BHC in Cartini India Limited

IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
WRIT PETITION NO.2468 OF 2008
Cartini India Limited, )
(Formerly Godrej Appliances Ltd. )
Pirojshanagar, Vikhroli (East), )
Mumbai 400 079. )..Petitioner.
V/s.
1) Additional Commissioner of )
Income Tax, 10(2), Mumbai, )
having office at Room No.433, )
Aayakar Bhavan, M.K.Road, )
Mumbai - 400 020. )
)
2) Chief Commissioner of Income )
Tax, having office Aayakar )
Bhavan, M.K.Road, )
Mumbai-400 020 )
)
2) Commissioner of Income Tax, )
City X, having office )
Aayakar Bhavan, M.K.Road, )
Mumbai - 400 020. )
)
4) Union of India, through )
the Secretary, Ministry )
of Finance North Block, )
New Delhi 110 001 )..Respondents.
Mr.P.J.Pardiwala, senior Advocate for petitioner.
Mr.Parag Vyas, Advocate for respondents.
CORAM : SMT. RANJANA DESAI AND J.P.DEVADHAR, JJ.
JUDGMENT RESERVED ON : 26TH FEBRUARY, 2009.
JUDGMENT PRONOUNCED ON : 25TH MARCH, 2009.
JUDGMENT (PER J.P.DEVADHAR, J.)
1. Rule. Rule made returnable forthwith. By
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consent of the parties, the petition is taken up for
final hearing.
2. Whether the notice issued by the assessing
officer under section 148 of the Income Tax Act, 1961
(’Act’ for short) on 30/3/2007 to reopen the assessment
for AY 2002-03 is valid and whether the assessing
officer by his order dated 15/9/2008 is justified in
rejecting the objections raised by the petitioner
regarding the reopening of the assessment are the two
questions raised in this petition.
3. The petitioner is engaged in the business of
manufacturing and marketing refrigerators, air
conditioners and washing machines.
4. The petitioner had filed its return of income
in respect of AY 2002-03 on 31/10/2002, declaring loss
of Rs.72,57,26,992/-.
5. In the said return of income, the petitioner
had claimed deduction of the entire "project launch
expenses" incurred during the previous year as revenue
expenditure even though in its books of accounts, the
petitioner had shown the expenditure spread over a
period of 3 years. Similarly, the petitioner had
treated tools, dies, jigs and moulds as inventory items
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and claimed deduction on the basis of their balance
useful life on the last day of the previous year.
6. On scrutiny of the return of income, the
assessing officer issued notice under section 143(2) of
the Act calling upon the petitioner to furnish
particulars, inter alia relating to the above two
claims and after considering the reply filed by the
petitioner, passed an assessment order under section
143(3) of the Act on 27/1/2005 allowing both the
aforesaid claims of the petitioner.
7. On 2/12/2005 the assessing officer issued a
notice under section 154 of the Act with a view to
rectify the assessment order on the ground that excess
relief was granted to the petitioner in respect of the
above two claims. By its reply dated 7/12/2005 the
Chartered Accountants of the petitioner submitted a
detailed note to the effect that there is no mistake
apparent on the record warranting rectification of the
assessment and, therefore, the notice issued under
section 154 of the Act be dropped.
8. Without passing any order on the notice dated
2/12/2005 issued under section 154 of the Act, the
assessing officer issued the impugned notice under
section 148 of the Act on 30/3/2007 with a view to
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reopen the assessment for AY 2002-03 by recording the
following reasons:-
" It is seen from the records that the assessee
company instead of capitalizing the value of ’Tools,
Dies, Jigs & Moulds’ claimed it as revenue
expenditure as mentioned in Notes appended to
Schedule-G. The value of the assets had been
included under Schedule-Q - Other Expenses and
according to the assessee they are not capital
expenditure. This is in addition to the value of
stock of stores, loose tools, etc. claimed
separately as revenue expenditure. The items viz.
Tools, Dies, Jigs & Moulds are not revenue but
capital expenditure as they are not consumable items
like loose tools. Unlike loose tools, the life of
’Tools, Dies, Jigs & Moulds’ are enduring in nature
and are used in manufacturing activities for number
of years. Therefore it is prudential to classify
them as capital. Moreover, it has been laid down
that depreciation at 100% will not be allowed on
machinery or plant whose cost does not exceed
Rs.5000/-. Instead, depreciation at normal rates
will be allowed as part of the block of assets in
accordance with Rule 5 of the Income Tax Rules, 1962.
It is seen from the records that the assessee company
had incurred an expenditure of Rs.1025.30 lakhs
towards Product launch expenses for advertisement
and publicity in respect of Penta Cool series of
Refrigerators. The assessee company contended that
as per the accounting policy consistently followed by
it, product launch expenses are being amortized for a
period of three years. It was, however, seen from
the computation of income for A.Y. 2002-03 that
though the assessee had debited Rs.341.77 lakhs to
the Profit and Loss Account towards Pentacool launch
expenses out of total expenditure of Rs.1025.30 lakhs
Rs.683.53 lakhs being the remaining balance amount of
expenditure has been claimed as deduction in
computation of income for the purpose of Income-tax
Act. Therefore, as per the practice followed by the
assessee in its books of account the same should have
been treated as deferred revenue expenditure. The
accounting practice followed by the assessee company
is correct because the expenditure incurred on
product launch is of enduring nature and its benefits
will not occur immediately in the year of
expenditure.
In view of the above, I have reason to believe that
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income chargeable to tax for A.Y. 2002-03 has
escaped assessment for failure on the part of the
assessing company to disclose fully and truly all the
material facts requiring for assessment for A.Y.
2002-03.
9. The petitioner objected to the reopening of
the reassessment. However, by his order dated
15/9/2008, the assessing officer rejected the
objections raised by the petitioner. Therefore, the
present petition is filed to challenge the notice dated
30/3/2007 issued under section 148 of the Act and the
order dated 15/9/2008 whereby the objections raised by
the petitioner against the reopening of the assessment
have been rejected.
10. Section 147 of the Act empowers the assessing
officer to reopen the assessment in respect of any
assessment year, if he has reason to believe that any
income chargeable to tax has escaped assessment. The
object of reassessment is to assess the correct income.
Under section 147 of the Act, the assessing officer can
assume jurisdiction to reopen the assessment only if
there exists tangible material on the basis of which he
forms a reasonable belief that the income chargeable to
tax has escaped assessment.
11. The Apex Court in the case of ACIT V/s.
Rajesh Jhaveri Stock Brokers P.Ltd. reported in 291
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I.T.R. 500 (S.C.) after considering various decisions
rendered by it in the past construed the word "reason
to believe" in section 147 of the Act and held that if
the assessing officer has cause or justification to
know or suppose that any income has escaped assessment,
then it could be said that the assessing officer had
reason to believe that the income chargeable to tax has
escaped assessment. The Apex Court further held that
the expression "reason to believe" in section 147 of
the Act cannot be read to mean that the assessing
officer should have finally ascertained the fact by
legal evidence or conclusion. The Apex Court further
held that at the stage of issue of notice under section
148 of the Act the only question to be considered is,
whether there was relevant material on which a
reasonable person could have formed a requisite belief
and not whether the materials would conclusively prove
escapement of income.
12. Applying the ratio laid down by the Apex Court
in the aforesaid case, we have to see that in the
present case, whether the assessing officer had any
cause or justification to form a reasonable belief that
income chargeable to tax has escaped assessment.
13. In the present case, on the basis of the
material on record, the assessing officer claims to
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have formed a reasonable belief that income chargeable
to tax has escaped assessment on two counts. Firstly,
in the original assessment, the assessing officer ought
not to have considered that tools, dies, jigs, moulds
are inventory items but ought to have considered those
items as capital items and accordingly allowed
depreciation instead of allowing deduction based on the
useful life of the said items. The claim allowed on
the basis of value determined by the petitioner is more
than the claim allowable by way of depreciation and,
therefore, the amount of the excess relief granted has
escaped assessment. Secondly, the project launch
expenses ought to have been considered as deferred
revenue expenditure over a period of 3 years as
amortized in the books of account maintained by the
petitioner and allow deduction proportionately instead
of allowing the entire project launch expenses.
14. It is pertinent to note that even in the past
the petitioner has been incurring expenditure on
acquisition of tools, dies, jigs and moulds and has
been incurring from time to time expenditure to promote
sales of the products manufactured by the petitioner.
Even in the past, the same method of accounting was
followed in respect of the above items as followed in
AY 2002-03. In all the earlier assessment years and
also in AY 2002-03, deduction on the above two claims
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has been allowed in the assessment orders passed under
Section 143(3) of the Act, after considering the
accounting system adopted by the petitioner in its
books of account. Thus, the deduction on the two items
in question have been consistently allowed in the past
after due scrutiny of the books of account maintained
by the petitioner.
15. The question, therefore, to be considered in
the present case is whether, on the basis of the
material on record, the assessing officer could form a
reasonable belief that income has escaped assessment
and accordingly reopen the assessment for A.Y. 2002-03
with a view to disallow the deduction on the two claims
which were allowed in the assessment order passed under
Section 143(3) of the Act ?
16. In the present case, admittedly, the reopening
of the assessment is based on the materials which were
already on record at the time of passing the assessment
order under Section 143(3) of the Act. In fact, during
the assessment proceedings, the assessing officer was
initially of the opinion that the deduction on the two
items in question were not allowable and accordingly
had called upon the petitioner to explain as to why
deduction on the two items in question should not be
disallowed in view of the accounting system maintained
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by the petitioner. The petitioner submitted a detailed
note and explained that tools, dies, jigs & moulds have
been regarded as inventory items in the books of
account as per the Accounting Standard 2 issued by the
Institute of Chartered Accountants of India. It was
explained that although the petitioner is entitled to
claim deduction of the entire cost of tools, dies, jigs
& moulds in the year of acquisition, in view of the
fact that the tools, dies, jigs & moulds being
inventory items as per the Accounting Standards, the
petitioner had debited the cost of acquisition of the
said items to ’purchase account’ and valued the same at
the end of the year at the lower of cost or net
realizable value determined on the basis of the
estimated life of the inventory items. The closing
inventory was then carried forward to the next year and
the process continued till the value became Nil. Thus,
the petitioner had explained that irrespective of the
method of accounting followed, the deduction was
allowable on the value of the inventory items such as,
tools, dies, jigs & moulds as allowed in the past.
17. Similarly, it was explained that the
expenditure incurred by way of advertisements on
television, newspaper advertisements, hoardings,
seminars, exhibitions, etc. to promote the products
launched by the petitioner being revenue in nature were
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allowable in full in the year in which those expenses
were incurred. It was explained that the effect of the
advertisements would ordinarily be in the mind of the
public approximately for three years and, therefore,
the advertisement expenses are spread over for a period
of three years in the books of account. It was
explained that by advertising, no tangible asset is
acquired by the petitioner which could be considered to
be of enduring nature. Moreover, there is no concept
of deferred revenue expenditure in computing the income
liable to tax. Therefore, irrespective of the fact
that the petitioner in its books of accounts had spread
over the product launch expenses over a period of three
years, the assessing officer was bound to allow the
entire cost of the product launch expenses in the
assessment year in question.
18. After considering the aforesaid explanation
the assessing officer arrived at a conclusion that the
petitioner is entitled to the deduction as claimed and
accordingly allowed the deduction in the assessment
order passed under section 143(3) of the Act. Thus, in
the present case, specific query was raised by the
assessing officer as to why the two claims in question
should not be disallowed on the basis of the accounting
system adopted by the petitioner. Detailed explanation
given by the petitioner to the assessing officer are
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all to be found at pages 148 to 173 of the affidavit in
rejoinder. It is only after considering the
explanation given by the petitioner and arriving at a
conclusion that the petitioner was entitled to the
relief, the assessing officer had allowed deduction on
the two items in question.
19. In such a case, after having arrived at a
conclusion on the basis of the material on record that
the petitioner was entitled to the deduction on the two
items in question and accordingly having allowed the
claim by passing assessment order under section 143(3)
of the Act, was it open to the assessing officer to
entertain a reasonable belief on the basis of the very
same material that income chargeable to tax has escaped
assessment and reopen the assessment ?
20. In our opinion, once the assessing officer at
the time of original assessment entertains a prima
facie belief that the deduction claimed cannot be
allowed in view of the accounting system adopted by the
assessee and after considering the explanation given by
the assessee deems it fit to allow deduction as claimed
by passing an assessment order under section 143(3) of
the Act, then, it will not be open to the assessing
officer to form a contrary opinion based on the very
same material and reopen the assessment. In other
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words, once the assessing officer on consideration of
the material on record and the explanation offered,
arrives at a final conclusion that the assessee is
entitled to the deduction as claimed then, on the basis
of the very same material, the assessing officer cannot
form a prima facie opinion that the deduction is not
allowable and accordingly reopen the assessment on the
ground that income chargeable to tax has escaped
assessment.
21. As noted earlier, in the present case, the
assessment is sought to be reopened on the basis of the
materials which were already on record at the time of
assessment. The question as to whether the expenditure
on acquisition of tools, dies, jigs and moulds could be
treated as capital expenditure was raised during the
assessment proceedings and allowed after considering
the explanation given by the petitioner. Similarly,
the question, as to whether the project launch
expenditure was allowable as revenue expenditure was
raised during the assessment proceedings and allowed
only after considering the explanation given by the
petitioner.
22. What section 147 of the Act contemplates is
the existence of material on record on the basis of
which a prima facie opinion could be formed by the
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assessing officer that any income chargeable to tax has
escaped assessment and not the material on record on
the basis of which a final decision has already been
taken at the time of assessment under section 143(3) of
the Act.
23. Where the material on record has already been
considered and adjudicated upon, it would not be open
to the assessing officer to disagree with the view
already taken on the material on record. In such a
case, reopening of the assessment based on the
materials already considered and adjudicated, would
amount to reviewing the assessment order by
reappreciating the material on record which is not
contemplated under section 147 of the Act. It is not
the case of the revenue that the reopening of the
assessment is covered under Explanation 2(c) to section
147 of the Act based on any material other than the
material considered by the assessing officer at the
time of assessment under section 143(3) of the Act.
Therefore, in the facts of the present case, where, the
materials on record have already been considered and
conclusively decided in the regular assessment, we are
clearly of the opinion that the prima facie opinion to
the contrary formed by the assessing officer on the
basis of the very same material would be mere change of
opinion, and therefore, the reopening of the assessment
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based on mere change of opinion cannot be sustained.
24. Placing strong reliance on the decisions of
the Apex Court in the case of Rajesh Jhaveri Stock
Brokers P.Ltd. (supra), Central Provinces Manganese
Ore Co.Ltd. V/s. I.T.O. (191 ITR 662), I.T.O. V/s.
Selected Dalurband Coal Co.P.Ltd. (217 I.T.R.597) and
Raymond Wollen Mills Ltd. V/s. I.T.O. (236 I.T.R.
34), learned counsel for the revenue submitted that
once there is material on record to form a prima facie
opinion on the part of the assessing officer that any
income chargeable to tax has escaped assessment, then,
it is not open to the Court to look into the
sufficiency of the material and interfere with the
jurisdiction invoked by the assessing officer. There
is no merit in the above contention. No doubt that the
judicial review in cases relating to reopening of the
assessment is restricted to consider as to whether any
material exists and not the sufficiency of the material
on record so as to form a belief that income chargeable
to tax has escaped assessment. But where on
consideration of the material on record, one view is
conclusively taken by the assessing officer, it would
not be open to the assessing officer to reopen the
assessment based on the very same material with a view
to take another view. Similar view has been taken by
this Court in the case of Siemens Information System
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Limited V/s. ACIT reported in 295 ITR 333 (Bom).
Moreover, the view taken by us in the present case is
not contrary to any of the propositions of law laid
down by the Apex Court in any of the aforesaid cases
relied upon by the counsel for the revenue. In none of
the cases relied upon by the counsel for the revenue,
it is held that where the assessing officer has already
considered the material on record and passed an
assessment order under section 143(4) of the Act taking
a particular view, the assessment can be reopened by
the assessing officer on the basis of the very same
material by taking a prima facie view to the contrary.
Therefore, in the present case, in our opinion, the
assessment is sought to be reopened on the basis of the
material based on which a final decision has already
been taken, and therefore, the reopening of the
assessment based on the very same materials to take a
contrary view constitutes reopening on account of
change of opinion which is not permissible under
section 147 of the Act.
25. For all the aforesaid reasons, we quash and
set aside the impugned notice dated 30/3/2007 issued
under section 148 of the Act as well as the order dated
15-9-2008. Rule is made absolute in the above terms
with no order as to costs.
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(SMT. RANJANA DESAI, J.)
(J.P.DEVADHAR, J.)