The Tax Publishers2006 TaxPub(DT) 1408 (Del-HC) : (2006) 283 ITR 0212 : (2006) 203 CTR 0550 : (2007) 158 TAXMAN 0182

 

Techspan India (P) Ltd. & Anr. v. ITO ()

 

CONSTITUTION OF INDIA

--Reassessment----WritMaintainability--Held: A writ petition would be maintainable to challenge invocation of proceedings for reassessment even though it was also open to the assessee to challenge the same before the AO during the assessment as also challenge the same before the appellate authorities after the reassessment proceedings were completed.

Constitution of India, 1950 Article 226

Income Tax Act, 1961 s.148


 

INCOME TAX

--Reassessment----Change of opinionDeduction under section 10A allowed after thorough inquiry in original assessment--The undertaking of the assessee engaged in the business of development and export of computer software is in a 'software technology park' (STP) and was eligible for deduction under section 10A. During the original assessment under section 143(3) it was noticed by the AO that the assessee was declaring income/receipts from two sources, namely, (1) software development and (2) human resources development. The assessee was required to show-cause as to why the expenses not be allocated between the two divisions in a proportionate manner as indicated in the notice itself in view of the fact that the assessee was not maintaining separate books of account for each division. After being satisfied with the reply of the assessee the AO completed original assessment. However, subsequently the AO issued notice under section 148 to initiate reassessment proceedings on the ground that deduction under section 10A was allowed in excess wrongly. Held: The reopening of assessment was not valid as the AO had allowed deduction under section 10A after a thorough discussion and enquiry and also the deduction as allowed was justified according to the law as prevalent in relevant assessment year. The reopening was thus based on change of opinion.

Income Tax Act, 1961 s.147

Income Tax Act, 1961 s.148



(2006) 283 ITR 0212 (Del-hc)

Techspan India P. Ltd. & Another v. Income-Tax Officer

In the Delhi High Court T. S. Thakur & Badar Durrez Ahmed Jj.

W. P. (C.) Nos. 14376 & 14377 of 2005. ITA 1961, ss 10A, 147, 148 ; Constitution of India, art 226 24 February 2006 A.Y. 2001-02

Counsel : C. S. Aggarzval with Prakash Kumar for the assessee R. D. Jolly for the revenue.

JUDGMENT

Badar Durrez Ahmed J.

With the consent of the parties this writ petition is taken up for final disposal at the admission stage itself. This writ petition is directed against the notice Oated 10-2-2005, issued under section 148 of the Income Tax Act, 1961 (hereinafter referred to as 'the said Act'), issued by the Income Tax Officer in respect of the assessment year 2001-02. It is also directed against the order dated 17-8-2005, passed by the Income Tax Officer in response to the objections to the said notice of 10-2-2005, filed by the assessee (petitioner No. 1). By virtue of this order dated 17-8-2005, the assessee's objections have been overruled and its request to drop the proceedings under section 147/148 of the said Act have been rejected and the reassessment has been directed to be proceeded with.

At the outset, it may be mentioned that two issues arise for our consideration in this writ petition. The first issue relates to the maintainability of the writ petition for quashing a notice under section 148 of the Act and/ or a speaking order disposing of the objections filed thereto. It is the contention of the petitioners that if the initiation of proceedings under section 147, by issuance of a notice under section 148, is itself without jurisdiction then, they are entitled to challenge the same by way of a writ petition both at the stage of the issuance of the notice under section 148 as well as at the stage after the speaking order is passed disposing of the assessee's objections to such notice and the assessee need not wait for the completion of the reassessment and challenge the order of reassessment by way of an appeal. On the other hand, it was contended on behalf of the revenue that a writ petition would not be maintainable in view of the fact that the assessee would have the remedy of appeal available to it once the reassessment order is passed and in such appeal the assessee can take all the grounds of challenge as have been taken in the present writ petition. The second issue is on the merits of the matter. According to the writ petitioners, before proceedings under section 147 of the said Act can be initiated, it is imperative that the assessing officer must have 'reason to believe' that income chargeable to tax has escaped assessment. This belief must be a genuine belief and must be based on something new that has come to the notice of the assessing officer and must not represent a mere change in opinion. In the present case, the impugned notice dated 10-2-2005, was issued on the premise that the deduction under section 10A of the said Act had been allowed in excess and, accordingly, income had escaped assessment to the extent of Rs. 57,36,811. It was the case of the revenue that the deduction under section 10A was allowable on the basis of profits of the whole business and not on the basis of the profits of the undertaking eligible for deduction under section 10A. The assessee's contention is that the deduction under section 10A has to be computed on the basis of profits of the eligible undertaking and not on the basis of the profits of the whole business particularly in view of the amendment of sub-section (4) of section 10A of the Act with effect from 1-4-2001. It was further submitted on behalf of the petitioners that when the original assessment was done all these factors were examined in detail and the deduction under section 10A was computed on the basis of profits of the eligible undertaking. The subsequent view sought to be taken by the assessing officer while issuing the notice under section 148 of the said Act, therefore, represented a mere change of opinion on the same set of facts. Therefore, it was contended that the initiation of proceedings under section 147/148 of the said Act was without jurisdiction and was liable to be set aside. The revenue, on the other hand, contended that the deduction had been allowed in excess and the assessing officer was within his rights to reopen the assessment as he had reason to believe that income had escaped assessment.

Before we consider the two issues noted above, it would be pertinent to point out certain facts which are relevant. The assessee (petitioner No. 1) is a private limited company which was incorporated on 5-10-1998, under the Companies Act, 1956, and is engaged in the business of development and export of computer software and human resource services. The undertaking of the assessee engaged in the business of development and export of computer software is in a 'software technology park' (STP) and is eligible for deduction under section 10A of the Act. In respect of the assessment year 2001-02, the assessee filed a return of income under section 139(1) of the said Act on 25-10-2001, declaring a loss of Rs. 3,31,301. The return was processed under section 143(1) and an intimation dated fune 28, 2002, under section 143(1)(a) of the said Act was issued accepting the returned loss. Thereafter the return was selected for regular assessment under section 143(3) of the said Act and during the course of these proceedings, a show-cause notice dated 9-3-2004, was issued to the assessee regarding allocation of common expenses between the STP unit (software technology) and non-STP unit (human resource development). In the said show-cause notice dated 9-3-2004, it was specifically observed that the assessee was declaring income/receipts from two sources, namely, (1) software development and (2) human resources development. The assessee was required to show cause as to why the expenses not be allocated between the two divisions in a proportionate manner as indicated in the notice itself in view of the fact that the assessee was not maintaining separate books of account for each division. By a letter dated 12-3-2004, the assessee, through its chartered accountant, gave a detailed reply to the proposed allocation between the two divisions. Thereafter, assessment was completed and by the assessment order dated 23-2-2004, a total income of Rs. 44,78,231 was determined which was fully set off against the brought forward loss for the assessment year 2000-2001. Subsequently, the assessment order was rectified under section 154 by an order dated 29-11-2004, and the total income was computed at Rs. 31,63,570 which was fully set off against the brought forward loss for the assessment year 2000-01. Accordingly, the income was assessed at nil. The issue had rested there till 10-2-2005, when the assessing officer issued the impugned notice under section 148 indicating that he had reason to believe that income chargeable to tax for the assessment year 2001-02 had escaped assessment within the meaning of section 147 of the said Act. And, therefore, the assessing officer proposed to reassess the income. By a letter dated 15-3-2005, the assessee requested for the reasons recorded for initiation of the reassessment proceedings. These reasons were supplied by a letter dated 16-3-2005. On the same date the assessee had filed his return of income, under protest declaring nil income. The reasons disclosed were that 'thus, deduction under section 10A have been allowed in excess and income escaped assessment works out to Rs. 57,36,811.' The assessee, through its chartered accountant, submitted its objections to the reasons on 28-3-2005. The main thrust of the objections was that the deductions under section 10A had been rightly claimed and rightly allowed in the original assessment and there was no question of any income escaping assessment. It was also urged that the issuance of the notice under section 148 was without jurisdiction inasmuch as the reasons recorded reflected a mere change in opinion which was not permissible for reopening an assessment. In the objections, the assessee had also prayed that in view of the directions given in the case of GKN Driveshafts (India) Ltd. v. Income Tax Officer (2003) 259 ITR 19 (SC), the objections raised by the assessee be disposed of by a speaking order. It is in this background that the speaking order dated 17-8-2005, which is also impugned herein came to be passed. The objections of the assessee were rejected and it was directed that the assessment proceedings pursuant to section 148 notice be continued. The reason for rejecting the objections disclosed in the speaking order was as under :

'The assessee-company was not maintaining any separate books of account from the very beginning of its business and for the period relevant to the assessment year under consideration. In subsequent assessment years the assessee -company itself has computed the income/expenses on pro rata basis.'

Aggrieved by the notice dated 10-2-2005, as well as the order dated 17-8-2005, and the continuation of the reassessment proceedings, the petitioners have approached this court by way of this writ petition.

I, now take up the issue with regard to the maintainability of a petition under article 226 of the Constitution seeking issuance of a writ of certiorari quashing a notice under section 148 and the speaking order passed by the assessing officer pursuant to the objections filed by the assessee. The leading case on the issue is the Constitution Bench decision of the Supreme court in the case of Calcutta Discount Co. Ltd. v. Income Tax Officer (1961) 41 ITR 191. The majority judgment was delivered by Das Gupta J. At pages 207 and 208 of the said Report, the majority view of the Supreme court was expressed in the following manner :

'Mr. Sastri next pointed out that at the stage when the Income Tax Officer issued the notices he was not acting judicially or quasi-judicially and so a writ of certiorari or prohibition cannot issue. It is well settled however that though the writ of prohibition or certiorari will not issue against an executive authority, the High Courts have power to issue in a fit case an order prohibiting an executive authority from acting without jurisdiction. Where such action of an executive authority acting without jurisdiction subjects or is likely to subject a person to lengthy proceedings and unnecessary harassment, the High Courts, it is well settled, will issue appropriate orders or directions to prevent such consequences.

Mr. Sastri mentioned more than once the fact that the company would have sufficient opportunity to raise this question, viz., whether the Income Tax Officer had reason to believe that underassessment had resulted from non-disclosure of material facts, before the Income Tax Officer himself in the assessment proceedings and, if unsuccessful there, before the Appellate Officer or the Appellate Tribunal or in the High Court under section 66(2) of the Indian Incometax Act. The existence of such alternative remedy is not however always a sufficient reason for refusing a party quick relief by a writ or order prohibiting an authority acting without jurisdiction from continuing such action.

In the present case the company contends that the conditions precedent for the assumption of jurisdiction under section 34 were not satisfied and came to the court at the earliest opportunity. There is nothing in its conduct which would justify the refusal of proper relief under article 226. When the Constitution confers on the High Courts the power to give relief it becomes the duty of the courts to give such relief in fit cases and the courts would be failing to perform their duty if relief is refused without adequate reasons. In the present case we can find no reason for which relief should be refused.'

The Supreme Court, as is clear from the aforesaid, repelled the argument that a writ petition would not lie inasmuch as the question whether the Income Tax Officer had reason to believe that underassessment had resulted from non-disclosure of material facts could be agitated before the Income Tax Officer in the assessment proceedings and, if unsuccessful there, before the Appellate Officer or the Appellate Tribunal. This decision which was rendered as far back as in 1961 holds good even today inasmuch as no contrary decision of a larger Bench has been brought to our notice. On the contrary, there is affirmation by the Supreme court in the case of Whirlpool Corporation v. Registrar of Trade Marks (1998) 8 SCC 1, wherein with reference to, inter aha, the Constitution Bench decision in Calcutta Discount Co. Ltd. (1961) 41 ITR 191, the Supreme court held (page 11) :

'20. Much water has since flown under the bridge, but there has been no corrosive effect on these decisions which, though old, continue to hold the field with the result that law as to the jurisdiction of the High Court in entertaining a writ petition under article 226 of the Constitution, in spite of the alternative statutory remedies, is not affected, specially in a case where the authority against whom the writ is filed is shown to have had no jurisdiction or had purported to usurp jurisdiction without any legal foundation.'

The procedure to be followed when a notice under section 148 of the said Act is issued has been settled by the decision of the Supreme court in the case of GKN Driveshafts (India) Ltd. v. Income Tax Officer (2003) 259 ITR 19 in the following words (page 20) :

'We see no justifiable reason to interfere with the order under challenge. However, we clarify that when a notice under section 1.48 of the Income Tax Act is issued, the proper course of action for the noticee is to file a return and if he so desires, to seek reasons for issuing notices. The assessing officer is bound to furnish reasons within a reasonable time. On receipt of reasons, the noticee is entitled to file objections to issuance of notice and the assessing officer is bound to dispose of the same by passing a speaking order. In the instant case, as the reasons have been disclosed in these proceedings, the assessing officer has to dispose of the objections, if filed, by passing a speaking order, before proceeding with the assessment in respect of the above said five assessment years.'

A similar question as the one posed before us arose for consideration before the Gujarat High Court in the case of Garden Finance Ltd. v. Asst. CIT (2004) 268 FIR 48. When the matter first came up before a Division Bench (D. H. Waghela and D. A. Mehta JJ), there was a difference of opinion amongst the two hon'ble judges. Waghela J., took the view that in view of the Supreme court decision in GKN Driveshafts (India) Ltd. v. Income Tax Officer (2003) 259ITR 19, the petitioner had an efficacious alternative remedy and, therefore, the petition could not be entertained at this stage. Mehta J., however, took the view that in the case of GKN Driveshafts (India) Ltd. v. Income Tax Officer (2003)259 ITR 19 the Supreme court did not lay down the law that in no case the assessee could move the court under article 226 for challenging the reassessment notice. In view of the difference of opinion amongst the two judges of the Division Bench, the same was referred to a third judge (M. S. Shah J.) who agreed with the view taken by Mehta J., on the maintainability of a writ petition. The view taken by him was (page 87) :

'What the Supreme court has now done in the GKN case (2003) 259 ITR 19 is not to whittle down the principle laid down by the Constitution Bench of the apex court in Calcutta Discount Co. Ltd. case (1961) 41 ITR 191 but to require the assessee first to lodge preliminary objection before the assessing officer who is bound to decide the preliminary objections to issuance of the reassessment notice by passing a speaking order and, therefore, if such order on the preliminary objections is still against the assessee, the assessee will get an opportunity to challenge the same by filing a writ petition so that he does not have to wait till completion of the reassessment proceedings which would have entailed the liability to pay tax and interest on reassessment and also to go through the gamut of appeal, the second appeal before the Income Tax Appellate Tribunal and then reference/ tax appeal to the High Court.

Viewed in this light, it appears to me that the rigour of availing of the alternative remedy before the assessing officer for objecting to the reassessment notice under section 148 has been considerably softened by the apex court in GKN case (2003) 259 ITR 19 in the year 2003. In my view, therefore, the GKN case (2003) 259 ITR 19 (SC) does not run counter to the Calcutta Discount Co. Ltd. case (1961141 ITR 191 (SC) but it merely provides for challenge to the reassessment notice in two stages, that is :

(i) raising preliminary objections before the assessing officer and in case of failure before the assessing officer,

(ii) challenging the speaking order of the assessing officer under section 148 of the Act.

May be in a given case, the exercise of the powers under section 148 may be so arbitrary or mala fide that the court may entertain the petition without requiring the assessee to approach the assessing officer but such cases would be few and far between. For instance, in Mohinder Singh Malik v. Chief CIT (2004) 267 ITR 716, the Punjab and Haryana High Court was concerned with the challenge to the notice under section 148 of the Act where the grievance of the petitioner was that the notice was issued with an ulterior motive and that the assessing officer had been demanding illegal gratification from the assessee, failing which the assessing officer was threatening that the assessment would be reopened and that it was because of noncompliance with such demand that the impugned notice came to be issued. It was in the context of such facts that, although the court did not record any positive finding against the assessing officer, looking to the reasons recorded and the circumstances in which the notice was issued, the court raised its eyebrows and looked into the merits of the matter and held that the issuance of the notice was not at all justified.'

A similar view was expressed by a Division Bench of the Allahabad High Court in the case of Indra Prastha Chemicals P. Ltd. v. CIT (2004) 271 ITR 113. It held (page 122) :

'The Constitution Benches of the hon'ble Supreme Court, in K. S. Rashid and Son v. Income-tax Investigation Commission (1954) 25 ITR 167; AIR 1954 SC 207; Sangram Singh v. Election Tribunal, AIR 1955 SC 425; Union of India v. T. R. Varma(1957-58)13 FJR 237; AIR 1957 SC 882; State of U. P. v. Mohammad Nooh, AIR 1958 SC 86 and K. S. Venkataraman and Co. (P.) Ltd. v. State of Madras (1966) 60 IIR 112 ; (1966) 17 STC 418, held that article 226 of the Constitution confers on all the High Courts a very wide power in the matter of issuing writs. However, the remedy of writ is an absolutely discretionary remedy and the High Court has always the discretion to refuse to grant any writ if it is satisfied that the aggrieved party can have an adequate or suitable relief elsewhere. The court, in extraordinary circumstances, may exercise the power if it comes to the conclusion that there has been a breach of principles of natural justice or procedure required for decision could not be adopted.

In Harbanslal Sahnia v. Indian Oil Corporation Ltd. (2003) 2 SCC 107, the hon'ble Supreme court held that the rule of exclusion of writ jurisdiction by availability of alternative remedy is a rule of discretion and not one of compulsion and the court must consider the pros and cons of the case and then may interfere if it comes to the conclusion that the petitioner seeks enforcement of any of the fundamental rights ; where there is failure of principle of natural justice or where the orders of proceedings are wholly without jurisdiction or the vires of an Act is challenged.

As held by the apex court in the case of Calcutta Discount Co. Ltd. (1961) 41 ITR 191 and Madhya Pradesh Industries Ltd. (1965) 57 ITR 637; (1970) 77 ITR 268 (SC) this court under article 226 is entitled to go into the relevancy of the reasons as also to scrutinize as to whether there was reasonable belief or not. Thus, the writ petition under article 226 is maintainable.

In view of the foregoing discussion, we are of the considered opinion that the notice issued under section 148 of the Act for the assessment years 1993-94 and 1994-95 and the entire proceedings taken pursuant thereto are wholly without jurisdiction and hereby quashed.'

Having considered the arguments of counsel and the aforesaid decisions, I am of the opinioh that the Supreme court in the case of Calcutta Discount Co. Ltd. (1961141 ITR 191 had clearly indicated that a writ petition would be maintainable to challenge invocation of proceedings for reassessment even though it was also open to the assessee to challenge the same before the assessing officer during the assessment as also challenge the same before the appellate authorities after the reassessment proceedings were completed. This well settled position of law has held the field since 1961 and, as indicated by the Supreme court itself in the case of Whirlpool Corporation (19981 8 SCC 1, although much water has flown under the bridge, there has been no corrosive effect on this position of law. The decision of GKN Driveshafts (India) Ltd. (2003) 259 ITR 19 (SC) also gives an indication that the requirement of passing the speaking order would provide an opportunity to the assessee to challenge the same by way of a writ petition under article 226. This interpretation finds favour with the Division Benches of other High Courts including the Gujarat High Court and the Allahabad High Court, as indicated above, and, in my view, is the correct position in law. As indicated in Whirlpool's case (1998) 8 SCC 1, the jurisdiction of the High Court in entertaining a writ petition under article 226 of the Constitution would not be affected although there exist alternative statutory remedies particularly in cases where the authority against whom the writ has been filed is shown to have had no jurisdiction or had purported to usurp jurisdiction without any legal foundation. It, however, remains a matter of discretion with the court as to whether in a particular case, it ought to interfere or not. But, a writ petition such as the one with which we are dealing, cannot be thrown out at the threshold on the ground that it is not maintainable.

This brings us to the issue of whether the reassessment proceeding initiated in the present case is without jurisdiction. It is to be remembered that the assessee had contended that the reasons recorded for issuance of a notice under section 148 of the Act merely disclosed that there was a change in opinion. It is clear from the decision of this court in Jindal Photo Films Ltd. v. Deputy CIT (1998) 234 ITR 170 that (headnote) 'where the Income Tax Officer attempts to reopen an assessment because the opinion formed earlier by him was in his opinion incorrect, the reopening could not be done.' This court clearly held that (headnote) 'the power to reopen an assessment was conferred by the Legislature not with the intention to enable the Income Tax Officer to reopen the final decision made against the revenue in respect of questions that directly arose for decision in earlier proceedings. If that were not the legal position it would result in placing an unrestricted power of review in the hands of the assessing authorities depending on their changing moods.' It was also held that (headnote) 'if an expenditure or deduction was wrongly allowed while computing the taxable income of the assessee, the same could not be brought to tax by reopening the assessment merely on account of the assessing officer subsequently forming an opinion that earlier he had erred in allowing the expenditure or the deduction.' Again in Transworld International Inc. v. joint CIT (2005) 273 ITR 242, this court held (page 255) 'hence, on the same material a different view was sought to be taken and that was nothing but a mere change of opinion and that would not amount to escapement of income. Mere change of opinion would not confer jurisdiction upon the assessing officer to initiate proceedings under section 147.'

In this context, we have to examine as to whether the facts of the present case disclose that the reopening of the assessment was based upon a mere change of opinion. It has already been noted above that during the original assessment proceedings a detailed inquiry was conducted by the assessing officer. The assessing officer even issued a show-cause notice on 9-3-2004, requiring the assessee to indicate the allocation of expenses to the software division and the fulfilment division and even suggested a proposed working of the allocation on proportionate basis. The suggestion was made on the premise that the assessee had not maintained separate books of account for each division. The assessee, as indicated above, had given a detailed reply justifying the allocation made by it. After a detailed examination of the same, the assessment was completed and a deduction under section 10A to the extent of Rs. 4,86,62,452 was allowed. In the reasons given for reopening, all that is indicated, is that the deduction under section 10A had been allowed in excess and, therefore, income had escaped assessment to the tune of Rs. 57,36,811. In the said reasons it was indicated that the deduction under section 10A ought to be only Rs. 3,73,77,462 as that would be derived from the formula

Business profits

x

Total export of computer software

Total business turnover

In the speaking order, however, the only reason purportedly given for rejecting the objections raised by the assessee was that the assessee was not maintaining any separate books of account. But this was clearly considered by the assessing officer during the original assessment proceedings. In fact, this was expressly stated in the show-cause notice dated 9-3-2004, itself. It is evident that no new material came to light and on the same set of facts, the subsequent assessing officer merely had a change of opinion with regard to the deduction under section 10A allowed to the assessee. In this view of the matter, the reopening of the assessment would not be justified and would be without jurisdiction. Accordingly, the reopening of the assessment by issuance of the notice under section 148 as well as the speaking order dated 17-8-2005, and proceedings pursuant thereto are liable to be quashed.

It must also be pointed out that the argument raised by the assessee in his objections with regard to the amendment of sub-section (4) to section 10A was not at all taken into account by the assessing officer in the impugned speaking order dated 17-8-2005. The specific argument raised by the assessee in the objections was as under :

'4. The relevant provisions of section 10A (as applicable for the assessment year 2001-02) read as follows :

(1) Subject t ' o the provisions of this section, any profits, and gains derived by an assessee from an industrial undertaking to which this section applies shall not be included in the total income of the assessee . . . . . .

(4) For the purposes of sub-section (1), the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking.'

The abovementioned sub-section (4) was substituted by the Finance Act, 2001, with effect from 1-4-2001. The sub-section (4) prior to the amendment was as follows :

'For the purposes of sub-section (1), the profits derived from export of articles or things or computer software shall be the amount

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