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Northern Strips Ltd. And Another v. Income-Tax Officer
Factual and Procedural Background
The writ petition challenges a notice dated March 27, 2008 and an order dated November 10, 2008 issued under sections 147/148 of the Income-tax Act, 1961, seeking reassessment for assessment year 2001-02.
The petitioner company manufactures and performs cutting and slitting of polyester films and operates an industrial undertaking at Silvasa (a notified backward area under the Eighth Schedule). For AY 2001-02 the petitioner filed its return under section 139(1) declaring income under normal provisions and book profit under section 115JB. It claimed a deduction under section 80-LA (also referred to and argued under section 80-IA/80-IB in the record) and the return was processed under section 143(1), followed by issuance of a notice under section 143(2) and completion of assessment under section 143(3) on March 31, 2003, which allowed deduction under section 80-IA.
On March 27, 2008 a notice under section 148 was issued initiating reassessment proceedings; the petitioner requested and received reasons recorded under section 147, raised objections on October 22, 2008, and the respondent dismissed those objections by an order dated November 10, 2008. The petitioner challenged the reopening and the dismissal of objections by filing this writ petition.
Legal Issues Presented
- Whether the reopening of assessment under sections 147/148 for AY 2001-02 was valid where the reasons relied upon by the Assessing Officer alleged that the assessee was engaged in processing/packing (not manufacturing) and therefore not entitled to deduction under section 80-IA/80-LA/80-IB.
- Whether the reasons recorded for reopening, made after the four-year period, properly averred failure to fully and truly disclose material particulars as required by the proviso to section 147.
- Whether the reassessment was impermissible as a mere change of opinion when no new fact or material was cited to justify reopening.
- Whether consistency in earlier and subsequent assessments (and a similar decision in respect of a group company) precluded reopening and denial of the deduction for the subject year.
Arguments of the Parties
Petitioner's Arguments
- The reasons for reopening do not aver that the assessee failed to fully and truly disclose material particulars — an averment necessary where proceedings are initiated after the expiry of four years (relying on JSRS Udyog Ltd. v. ITO [2009] 313 ITR 321 (Delhi)).
- The reasons contain no new fact and therefore the reopening is a mere change of opinion, which cannot justify proceedings under sections 147/148.
- The Assessing Officer had allowed the deduction in preceding years (1999-2000, 2000-01) and subsequent years (2002-03); after such allowances, reopening to withdraw the deduction is unwarranted.
- In respect of a group company (M/s Super Plastic Coats Pvt. Limited) engaged in similar activity, the Assessing Officer had ultimately held the activity to be manufacturing and allowed the deduction; the present reopening is inconsistent with that approach.
Respondent's Arguments
- The respondent principally relied on the order dated November 10, 2008 passed by the Assessing Officer under section 147, which concluded that the assessee was engaged in "mere processing and packing" and not in manufacturing or production of any article or thing and therefore was not entitled to deduction under section 80-IA/80-LA/80-IB.
- The respondent placed reliance on the portion of the final order that identifies the statutory condition in section 80-IB(2)(iii) (manufacturing/production) and concluded that the assessee's activity did not meet this condition.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| JSRS Udyog Ltd. v. ITO, [2009] 313 ITR 321 (Delhi) | Proposition that reasons for reopening (particularly after four years) must show failure to fully and truly disclose material particulars; reopening cannot be based on mere change of opinion. | The petitioner relied on this authority to contend that the reopening was without basis. The court applied the principle expressed in the opinion that reassessment cannot be initiated as a mere change of opinion and found the Assessing Officer's reasons lacked any new material or an averment of failure to fully and truly disclose, thereby supporting quashing of the reassessment. |
Court's Reasoning and Analysis
The court examined the reasons recorded by the Assessing Officer for reopening. The AO's stated basis was that the assessee had claimed a deduction under section 80-IB (referred in the record also as 80-IA/80-LA) but was engaged in cutting and slitting of polyester film — described by the AO as "mere processing and packing" — and therefore not manufacturing or producing an article or thing as required by section 80-IB(2)(iii).
The court set out the governing legal principles: where reassessment is sought after the four-year period, the reasons recorded must demonstrate either a failure to fully and truly disclose material particulars or point to new facts or materials that justify reopening; a mere change of opinion is not a valid basis. The court observed that this principle is well settled and is the touchstone for evaluating the reasons recorded by the AO.
Applying these principles to the material on record, the court noted that:
- The AO's recorded reasons merely stated his view that the activity was not manufacturing. The reasons did not cite any new facts or materials discovered after the original assessment, nor did they aver that the assessee had failed to fully and truly disclose material particulars.
- The assessee had already furnished detailed explanations and documentary submissions during the scrutiny assessment (including letters dated December 10, 2002 and March 24, 2003) justifying the allowability of the deduction; the deduction was allowed by the order under section 143(3).
- Deduction had been allowed in preceding and subsequent assessment years, indicating an established position that the activity qualified as manufacturing for the purposes of the deduction — this consistency undermined the assertion that the 2001-02 return had escaped assessment due to concealment or nondisclosure.
- Proceedings in respect of a group company engaged in similar activity had been initiated but ultimately dropped with recognition of entitlement to the deduction, reinforcing the lack of new material to justify reopening in the present case.
Having applied the legal standard, the court concluded that the AO's reasons amounted to a mere change of opinion and did not meet the statutory requirement for reopening after four years. The court emphasized that the record did not contain new material nor an averment of failure to disclose, and therefore the reassessment proceedings could not be sustained.
Holding and Implications
Holding: Writ Petition Allowed; the impugned notice dated March 27, 2008 and the order dated November 10, 2008 (proceedings under sections 147/148 of the Income-tax Act) are quashed.
Implications:
- The reassessment proceedings initiated by the respondent for assessment year 2001-02 pursuant to the notice dated March 27, 2008 are quashed, and a writ in the nature of certiorari was issued to that effect.
- The direct effect on the parties is that the deduction allowed under section 80-IA/80-LA (80-IB) in the original assessment stands for the subject year, and the reopening initiated on the stated grounds is invalidated.
- The court did not purport to lay down a new legal principle; it applied established law that reopening cannot rest on a mere change of opinion and that reasons must show either new material or failure to fully and truly disclose where the proviso to section 147 is attracted.
Valmiki J. Mehta, J.:— The present writ petition seeks quashing of the notice dated March 27, 2008 and the order dated November 10, 2008 passed by the respondent under section 147/148 of the Income-tax Act, 1961.
2. The petitioner-company is engaged in the business of manufacturing of cutting and slitting of polyster films. It has its industrial undertaking at Silvasa which is a notified backward area as specified in the Eighth Schedule to the Income-tax Act. For the assessment year 2001-02, the petitioner company filed a return of income under section 139(1) declaring an income of Rs. 3,37,167 under the normal provisions of the Act and an income of Rs. 2,58,98,479 under section 115JB of the Act. The petitioner company claimed a deduction of Rs. 2,18,17,975 under section 80-LA of the Act. The return of income was processed under section 143(1) and selected for scrutiny by issuance of notice under section 143(2) of the Act. During the course of assessment proceedings, the Assessing Officer asked the petitioner company to explain the basis of the claim of deduction and to which a detailed note was filed by the petitioner company with respect to allowability of deduction under section 80-LA of the Income-tax Act. The petitioner company by its letter dated December 10, 2002 furnished a note before the Assessing Officer, on the business activity and allowability of deduction under section 80-IA of the Act. The petitioner company also furnished another reply dated March 24, 2003, inter alia, with respect to allowability of deduction under section 80-LA. Vide order dated March 31, 2003, the Assessing Officer allowed the deduction under section 80-IA to the petitioner/assessee. The income was assessed at Rs. 4,37,450, however, the income declared at Rs. 2,58,98,479 under section 115JB of the Income-tax Act was taken for taxation purposes.
3. It is thereafter that the impugned notice was issued to the petitioner under section 148 of the Act dated March 27, 2008, and to which by letter dated April 21, 2008, the petitioner company requested the respondent to furnish a copy of the reasons recorded for initiating proceedings under section 147 of the Income-tax Act. Through the letter dated April 29, 2008, the respondent supplied the reasons recorded to the petitioner company for initiating proceedings under section 147/148 of the Act. The petitioner by letter dated October 22, 2008, filed the objections to the initiation of the reassessment proceedings on receiving the copy of the reasons. On November 10, 2008, the respondent passed an order dismissing the objections raised by the petitioner company to the initiation of reassessment proceedings. Hence this writ petition.
4. We may straightaway refer to the reasons given by the respondent for reopening of the assessment and which are as under:
“Reasons for reopening the case under section 147 of the Income-tax Act in the case of Northern Strips Ltd. in the assessment year 2001-02
The return of income in this case was filed on October 31, 2001 declaring an income of Rs. 3,37,167 and book profit under section 115JB of the Act of Rs. 2,58,98,479. Return was processed under section 143(1) of the Income-tax Act on February 25, 2003 and assessment under section 143(3) of the Act was made on March 31, 2003.
On perusal of the assessment records it has been found that during the year assessee has claimed deduction under section 80-IB of the Act for Rs. 2,18,17,975. As per section 80-IB(2)(iii) of the Act, one of the basic conditions for claim of deduction under this section is that ‘it manufactures or produces any article or thing not being any article or thing specified in the list in the Eleventh Schedule, or operates one or more cold storage plant or plants, in any part of India’. During the year under consideration the assessee was engaged in cutting and slitting of polyester film of various sizes, weight and micron. In fact the assessee has been engaged in mere processing and packing business and not any manufacturing or production of any article or thing.
In view of the above facts, I have reason to believe that the assessee is not entitled to claim deduction under section 80-LA of the Act, and by claiming the same the income has escaped assessment in the assessment year 2001-02. Since four years has expired from the end of the relevant years, and scrutiny assessment was completed under section 143(3) of the Income-tax Act, therefore, the statutory approval of the learned CIT, Delhi-V, New Delhi is required under section 151(1) of the Income-tax Act in the case of the assessee for the said assessment year, the reasons recorded above for the purpose of reopening of assessment is put up for kind satisfaction of Addl. CIT, Range-13, New Delhi in terms of the proviso to section 151 of the Act.
Put up for your kind perusal and forwarding to learned Commissioner of Income-tax, Delhi-V, New Delhi for necessary approval please.
R.K Sharma,
Asst. Commissioner of Income-tax
Circle-13(1), New Delhi.”
5. The counsel for the writ petitioner has urged four submissions before this court:
(i) The reasons given for the assessment do not show any averment that the assessee has failed to fully and truly disclose all material particulars. This averment was necessary inasmuch as the proceedings for reassessment were initiated after the expiry of a period of four years and hence covered by the proviso to section 147 of the Act. The counsel for the petitioner relies upon the judgment reported as JSRS Udyog Ltd. v. ITO, [2009] 313 ITR 321 (Delhi) in support of this proposition.
(ii) A reference to the reasons reproduced above show that no new fact has been referred to as the reason for reopening of the assessment and therefore, this amounts to a mere change of opinion which cannot form the basis for initiation of proceedings under section 147/148 of the Act.
(iii) The Assessing Officer has allowed deduction both in the preceding assessment years 1999-2000 and 2000-01 and also for the subsequent years 2002-2003, but after first allowing the same, this is now sought to be deleted pursuant to proceedings under section 147/148 of the Act.
(iv) With respect to a group company of the assessee namely M/s. Super Plastic Coats Pvt. Limited, the Assessing Officer has held the same process to be a manufacturing activity and has allowed deduction under section 80-IA. Copy of this order is placed at pages 196 to 198 of the writ petition. Even in the case of the group company, proceedings were initiated under section 147/148 of the Act, and which proceedings were dropped by holding that the activity which was carried on by the group company, and which is similar to the activity as in the present case, was a manufacturing activity.
6. It was therefore contended that there is no ground whatsoever for initiation of proceedings under section 147/148 of the Act.
7. In response, the counsel for the respondent has basically placed reliance upon the order dated November 10, 2008 passed by the Income-tax Officer under section 147 of the Act. He has more particularly relied upon the following portion of the order:
“The perusal of the assessment record of the assessee-company it has been found that during the year the assessee has claimed deduction 80-IB of the Act for Rs. 2,18,17,975. As per section 80-IB(2)(iii) of the Act, one of the basic conditions for claim of deduction under this section is that ‘it manufactures or produces any article or thing not being any article or thing specified in the list in the Eleventh Schedule, or operates one or more cold storage plant or plants, in any part of India’. During the year under consideration the assessee was engaged in cutting and slitting of polyester film of various sizes, weight and micron. In fact the assessee has been engaged in mere processing and packing business and not any manufacturing or production of any article of thing. Hence the assessee is not entitled for claiming of deduction under section 80-IA.”
8. The contents of the petition are well founded and we have no hesitation in allowing the present writ petition. The law is well settled that the proceedings under section 147/148 cannot be initiated merely because there is a change of opinion and there are no new facts for justifying the initiation of reassessment proceedings. A reference to the portion of the final order dated November 10, 2008, quoted above simply states that according to the Assessing Officer, the activity carried on by the assessee is not a manufacturing activity. In view of the fact that this very issue was duly considered and the assessee furnished a detailed note as also its letter dated December 10, 2002 and March 24, 2003 justifying the allowability of deduction under section 80-IA and which was duly allowed by an order passed under section 143(3) of the Act, it is clear that there is no basis for initiating proceedings under section 147/148. The very fact that deduction has been allowed in the preceding assessment years as also in the subsequent assessment years clearly points to the fact that the assessee was entitled to deduction under section 80-IA. Thus, even on the principle of consistency, there is no reason to disallow the deduction for the subject assessment year 2001-02. In the case of the group company of the assessee which carries on similar activity, similar proceedings were initiated under section 147/148 and which were ultimately dropped by holding the entitlement to deduction under section 80-IA with respect to the same manufacturing activity. The contention of the counsel for the respondent, by reference to the final order dated November 10, 2008, clearly carries no weight because the relevant portion of the order reproduced above does not show any new material or even an averment of failure on the part of the assessee to fully and truly disclose material particulars.
9. We, therefore, allow the writ petition and quash the impugned notice ‘dated March 27, 2008 and the order dated November 10, 2008 in the proceedings under section 147/148 of the Act. Writ in the nature of certiorari is issued quashing the reassessment proceedings initiated by the respondent in pursuance to the notice dated March 27, 2008 for the assessment year 2001-2002.
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