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* IN THE HIGH COURT OF DELHI AT NEW DELHI
Reserved on: 27.10.2017
Pronounced on: 08.12.2017
+ W.P.(C) 2697/2015
SC JOHNSON PRODUCTS PRIVATE LIMITED
..... Petitioner
Through: Mr. C.S.Aggarwal, Senior
Advocate with Mr. Prakash
Kumar, Advocate
versus
ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE
22(2), NEW DELHI ..... Respondent
Through: Mr. Ruchir Bhatia, Advocate
+ W.P.(C) 10904/2016 & CM No.42721/2016 (stay)
SC JOHNSON PRODUCTS PRIVATE LIMITED
..... Petitioner
Through: Mr. C.S.Aggarwal, Senior
Advocate with Mr. Prakash
Kumar, Advocate
versus
ADDITIONAL COMMISSIONER OF INCOME TAX,
SPECIAL RANGE-8, NEW DELHI ..... Respondent
Through: Mr. Rahul Kaushik, Advocate
with Mr. Dhanesh Kumar,
Advocate
CORAM:
HON'BLE MR. JUSTICE S. RAVINDRA BHAT
HON'BLE MR. JUSTICE SANJEEV SACHDEVA
W.P.(C) Nos.2697/2015 & 10904/2016 Page 1
S. RAVINDRA BHAT, J.
1. In both these writ petitions, by the assessee, the relief claimed is
a direction to quash the reassessment notices issued by the income tax
department (hereafter "the revenue"). The assessee is aggrieved, and
submits that the reassessment notices under Sections 147/148 of the
Income Tax Act, 1961 (also "the Act") are vitiated and unsupportable
in law.
2. The brief facts are that the assessee filed its return of income for
the assessment year (AY) 2007-08 declaring an income of
`20,26,22,6051-. After selection of its case for scrutiny, the assessing
officer completed the assessment, bringing to tax `70,47,44,252/- by
assessment order dated 24.12.2010. It is alleged that the petitioner
received notice on 11 April, 2014, under Section 142 (1) of the Act, to
which it responded, pointing out that it was never served with any
reassessment notice. It was thereafter served a notice, dated 28 March,
2014, proposing to reassess income for AY 2007-08. The petitioner
filed its returns and, at its request, it was furnished with reasons for
reopening the completed assessment, on 10.02.2015. It objected to re-
opening of its assessment, through representation dated 25 February
2015. On 27 February 2015, those objections were rejected.
3. In WP 10904/2016, the facts are that for AY 2008-09, the
petitioner had filed its returns declaring an income of `23,80,55,757/-.
Like for the other year, the case was selected for scrutiny and the
assessments were framed, under Section 143 (3) after thorough
scrutiny, on 31.12.2010. The sum brought to tax was `86,80,81,180/-.
W.P.(C) Nos.2697/2015 & 10904/2016 Page 2
On 30.03.2015 the revenue issued notice for reassessment for AY
2008-09 under Sections 147/148; the petitioner resisted, pointing out
that the original assessment was completed under Section 14 (3) of the
Act. These were to no avail and the revenue rejected these objections.
4. It is alleged on behalf of the assessee/petitioner and argued by
its senior counsel, Mr. C.S. Agarwal that the reasons given, i.e. that a
wrong accounting standard was applied, resulting in concealment of
the true income, amounts to review of the same material on the record,
which is impermissible. It is stated that all material facts were duly
disclosed with respect to the computation of book profit under Section
115 JB of the Act. In this regard, it is submitted that copy of annual
account for the preceding year i.e. 2006-07 and the Order dated
09.10.2006 in Company Petition No. 73, were part of the record. It is
further argued that the A.O. never computed book profit and in the
absence of computation of book profit, the allegation that, there is an
escapement of income is impermissible. Senior counsel also argued
that fresh material surfaced subsequent to the culmination of
assessment proceedings. Learned counsel relied on the rulings
reported as Additional Commissioner of Income Tax vs. ICICI
Securities Primary Dealership Ltd. (2012) 348 ITR 299 (SC),
Madhukar Khosla vs. Assistant Commissioner of Income Tax (2014)
367 ITR 165 (Delhi), Mohan Gupta (HUF) vs. Commissioner of
Income Tax 2014 (141) DRJ 471 and Orient Craft Ltd vs.
Commissioner of Income-tax 354 ITR 536 (Delhi). Counsel also relied
on Apollo Tyres Ltd vs. CIT 255 ITR 273 to say that once returns are
filed and the company's accounts are audited and accepted as long
W.P.(C) Nos.2697/2015 & 10904/2016 Page 3
as they conform to schedule VII of the Companies Act, 1956 (also the
"Companies Act"), the revenue cannot question them, under Section
115J of the Income Tax Act. It is urged that the AO's power is to
satisfy himself if the accounts were accepted by the authorities and
certified; the only scope for adjustment is outlined in Explanation to
Section 115J (1A). Beyond that the AO cannot question the net profit.
5. It is submitted that Accounting Standard 14 is appropriate and
applicable for the facts. It provides, inter alia, that,
"37. Any excess of the amount of the consideration
over the value of the net assets of the transferor
company acquired by the transferee company
should be recognised in the transferee company's
financial statements as goodwill arising on
amalgamation. If the amount of the consideration
is lower than the value of the net assets acquired,
the difference should be treated as Capital
Reserve.
38. The goodwill arising on amalgamation should
be amortised to income on a systematic basis over
its useful life. The amortization period should not
exceed five years unless a somewhat longer period
can be justified."
6. Learned senior counsel submitted that the assessee company
accounted for the amalgamation transaction in its books of accounts.
This accounting is also in accordance with Generally Accepted
Accounting Principles ("GAAP") and was certified / accepted by the
statutory auditors. Accordingly, the assessee amortized the goodwill in
the books of accounts and claimed them under the head
W.P.(C) Nos.2697/2015 & 10904/2016 Page 4
"Depreciation/ Amortization" in the Profit and Loss account.
However, as evident from the copy of reasons provided to the assessee
the revenue alleged that the accounting of merger should have been
under "pooling of interest method" wherein the difference between
the value of investments in the subsidiary company and net assets so
acquired should have been adjusted in the reserves and hence, there
should not have been any question of creation of goodwill, had the
assessee-company followed the "pooling of interest" method instead
of the "Purchase" method. Further, the revenue alleged that in absence
of compliance to the relevant method, the financial statements of the
company does not give a true and fair view and the deviation in
accounting is a device deployed to avoid taxes. Such re-opening of
amounts to taking a second look, is without any basis, it is urged.
7. Learned senior counsel urged, relying on Ganga Saran vs.
Income Tax Officer 130 ITR 1 (SC) that the proviso to Section 147
does not empower the assessing officer or the revenue to re-open a
completed scrutiny assessment, unless fresh material surfaces,
disclosing that the assessee had hidden or concealed the real income.
Reliance was placed also on Calcutta Discount Co. Ltd. vs. Income-
tax Officer (1961) 41 ITR 191.
8. The revenue argues that the assessee tried to make out a case
that the amalgamation of two companies namely, M/s Karamchand
Appliances Pvt. Ltd. and M/s Roshni Appliances Pvt. Ltd. with the
transferor company, namely, M/s S.C. Johnson Products Pvt. Ltd. was
by a method of merger called 'purchase method' by which it is not
necessary that all the shareholders of the erstwhile transferor
W.P.(C) Nos.2697/2015 & 10904/2016 Page 5
companies would become shareholders in the same ratio in the
transferee company. It is argued that the accounting for a merger type
of amalgamation is made in terms of the accounting standard AS-14
which reads as follows:
"The object of the purchase method is to account
for the amalgamation by applying the same
principles as are applied in the normal purchase of
assets. This method is used in accounting for
amalgamation in the nature of purchase."
9. On the other hand in the 'pooling of interest' method of
amalgamation the transferor's assets, liabilities and reserves are
recorded by the transferee at the relevant "carrying amounts," i.e.
points. The criteria applicable, it is urged is 'pooling of interests
method' in para 3 (e) of AS-14. On the other hand the reason recorded
for issue of notice u/s 148 indicate that while the assessee maintains
this de jure position but actually the merger/amalgamation has de
facto followed the 'pooling of interests method' by which there could
not have been accounting for goodwill. It is contended that the
assessee in effect did not disclose full and true facts in its return of
income.
10. Counsel for the revenue argues that the assessee also annexed
the order of the Company Court when it has recognized and approved
the scheme of amalgamation under sections 391 and 394 of the
Companies Act. However, a perusal of paras 1 and 2 of the scheme
approved on 09.10.2006, shows that all assets and liabilities of the
transferor companies have passed on, in totality, to the transferee
company thus indicating that it is a 'pooling of interest' method of
W.P.(C) Nos.2697/2015 & 10904/2016 Page 6
amalgamation. It is thus, argued that clearly, an examination of the
scheme of merger, especially the clauses which deals with
amalgamation, 3.1 to 3.2.11 (which deal with the transfer of assets),
Clause 7 which deals with the shareholding after amalgamation and
clause 9 (which deals with the share capital reorganization) all show
that the merger was following 'pooling of interest' method.
11. It is stated that in view of this position, clearly the assessee did
not disclose the full and true facts and that the de facto position is
different from the de jure position. Therefore the deduction taken by
the petitioner for goodwill being the difference between the assets and
liabilities was incorrect and a stratagem by the assessee to reduce its
profit u/s 115JB of the Act by an amount of `103,26,96,924/-.
12. Countering the petitioner's argument, based on Apollo Tyres
(supra), counsel for the revenue argues that the Supreme Court held
that the accounts prepared as per the provisions of the Companies Act
and ratified by the Board of Directors should not be interfered with. It
is pointed out, that the court did not say that the company should say
one thing and do another. Both the methods specified above are
sanctioned by the Companies Act; yet the assessee stated that it
followed one method but actually followed the other which goes to
prove that the facts declared by it are not full and true; rather it
revealed a misleading picture. The approval of the Scheme of
amalgamation by the Companies Court meant that the assessee felt
that the interest of the shareholders and of creditors is well protected.
It is submitted that the approval of the scheme does not ipso facto bar
the revenue from examining the impact of provisions of the Income
W.P.(C) Nos.2697/2015 & 10904/2016 Page 7
Tax Act.
13. The revenue relies on the Explanation to Section 147 of the
Income Tax Act which states as under:
"Production before the Assessing officer of account
books or other evidence from which material
evidence could with due diligence have been
discovered by the Assessing Officer will not
necessarily amount to disclosure within the
meaning of the foregoing proviso."
Reliance is also placed on Explanation 2(c) to section 147 of the
Act, which states as follows:
"Explanation 2- For the purposes of this section,
the followingshall also be deemed to be cases
where income chargeableto tax has escaped
assessment, namely:-
(c) Where an assessment has been made but-
(i) Income chargeable to tax has been
under assessed; or..."
The revenue also cites Sri Krishna (P) Ltd. (1996) 221 ITR 538(SC)
where it was held that:
"Every disclosure is not and cannot be treated to
be a full and true disclosure. A disclosure may be a
false one or true one. It may be a full disclosure or
it may not be. A partial disclosure may often be a
misleading one. What is required is a full and true
disclosure of all material facts necessary for
making assessment for that year. This calls for
W.P.(C) Nos.2697/2015 & 10904/2016 Page 8
examination of the decisions of the court analyzing
and elucidating section 147 and 148. The
obligation on the assessee to disclose the material
facts or what are called primary facts- is not a
mere disclosure but a disclosure which is full and
true. A false disclosure is not a true disclosure. The
disclosure must not only be true but must be full -'
fully and truly'. A fake assertion, or statement, of
material fact, therefore, attracts the jurisdiction of
the ITO under section147."
Analysis and Conclusions
14. It is apparent from the facts that the completed assessments for
the two years, had taken into account the documents and materials.
Those assessments were undeniably after scrutiny, finalized under
Section 143 (3). Both assessments were completed in December 2010.
While framing a similar assessment, for AY 2009-10, the AO noticed
that the assessee had adopted a wrong method, of "purchase", while
calculating depreciation, instead of the "pooling of assets" method, in
terms of a different accounting standard. The assessee argues that
there is absolutely no material on the record to justify re-opening of an
otherwise valid assessment and the citing of a more appropriate
method cannot mean that there was concealment of material facts.
15. Long ago, in Calcutta Discount, (supra) the Supreme Court had
ruled as follows:
"There can be no doubt that the duty of disclosing
all the primary facts relevant to the decision of the
question before the assessing authority lies on the
assesses. To meet the possible contention that when
W.P.(C) Nos.2697/2015 & 10904/2016 Page 9
some account books or other evidence has been
produced, there is no duty on the assessee to
disclose further facts, which on due diligence, the
Income-tax Officer might have discovered, the
Legislature has put in the Explanation, which has
been set out above. In view of the Explanation, it
will not be open to the assessee to say, for example
- "I have produced the account books and the
documents : You, the assessing officer examine
them, and find out the facts necessary for your
purpose : My duty is done with disclosing these
account-books and the documents." His omission
to bring to the assessing authority's attention those
particular items in the account books, or the
particular portions of the documents, which are
relevant, amount to "omission to disclose fully and
truly and truly all material facts necessary for his
assessment." Nor will he be able to contend
successfully that by disclosing certain evidence, he
should be deemed to have disclosed other evidence,
which might have been discovered by the assessing
authority if he had pursued investigation on the
basis of what has been disclosed. The Explanation
to the section, gives a quietus to all such
contentions; and the position remains that so far as
primary facts are concerned, it is the assessor's
duty to disclose all of them - including particular
entries in account books, particular portions of
documents, and documents, and other evidence,
which could have been discovered by the
assessing authority, from the documents and other
evidence disclosed.
W.P.(C) Nos.2697/2015 & 10904/2016 Page 10
Does the duty however extend beyond the full and
truthful disclosure of all primary facts ? In our
opinion, the answer to this question must be in the
negative. Once all the primary facts are before the
assessing authority, he requires no further
assistance by way of disclosure. It is for him to
decide what inferences of facts can be reasonably
drawn and what legal inferences have ultimately to
be drawn. It is not for somebody else - far less the
assessee - to tell the assessing authority what
inferences, whether of facts or law, should be
drawn. Indeed, when it is remembered that people
often differ as regards what inferences should be
drawn from given facts, it will be meaningless to
demand that the assessee must disclose what
inferences - whether of facts or law - he would
draw from the primary facts.
If from primary facts more inferences than one
could be drawn, it would not be possible to say that
the assessee should have drawn any particular
inference and communicated it to the assessing
authority. How could an assessee be charged with
failure to communicate an inference, which he
might or might not have drawn ?
It may be pointed out that the Explanation to the
sub-section has nothing to do with "inferences"
and deals only with the question whether primary
material facts not disclosed could still be said to be
constructively disclosed on the ground that with
due diligence the Income-tax Officer could have
discovered them from the facts actually disclosed.
The Explanation has not the effect of enlarging the
section, by casting a duty on the assessee to
W.P.(C) Nos.2697/2015 & 10904/2016 Page 11
disclose "inferences" - to draw the proper
inferences being the duty imposed on the Income-
tax Officer.
We have therefore come to the conclusion that
while the duty of the assessee is to disclose fully
and truly all primary relevant facts, it does not
extend beyond this."
16. In Phool Chand Bajrang Lal vs. ITO (1993) 203 ITR 456 it was
held that:-
"From a combined review of the judgments of this
court, it follows that an Income-tax Officer
acquires jurisdiction to reopen an assessment
under section 147 (a) read with section 148 of the
Income-tax Act, 1961, only if on the basis of
specific, reliable and relevant information coming
to his possession subsequently, he has reasons,
which he must record, to believe that, by reason of
omission or failure on the part of the assessee to
make a true and full disclosure of all material facts
necessary for his assessment during the concluded
assessment proceedings, any part of his income,
profits or gains chargeable to income-tax has
escaped assessment. He may start reassessment
proceedings either because some fresh facts had
come to light which were not previously disclosed
or some information with regard to the facts
previously disclosed comes into his possession
which tends to expose the untruthfulness of those
facts. In such situations, it is not a case of mere
change of opinion or the drawing of a different
inference from the same facts as were earlier
W.P.(C) Nos.2697/2015 & 10904/2016 Page 12
available but acting on fresh information. Since the
belief is that of the Income- tax Officer, the
sufficiency of reasons for forming this belief is not
for the court to judge but it is open to an assessee
to establish that there in fact existed no belief or
that the belief was not at all a bona fide one or was
based on vague, irrelevant and non- specific
information. To that limited extent, the court may
look into the conclusion arrived at by the Income-
tax Officer and examine whether there was any
material available on the record from which the
requisite belief could be formed by the Income-tax
Officer and further whether that material had any
rational connection or a live link for the formation
of the requisite belief."
17. It is therefore clear that if the rationale for re-opening is purely
factual, unless fresh facts or material having a "live link" with the
issue, that can lead to inference of concealment of material facts
cannot be gone into; the earlier assessment order becomes conclusive.
However, if the AO comes across material subsequently, such as fresh
facts, or materials which pertain to a previous assessment or
assessment orders (as in the present case) where it is felt that returns
were "dressed up" or improper claims were made, that escaped
inquiry, reassessment is warranted. In such cases, the materials can
also include subsequent years' assessments, which receive scrutiny
during the course of whose proceedings the AO has occasion to see if
the same, or same pattern of returns or claims were made. If so, the
notice of reassessment would be justified.
W.P.(C) Nos.2697/2015 & 10904/2016 Page 13
18. In the present case, there is no doubt that this court had, while
accepting the scheme for amalgamation, facially accepted the method
which the assessee indicated. At that stage, neither did the court
conduct any detailed inquiry into the question of the appropriateness
of the method, nor was it competent to return findings that would have
been conclusive. This event was relied upon by the assessee to argue
that the court, under the Companies Act, had accepted the method.
However, that ipso facto could not have barred any inquiry by the AO.
Indisputably, the AO did not proceed further, but merely accepted the
assessee's arguments. In these circumstances, the materials produced
for AY 2009-10 triggered the reassessment notices in the present case.
Having regard to the law declared in Calcutta Discount (supra) and
Phool Chand Bajrangi Lal (supra) it is held that there is no infirmity
with the impugned reassessment notices.
19. In view of the foregoing discussion, it is held that the writ
petitions lack in merit and have to fail. They are accordingly
dismissed.
S. RAVINDRA BHAT, J
SANJEEV SACHDEVA, J
DECEMBER 08, 2017
W.P.(C) Nos.2697/2015 & 10904/2016 Page 14
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