$~8 & 9
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Date of decision: 25th October 2017
8
+ W.P.(C) 480/2016
SAMVARDHANA MOTHERSON
INTERNATIONAL LTD ..... Petitioner
Through: Dr. Rakesh Gupta, Mr. Ashwani
Taneja, Mr. Somil Agarwal, Mr.
Rohit Kumar Gupta and Mr.
Lakashya Goyal, Advocates.
versus
ASSISTANT COMMISSIONER OF
INCOME TAX & ANR. ..... Respondents
Through: Mr. Ashok Manchanda and Mr.
Raghvendra Singh, Advocates.
AND
9
+ W.P.(C) 526/2016
SAMVARDHANA MOTHERSON INTERNATIONAL LTD.
(FORMERLY KNOWN AS(M/S SAMVARDHANA MOTHERSON
FINANCE LTD.)AUTHORISED SIGNATORY, SHRI MANOJ
MAHESHWARI, ..... Petitioner
Through: Dr. Rakesh Gupta, Mr. Ashwani
Taneja, Mr. Somil Agarwal, Mr.
Rohit Kumar Gupta and Mr.
Lakashya Goyal, Advocates.
versus
ASSITANT COMMISSIONER OF INCOME TAX,
CIRCLE 22(1) & ANR. ..... Respondents
W.P.(C) 480/2016 & W.P.(C) 526/2016 Page 1 of 15
Through: Mr. Ashok Manchanda and Mr.
Raghvendra Singh, Advocates.
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MS. JUSTICE PRATHIBA M. SINGH
SANJIV KHANNA, J. (ORAL)
We with the consent of the parties have heard the arguments and the
writ petitions are taken up for final disposal.
2. M/s. Samvardhana Motherson International Ltd. (formerly known as
Samvardhana Finance Ltd.) has filed the present writ petitions impugning
two notices dated 30th March, 2015, issued by the Additional Commissioner
of Income Tax, Circle 22(1), New Delhi under Section 148 of the Income
Tax Act, 1961 (`the Act' for short) relating to Assessment Years (`AY')
2010-2011 and 2011-2012.
3. The Petitioner has also placed on record a copy of the order dated 16th
December, 2015 passed by the Assessing Officer (`AO') disposing of
objections of the Petitioner against reopening of assessments under Section
147/148 of the Act on the ground of `change of opinion'.
4. The undisputed position is that the Petitioner company is engaged in
the business of establishing subsidiaries, making majority or minority
investments and/or to promote technical collaborations and to act as a
holding company. The Petitioner in paragraph 4 of the petition has stated
that the Petitioner company makes strategic investments.
W.P.(C) 480/2016 & W.P.(C) 526/2016 Page 2 of 15
Original Assessment proceedings for AY 2010-11.
5. For the AY 2010-2011, the return filed by the Petitioner company had
disclosed dividend income of Rs. 20,48,37,585/- which it claimed as exempt
from tax under Section 10(34) of the Act. The Assessee had disallowed
expenditure amounting to Rs. 9,75,26,937/- for earning the exempt income
under Section 14A of the Act for AY 2010-11.
6. The return was taken up for scrutiny assessment after issue of notice
under Section 143(2) of the Act. In terms of notice dated 16th May, 2012
under Section 142(1) of the Act, the Petitioner was required to furnish
several details, including details of dividend income received, and details of
expenses attributable for earning of this income. The aforesaid notice was
followed by another notice dated 18th October, 2012 by which the Petitioner
was asked to give a detailed calculation of the disallowance under Section
14A of the Act read with Rule 8D of the Income Tax Rules, 1962 (`the
Rules' for short).
7. In response to the first notice, the Petitioner filed a reply dated 12th
June, 2012 stating that it had received dividend income of Rs.20,48,37,585/-
which was claimed as exempt under Section 10(34) of the Act. In its
subsequent reply dated 11th February, 2013, the Petitioner submitted
calculation of disallowance under Section 14A read with Rule 8D of the
Rules and computation of the disallowance made by them. For the sake of
convenience, since counsels for both parties rely on the same, we would like
to reproduce the aforesaid computation, which reads as under:
W.P.(C) 480/2016 & W.P.(C) 526/2016 Page 3 of 15
Samvardhana Motherson Finance Limited
Expenditure in relation to Dividend Income
S. No. Particulars Detail Amount
1 Expenditure Directly relating to Dividend
Income
2 Interest Expense allocated 73,566,653 73,566,653
3 0.5% of Average Investment 50,854,376 23,960,283
Since the total expenditure which is
Disallowed is Rs 97,526,937/-, hence it is
restricted to Rs 97,526,937 Rs
73,566,653)
Total Amount 124,421,029 97,526,937
Working
Interest expense allocated
Interest Cost Allocated = Interest * Average Value of Investment
Average of Total Assets
Interest
Total Interest Cost as per Balance Sheet 79,528,600
Less: Expenses incurred to earn Interest Income 5,937,096
Less: Interest on delay in ITDS 24,851
Expenses made directly for Investment 73,566,653
Average Value of Investment
Total Investment 11,582,908,669 8,923,821,95
Less:- Overseas Investment (99,512,139) (65,468,209)
Investment in Indian Companies 11,483,396,530 8,858,353,744
Average Value 10,170,875,137
Average of Total Assets
Fixed Assets 162,378 22,714
Investments 11,582,908,669 8,923,821,953
Current Assets, Loans and Advances 218,130,657 196,786,639
Deferred Tax Asset 181,144
_______________________________
11,801,382,848 9,120,631,305
Average Value 10,461,007,077
W.P.(C) 480/2016 & W.P.(C) 526/2016 Page 4 of 15
Total disallowance
Total Expenses 171,277,589
Less: Interest Expenses to earn Interest Income 5,937,096
165,340,493
Less: Expenses for Consultancy 13,085,569
152,254,924
Less: Expenses which is disallowed as per
Provisions of PGBP
Donation 50,000
Provision for diminution in the value of
Investment 53,891,189
Provision for Leave Encashment 311,096
Loss on Sale of Investment 178,403
Gratuity Provision 272,448
Interest Paid on TDS 24,851
54,727,987
97,526,937
Less: Expenses Incurred directly for investments 73,566,653
23,960,284
8. After examining the aforesaid information and details, the assessment
order for AY 2010-11 dated 18th February, 2013 was passed under Section
143(3) of the Act, accepting the returned income of the Assessee of
Rs.88,56,759/-.
Original assessment proceedings for AY 2011-12
9. For the AY 2011-12, the return filed by the Petitioner company had
disclosed dividend income of Rs.28,55,09,111/-, which it claimed as exempt
from tax under Section 10(34) of the Act. The Assessee had disallowed
expenditure amounting to Rs. 12,44,11,096/- for earning the exempt income
under Section 14A of the Act for the AY 2011-12.
10. The case was taken up for scrutiny. During the course of the
assessment proceedings, the Assessing Officer (AO) issued a questionnaire,
W.P.(C) 480/2016 & W.P.(C) 526/2016 Page 5 of 15
enclosed as Annexure 3 to the writ petition, which had required the
Petitioner to file detailed computation of disallowance made under Section
14A of the Act, in the computation of the total income.
11. In response to the aforesaid questionnaire, the Petitioner filed its reply
dated 29th January, 2014, enclosed therewith as Annexure 16, enclosing
detailed computation of disallowance under Section 14A of the Act. For the
sake of convenience, since counsels for both the parties rely on the same, we
would like to reproduce the aforesaid computation, which reads as under:
Samvardhana Motherson Finance Limited
Annexure to Form 3 CD
Clause 17(1)
Expenditure in relation to Dividend Income
S. No. Particulars Detail Amount
1 Expenditure Directly relating to 1,581,654 1,581,654
Dividend Income
2 Interest Expense allocated 121,581,256 115,704,382
3 0.5% of Average Investment 56,521,295 7,125,060
Total Amount 179,684,205 124,411,096
Working
Interest expense allocated
Interest Cost Allocated = Interest * Average Value of Investment
Average of Total Assets
Interest
Total Interest Cost as per Balance Sheet 165,983,855
Less: Expenses incurred to earn Interest Income 44,402,599
Less: Interest on delay in ITDS
Expenses made directly for Investment 121,581,256
Average Value of Investment
Total Investment 11,359,310,551 11,529,017,479
Less:- Overseas Investment 180,297,977 99,512,139
Investment in Indian Companies 11,179,012,574 22,429,505,340
W.P.(C) 480/2016 & W.P.(C) 526/2016 Page 6 of 15
Average Value 11,304,258,957
Average of Total Assets
Fixed Assets 380,948 162,378
Investments 11,359,310,551 11,529,017,479
Current Assets, Loans and Advances 649,670,082 218,130,657
Deffered Tax Asset 181,144
______________________________
12,009,361,581 11,747,491,657
Average Value 11,878,426,619
Total disallowance
Total Expenses 251,139,740
Less: Interest Expenses to earn Interest Income 44,402,599
206,737,141
Less: Expenses for Consultancy & others 32,397,824
174,339,317
Less: Expenses which is disallowed as per
Provisions of PGBP
Donation 1,300,000
Provision for diminution in the value of
Investment 43,841,819
Provision for Leave Encashment 745
Loss on Sale of Investment
Gratuity Provision 490,436
Interest Paid on TDS
45,633,000
128,706,317
Less: Interest Expenses un allocated
121,581,256
7,125,060
W.P.(C) 480/2016 & W.P.(C) 526/2016 Page 7 of 15
Operating Non-Operating Total
Section 14A
(Rule 8D)
Income (X) 120,471,781 285,509,111 405,980,892
Personnel Expenses
Salary & Wages 5,414,576 896,779 6,311,355
Employer's Contribution to PF 460,806 638,466 1,099,273
Bonus 286,227 46,409 332,636
Total (A) 6,161,608 1,581,654 7,743,263
Administrative Expenses
Regd. Office Rent - 39,708 39,708
Repair & Maintenance (Others) 353,718 247,012 600,730
Courier & Postage Expenses - 62,583 62,583
Rates and Taxes - 87,020 87,020
Legal and Professional Charges 20,359,985 3,786,410 24,146,395
Business Promotion 3,184,063 152,390 3,336,453
Travelling Expenses 1,862,969 1,628,856 3,491,825
Telephone Expenses 37,636 12,895 50,531
Insurance Expenses - 7,613 7,613
Provision for diminution in long term - 43,841,819 43,841,819
investments (net)
Printing and Stationery 6,439 - 6,439
Donation - 1,300,000 1,300,000
Miscellaneous Expenses 431,406 10,100 441,506
Total (B) 26,236,216 51,176,406 77,412,622
Interest and Finance Charges
Interest on
Secured Term loans from Other 44,402,599 115,883,363 160,285,962
than Banks
Unsecured loans from Other than - 512,781 512,781
banks
Bank Charges - 919,846 919,846
Processing Fee - 4,265,266 4,265,266
Total (C) 4,402,599 121,581,256 165,983,855
Grand Total Expenses (A+B+C) 76,800,423 174,339,317 251,139,740
Profit (X-(A+B+C)) 43,671,358 111,169,794 154,841,152
12. Vide assessment order dated 28th February, 2014, the AO assessed the
income of the Assessee for the assessment year 2011-12 at Rs.3,59,35,409.
The disallowance made by the Assessee of Rs.12,44,11,096/- under Section
W.P.(C) 480/2016 & W.P.(C) 526/2016 Page 8 of 15
14A of the Act was accepted.
Reassessment proceedings; Reasons to believe
13. To examine the contention of the Petitioner and the respondent on the
question of change of opinion, we would like to reproduce the reasons to
believe recorded by the AO for AY 2010-11 and 2011-12. The relevant
portions have been underlined.
Reasons recorded for initiating proceedings u/s 147/148 AY
2010-2011
"In this case, the assessment proceedings u/s 143 (3) of the I.T.
Act,1961 for the A.Y. 2010-11 was completed on 18.02.2013 at an
income of Rs.88,56,759/-. On scrutiny of records it was found that an
amount of Rs.2,68,94,092/- has escaped assessment on account of
incorrect computation of disallowance u/s 14A of the I.T. Act, 1961.
It was noticed that the assessee had claimed deduction of Rs.
20,48,37,585/- on account of Dividend income and disallowed
expenditure amounting to Rs.9,75,26,937/- u/s 14A. Further scrutiny
revealed that the assessee had major income from Dividend and had
investments of Rs. 8,92,38,21,953/-(as on 31.03.2009) and Rs.
11,52,90,17,479/- (on 31.03.2010) respectively. The total
disallowance u/s 14A r/w Rule 8D should be amounted to
Rs.12,44,21,029/-, however assessee restricted it to Rs.9,75,26,937 /-
in contravention to Section 14A of the I.T. Act, 1961. Hence it
resulted in underassessment of income Rs.2,68,94,092/-
(Rs.12,44,21,029- Rs.9,75,26,937).
In this case, it has also been observed that the assessee
had itself calculated disallowance u/s 14A amounting to
Rs.12,44,21,029/- but restricted the same to Rs. 9,75,26,967 /-. As
Section 14A of the I.T. Act, 1961 r/w Rule 8D does not permit any
restriction in this regard and therefore the whole amount of Rs.
12,44,21,029/-, should have been disallowed.
In view of the above mentioned facts, it is clear that the
assessee company has not disclosed fully and truly all material facts
W.P.(C) 480/2016 & W.P.(C) 526/2016 Page 9 of 15
before the A.O. resulting in under assessment of income. Hence, I
have reasons to believe that a sum of Rs.2,68,94,092/- has escaped
assessment in the case of assessee relevant to A.Y. 2010-11, within
the meaning of Section 147 of the IT Act."
Reasons recorded for initiating proceedings u/s 147/148 for AY
2011-2012.
"In this case, the assessment proceedings u/s 143 (3) of the I.T. Act,
1961 for the A.Y. 2011-12 was completed on 28.02.2014 at an
income of Rs.3,59,35,409/-. On scrutiny of records it was found that
an amount of Rs.5,00,95,760/- has escaped assessment on account of
incorrect computation of disallowance u/s 14A of the I.T. Act, 1961.
It was noticed that the assessee had claimed deduction of Rs.
28,55,09,111/- on account of Dividend income and disallowed
expenditure amounting to Rs.12,44,11,096/- u/s 14A. Further
scrutiny revealed that the assessee had major income from Dividend
and had investments of Rs. 11,52,90,17,479 (as on 31.03.2010) and
Rs. 11,35,93,10,551/- (as on 31.03.2011) respectively. The total
disallowance u/s 14A r/w Rule 8D should be amounted to
Rs.17,45,06,856/-, however assessee restricted it to Rs.
12,44,11,096/- in contravention to section 14A of the I.T. Act, 1961.
Hence it resulted in underassessment of income of Rs. 5,00,95,760/-
(Rs. 17,45,06,856 - Rs.12,44,11,096).
In this case, it has also been observed that the assessee had
itself calculated disallowance u/s 14A amounting to
Rs.17,38,07,331/- but restricted the same to Rs. 12,44,11,096/-. As
section 14A of the I.T. Act, 1961 r/w Rule 8D does not permit any
restriction in this regard and therefore the whole amount of Rs.
17,45,06,856/-, should have been disallowed.
In view of the above mentioned facts, it is clear that the assessee
company has not disclosed fully and truly all material facts before
the A.O. resulting in under assessment of income. Hence, I have
reasons to believe that a sum of Rs. 5,00,95,760/- has escaped
assessment in the case of assessee relevant to A.Y. 2011-12, within
the meaning of Section 147 of the IT Act."
(emphasis supplied)
W.P.(C) 480/2016 & W.P.(C) 526/2016 Page 10 of 15
Analysis and Findings:
14. The contention of the respondent-Revenue is that this is not a case of
change of opinion because the Assessee had made an incorrect or wrong
calculation which was accepted by the AO. In particular, reliance is placed
upon the computation charts submitted by the Petitioner in response to the
questionnaire/queries raised, which have been reproduced above. Hence, it
is the Revenue's submission that in the present case the assessment
proceedings have been validly initiated under the provisions of Section 147
read with Section 148 of the Act and the judgment of the full Bench of the
Delhi High Court in the case of Commissioner of Income Tax v. Usha
International, (2012) 348 ITR 485 (Del) (hereafter `Usha International')
would support the case of Revenue and not the case of the Petitioner.
15. There could not be a more clear and obvious case of change of
opinion. The AO doing the original assessment had focused himself and
examined the question of appropriateness of the expenditure which was
disallowed by the Assessee under Section 14A of the Act. The AO was
aware of the difference between the disallowance of expenditure made by
the Assessee in its computation under Section 14A of the Act, and
disallowance if made by applying Rule 8D of the Rules. The AO not only
raised a specific query but did so twice in respect of the disallowances for
the AY 2010-11. The details called for in the two notices/questionnaires for
AY 2010-11 read as under:
"Notice dated 16.5.2012:
21. Details of dividend received, if any. Also give details of
expenses attributable for earning this income."
W.P.(C) 480/2016 & W.P.(C) 526/2016 Page 11 of 15
"Notice dated 18.10.2012:
-Calculation of Disallowance U/s 14A read with Rule 8D."
In AY 2011-12, the AO had asked for the details vide questionnaire dated
NIL as under:
"Questionnaire dated NIL:
45. Detailed computation of Disallowance made u/s 14A of
the Act as per the Computation of Total Income."
16. From the queries raised during the course of assessment proceedings
and the replies thereto, there can be no doubt that the AO specifically
examined and went into the question of disallowance of expenditure under
Section 14A of the Act as the Assessee had declared substantial dividend
income, which was exempt from tax. The AO was certainly conscious and
aware of the nature of business activities undertaken by the Petitioner as a
strategic investor in shares, making majority or minority investments.
17. In the aforesaid circumstances, principle of change of opinion as
enunciated in Usha International (supra) would be applicable. The majority
opinion in Usha International (supra) holds:-
"12. It is, therefore, clear from the aforesaid position that:
(1) Reassessment proceedings can be validly initiated in
case return of income is processed under Section 143(1) and no
scrutiny assessment is undertaken. In such cases there is no
change of opinion;
(2) Reassessment proceedings will be invalid in case the
assessment order itself records that the issue was raised and is
decided in favour of the assessee. Reassessment proceedings
in the said cases will be hit by principle of "change of
opinion".
(3) Reassessment proceedings will be invalid in case an
issue or query is raised and answered by the assessee in
W.P.(C) 480/2016 & W.P.(C) 526/2016 Page 12 of 15
original assessment proceedings but thereafter the
Assessing Officer does not make any addition in the assessment
order. In such situations it should be accepted that the issue
was examined but the Assessing Officer did not find any ground
or reason to make addition or reject the stand of the assessee.
He forms an opinion. The reassessment will be invalid because
the Assessing Officer had formed an opinion in the original
assessment, though he had not recorded his reasons.
13. In the second and third situation, the Revenue is not without
remedy. In case the assessment order is erroneous and
prejudicial to the interest of the Revenue, they are entitled to
and can invoke power under Section 263 of the Act. This aspect
and position has been highlighted in CIT vs. DLF Powers
Limited, ITA 973/2011 decided on 29th November, 2011 and
BLB Limited vs. ACIT Writ Petition (Civil) No. 6884/2010
decided on 1st December, 2011. In the last decision it has been
observed:
13. Revenue had the option, but did not take recourse to
Section 263 of the Act, inspite of audit objection.
Supervisory and revisionary power under Section 263 of
the Act is available, if an order passed by the Assessing
Officer is erroneous and prejudicial to the interest of the
Revenue. An erroneous order contrary to law that has
caused prejudiced can be correct, when jurisdiction
under Section 263 is invoked.
14. Thus where an Assessing Officer incorrectly or erroneously
applies law or comes to a wrong conclusion and income
chargeable to tax has escaped assessment, resort to Section
263 of the Act is available and should be resorted to. But
initiation of reassessment proceedings will be invalid on the
ground of change of opinion."
(emphasis supplied)
18. The Supreme Court recently in Godrej and Boyce Manufacturing
Company Limited v. Deputy Commissioner of Income Tax, Mumbai &
Anr., (2017) 7 SCC 421 on the question of disallowance under Section 14A
W.P.(C) 480/2016 & W.P.(C) 526/2016 Page 13 of 15
of the Act and the effect of Rule 8D of the Rules has held as under:
"37. We do not see how in the aforesaid fact situation a different
view could have been taken for Assessment Year 2002-2003. Sub-
sections (2) and (3) of Section 14-A of the Act read with Rule 8-D of
the Rules merely prescribe a formula for determination of
expenditure incurred in relation to income which does not form part
of the total income under the Act in a situation where the assessing
officer is not satisfied with the claim of the assessee. Whether such
determination is to be made on application of the formula
prescribed under Rule 8-D or in the best judgment of the assessing
officer, what the law postulates is the requirement of a satisfaction in
the assessing officer, what the law postulates is the requirement of a
satisfaction in the assessing officer that having regard to the
accounts of the assessee, as placed before him, it is not possible to
generate the requisite satisfaction with regard to the correctness of
the claim of the assessee. It is only thereafter that the provisions of
Sections 14-A(2) and (3) read with Rule 8-D of the Rules or a best
judgment determination, as earlier prevailing, would become
applicable.
38. In the present case, we do not find any mention of the reasons
which had prevailed upon the assessing officer, while dealing with
Assessment Year 2002-2003, to hold that the claims of the assessee
that no expenditure was incurred to earn the dividend income cannot
be accepted and why the orders of the Tribunal for the earlier
assessment years were not acceptable to the assessing officer,
particularly, in the absence of any new fact or change of
circumstances. Neither any basis has been disclosed establishing a
reasonable nexus between the expenditure disallowed and the
dividend income received. That any part of the borrowings of the
assessee had been diverted to earn tax free income despite the
availability of surplus or interest free funds available (Rs 270.51
crores as on 1-4-2001 and Rs 280.64 crores as on 31-3-2002)
remains unproved by any material whatsoever. While it is true that
that the principle of res judicata would not apply to assessment
proceedings under the Act, the need for consistency and certainty
and existence of strong and compelling reasons for a departure from
a settled position has to be spelt out which conspicuously is absent in
the present case. In this regard, we may remind ourselves of what
W.P.(C) 480/2016 & W.P.(C) 526/2016 Page 14 of 15
has been observed by this Court in Radhasoami Satsang v. CIT
(1992) 1 SCC 659: (1992) 193 ITR 321.
"16. We are aware of the fact that strictly speaking res judicata
does not apply to income tax proceedings. Again, each assessment
year being a unit, what is decided in one year may not apply in the
following year but where a fundamental aspect permeating through
the different assessment years has been found as a fact one way or
the other and parties have allowed that position to be sustained by
not challenging the order, it would not be at all appropriate to allow
the position to be changed in a subsequent year."
(emphasis supplied)
19. The chronology of events leading up to the passing of the orders
under Section 143(3) of the Act, clearly shows that the AO was `satisfied
with the claim of the assessee' while passing the original orders. Rule 8D is
triggered only in a case where the AO is not satisfied with the deduction
made by the Assessee. The reasons to believe assume and are predicated on
the belief that the AO should not have accepted the Petitioner's deduction as
explained and justified, albeit should have applied Rule 8D. Thus, the view
and opinion formed by the AO, while passing the original assessment orders
is doubted as erroneous. This is obviously a case of change of opinion.
20. In view of the aforesaid position, we allow the present writ petition
and quash the reassessment notices dated 30th March, 2015 in the case of the
Petitioner for the AYs 2010-11 and 2011-12. In the facts of the case, there
will be no order as to costs.
SANJIV KHANNA, J
PRATHIBA M. SINGH, J
OCTOBER 25, 2017/dk
W.P.(C) 480/2016 & W.P.(C) 526/2016 Page 15 of 15
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