writ petition is allowed.

Implications:

Direct effect on the parties: The reassessment proceedings initiated by the notice under Section 148 for Assessment Year 1995–1996 are rendered invalid by the quashing of the notice; the assessee is relieved of the immediate burden of those reassessment proceedings arising from that notice.
No costs were awarded: The Court specified that in the circumstances there shall be no order as to costs.
Broader precedent: The opinion does not purport to lay down a novel legal principle beyond applying existing authorities; the Court followed established authorities (as recorded) to conclude that where reasons on the face of the record do not show the required statutory satisfaction (that escapement resulted from failure to disclose fully and truly all material facts), the notice is without jurisdiction and may be quashed by writ. The opinion did not declare any new departure from precedent.

Petition allowed.

Show all summary ...

N.K Sud, J.:— Challenge in this writ petition is to the validity of notice under Section 148 of the Income Tax Act, 1961 (for short ‘the Act’) by which proceedings under Section 147 of the Act (Annexure P-16) have been initiated to re-assess the income which is alleged to have escaped assessment for the Assessment Year 1995–1996.

2. Before adverting to the dispute, the relevant facts may first be noticed.

3. Petitioner is a Public Limited Company incorporated under the Companies Act, 1956 and is regularly assessed to income tax under the Act. It filed its return of income for the Assessment Year 1995–1996 on 28.11.1995 showing a total income of Rs. 23,85,28,960/-. The return was subsequently revised on 16.7.1996 showing an income of Rs. 24,24,63,910/-. In the return filed by the assessee, it had claimed exemption under Section 10-B of the Act in respect of profits and gains derived from one of its units M/s. Annant Spinning Mills (Unit-I), which was 100% Export Oriented Unit, amounting to Rs. 4,64,51,545/-. It also claimed deduction under Section 80-HHC of the Act amounting to Rs. 5,51,59,320/-. Assessment under Section 143(3) of the Act was made on 16.3.1998 at an income of Rs. 25,06,29,080/-. The Assessing Officer allowed exemption under Section 10-B as claimed whereas deduction under Section 80-HHC was reduced to Rs. 5,29,90,077/-. The assessee preferred an appeal before the Commissioner of Income Tax (Appeals) who allowed certain deductions.

4. On 30.3.2001, the Assessing Officer issued the impugned notice under Section 148 of the Act observing that income chargeable to tax for Assessment Year 1995–1996 had escaped assessment within the meaning of Section 147 of the Act. The assessee was, therefore, required to furnish a return of income within 30 days from the service of that notice. The Assessee complied with the said notice and filed the return on 10.8.2001 and also requested that a copy of the reasons recorded for initiation of proceedings under Section 147 of the Act be supplied to it so that it may file objections against the same. Since, the reasons recorded by the Assessing Officer were not supplied, a reminder to that effect was sent vide letter dated 18.8.2001 Getting no response from the Assessing Officer, the petitioner addressed a letter to the Commissioner of Income Tax, Ludhiana, dated 24.8.2001, bringing it to his notice that the Assessing Officer has neither supplied copy of the reasons recorded nor allowed inspection of the record. Another reminder was sent to the Assessing Officer on 29.8.2001 Since no reasons were being supplied, the assessee approached this Court by filing the present petition.

5. Written statement has been filed on behalf of respondent No. 2 along with which copy of reasons recorded have been enclosed as Annexure R-1.

6. In replication, the petitioner has pointed out that a bare perusal of the reasons recorded shows that the assumption of jurisdiction was clearly bad as the pre-requisite conditions as provided in Section 147 of the Act have not been fulfilled.

7. Mr. G.C Sharma, learned counsel for the petitioner, pointed out that it is a case where assessment had been completed under Section 143(3) of the Act and proceedings under Section 147 are sought to be initiated after the expiry of four years from the end of the relevant Assessment Year. In such circumstances, it was not enough for the Assessing Officer to entertain a reason to believe that income had escaped assessment. He is further required to record satisfaction and entertain reason to believe that the escapement had resulted on account of failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment. No such satisfaction had been recorded in the reasons attached with the written statement as Annexure R-1. He relied on the judgment of this Court in CWP 4516 of 2003 decided on 20.12.2003 (Duli Chand Singhania v. Asstt. Commissioner of Income Tax, Phagwara). He also placed reliance on the judgment of the Supreme Court in Commissioner of Income-tax v. Foramer France, 2003 (264) ITR 566.

8. Mr. R.R Sawhney, Sr. Advocate, on the other hand, contended that the writ petition is not maintainable against notice under Section 148 of the Act as the assessee shall have full opportunity to raise all legal objections before the Assessing Officer. For this purpose, he placed reliance on the judgment of the Supreme Court in GKN Driveshafts (India) Ltd. v. Income Tax Officer, 2003 (259) ITR 19. He further stated that since the assessee had claimed double deductions by claiming exemption under Section 10-B as also deduction under Section 80-HHC in respect of Annant Spinning Mills (Unit-I), it is clear that assessee had failed to disclose truly and fully all material facts necessary for its assessment.

9. Mr. G.C Sharma relied on the judgment of the Bombay High Court in Ajanta Pharma Ltd. v. Assistant Commissioner of Income Tax, 2004 (267) ITR 200 in which notice under Section 148 of the Act was quashed in a writ petition over-ruling the objection of the Revenue that in view of the judgment of the Supreme Court in the case of GKN Driveshafts (India) Ltd. case (supra), no writ petition against a notice under Section 148 of the Act was maintainable. The High Court at page 206 has observed as under:—

“If one reads the decision of the Apex Court in GKN's case (supra), as rightly submitted by the learned advocate for the petitioner, it nowhere lays down the law to the effect that the party is totally debarred from approaching this court under Article 226 of the Constitution of India when the exercise of powers by the authority under Section 148 of the said Act ex facie appears to be without jurisdiction. Undoubtedly, whether such an exercise is with or without jurisdiction will have to be revealed from the notice and reasons on the face thereof. At the same time, it is also well settled and the decision of the Constitution Bench of the Apex Court in Calcutta Discount Co.'s case (supra) is very clear on the point that mere availability of an alternative relief can be no bar for exercise of a writ jurisdiction when the authorities seek to assume jurisdiction which they do not possess or act in a totally arbitrary manner. The decision in GKN's case (supra) certainly reminds the assessee that when a notice under Section 148 is issued, the proper course of action is to file a reply with his objections including those in relation to the absence of jurisdiction. However, it does not lay down the law to the effect that when such an objection is in relation to absence of jurisdiction and the same is revealed ex facie or apparent on the face of a notice or reasons in support thereof, the assessee has compulsorily to invite an order from the Assessing Officer in relation to the absence of jurisdiction. It is another case that when certain facts are to be ascertained or various other materials are to be gone through to arrive at a finding about the absence of jurisdiction, in which case, certainly, the assessee will have to approach the Assessing Officer. It is so because the jurisdiction under Article 226 of the Constitution of India being an extraordinary jurisdiction cannot be allowed to be availed of as a matter of course. In order to decide an issue of jurisdiction, findings of the authority on the factual aspect may be necessary. In that case, certainly primarily the assessee will have to approach the Assessing Officer. That does not mean that the assessee is invariably bound to approach the Assessing Officer in each and every case. There can be the cases, like the one in hand, where he may be entitled to approach the court directly under Article 226 of the Constitution of India.”

10. We are in agreement with the above observations.

11. Before issuing the impugned notice under Section 148 of the Act, the Assessing Officer had recorded the following reasons as required under sub-section (2) of Section 148 of the Act:—

“Return in this case was filed on 28.11.1995, showing total income of Rs. 23,85,28,960/-. Revised return of income processed under Section 143(1)(a) on 22.8.1996 at an income of Rs. 24,24,63,910/-. Assessment u/s 143(3) was made on 18.3.1998 at Rs. 25,06,29,080/-. The Ld. CIT(A) allowed certain relief vide his order in appeal No. 89/11798-1999, dated 2.6.1988 and income reduced to Rs. 23,43,21,480/-. Department as well as assessee filed appeals in ITAT which are pending. The assessee's income determined at Rs. 24,10,65,297/- vide order under Section 154, dated 29.12.1999

During the course of assessment proceedings for Assessment Year 1998–1999, it came to the notice of the undersigned that the assessee had been claiming exemption under Section 10-B in respect of the income of its 100% EOU named as Annant Spinning Mills (Unit-I) for Assessment Year 1995–1996 to 1999–2000. At the same time, it has also been claiming deduction under Section 80-HHC in respect of export sales of the said Unit resulting into double relief under Section 10-B and 80-HHC on the same export sales. This double relief (exemption under Section 10-B and deduction u/s 80-HHC) is not allowable under the provisions of the Act to an 100% E.O.U This issue has been discussed in details in the assessment order under Section 143(3) dated 30.3.2001 for Assessment Year 1998–1999. After taking into consideration, the assessee's reply and arguments on the said issue, it has been held that the assessee is not entitled to claim deduction u/s 80-HHC on export sales of an 100% EOU, in respect of income of which exemption has been claimed u/s 10-B of the Act.

A scrutiny of assessment record of Assessment Year 1995–1996 reveals that the assessee had claimed exemption u/s 10-B of the Act in respect of income of Rs. 4,64,51,545/- relating to its 100% EOU named as Annant Spinning Mills Unit-I. Simultaneously, it had also claimed deduction under Section 80-HHC in respect of export sales of the said Unit which were included in the total export turnover of Rs. 50,13,80,068/- on which deduction has been claimed u/s 80-HHC. The said deduction u/s 80-HHC was allowed wrongly by the A.O in his order under Section 143(3) dated 18.3.1998 though the deduction under Section 80-HHC was not allowable in respect of export turnover of its 100% E.O.U as it had already claimed exemption of its income under Section 10-B. In view of facts and circumstances discussed above, I have reasons to believe that excessive deduction under Section 80-HHC has been allowed to the assessee under Section 80-HHC to the extent of deduction allowed in respect of export turnover of the said 100% EOU and income to that extent which was chargeable to tax has escaped assessment for Assessment Year 1995–1996. This escaped income is proposed to be reassessed now u/s 147. It is, therefore, requested that permission may kindly be allowed to issue notice u/s 148 read with Section 150(1) of the I.T Act.”

12. A bare perusal of the above shows that the entire thrust of the observations recorded by the Assessing Officer is to justify his satisfaction about escapement of income. There is not even a whisper of an allegation that such escapement had occurred by reason of failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment. As held in Duli Chand Singhania's case (supra), absence of this finding makes the action of the Assessing Officer wholly without jurisdiction. Since the illegality of notice under Section 148 of the Act is apparent from the reasons recorded for initiation of proceedings under Section 147 of the Act, it is a fit case for interference in the exercise of our writ jurisdiction. Sending the petitioner back to the Assessing Officer to raise these objections and requiring him to pass an order thereon would be prolonging the proceedings unnecessarily.

13. In view of the above, we are satisfied that the impugned notice under Section 148 of the Act is without jurisdiction and is, accordingly, quashed. The writ petition stands allowed. However, in the circumstances of the case, there shall be no order as to costs.