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* IN THE HIGH COURT OF DELH I AT NEW DELHI
+ W.P.(C) 1707/2014 & CM No.3569/2014
Reserved on:13th January 2016
Decided on: 22nd February 2016
MUNJAL SHOWA LIMITED ..... Petitioner
Through: Mr. Ajay Vohra, Senior Advocate with
Ms. Kavita Jha and Ms. Roopali Gupta,
Advocates.
versus
DEPUTY COMMISSIONER OF INCOME TAX
& ANR. ..... Respondents
Through: Mr. Ashok K. Manchanda, Senior
Standing counsel.
CORAM:
JUSTICE S. MURALIDHAR
JUSTICE VIBHU BAKHRU
JUDGMENT
% 22.02.2016
Dr S. Muralidhar, J.:
1. Munjal Showa Limited (`MSL') (hereafter the Assessee) has filed this
petition under Article 226 of the Constitution challenging the validity of a
notice dated 11th March 2013 issued by the Deputy Commissioner of Income
Tax (`DCIT'), Circle-5(1), New Delhi under Section 148 of the Income Tax
Act, 1961 (`Act') proposing to reassess the income of the Assessee for the
Assessment Year (`AY') 2008-09 on the ground that he had reasons to
believe that the Assessee's income for the said AY had escaped assessment.
W.P. (C) No. 1707/2014 Page 1 of 25
2. By the order dated 14th March 2014, while directing notice to issue in the
writ petition, an interim order was passed that no final assessment order be
made pursuant to the impugned notice till further orders.
Background Facts
3. The background facts are that the Assessee, a public limited company,
was incorporated in 1985 as a joint venture between Showa Corporation,
Japan and Hero Group, India. It is engaged, inter alia, in the business of
manufacture and sale of shock absorbers for vehicles.
4. For the previous year relevant to AY 2008-09, the Assessee filed a return
of income at a total income of Rs. 25,10,74,700. The return was picked up
for scrutiny. According to the Petitioner, after making exhaustive
examination and proposing several disallowances a draft assessment order
was passed by the Assessing Officer (`AO') under Section 143(3) of the Act
on 28th November 2011. This was a draft assessment order since one of the
issues examined concerned the determination of arm's length price (`ALP')
of the international transaction entered into by the Assessee with its foreign
associate.
5. It is significant that during the course of the assessment, notices under
Section 143(2) and 142(1) were issued by the AO on 21 st June 2011
requiring the Assessee to furnish the following information:
(a) the details of the short term loans taken by the Petitioner Kotak Mahindra
Bank and Nova Scotia Bank.
W.P. (C) No. 1707/2014 Page 2 of 25
(b) the details of the investment made during the year.
(c) the details of the dividend income earned during the year along with a
justification for making `nil' disallowances under Section 14A of the Act.
6. On 19th September 2011, the Petitioner furnished the above details
including the details of interest bearing funds borrowed during the year as
well as the justification for inapplicability of Section 14A of the Act to the
expenses, including interest expenses incurred, on the ground that the
investment yielding exempt income was not yielded from borrowed funds.
7. On 26th September 2011 another show cause notice was issued by the AO
under Section 143(2) read with Section 142(1) of the Act inter alia asking
the Assessee to furnish:
(i) justification as to why disallowance in terms of Rule 8D of the Income
Tax Rules, 1962 (`Rules') should not be made, and
(ii) bifurcation/details of the foreign exchange (`FE') fluctuations loss.
8. This was replied to by the Assessee on 21st October 2011. As far as the
justification regarding non-applicability of Secton14A of the Act read with
Rule 8D of the Rules, on 28th November 2011 the Assessee furnished details
of the FE fluctuation loss along with the legal justification regarding
admissibility of the said loss as an allowable deduction under Section 37(1)
of the Act.
9. As mentioned earlier, on 28th November 2011 the AO passed a draft
assessment order. The objections thereto filed by the Petitioner were
W.P. (C) No. 1707/2014 Page 3 of 25
considered by the Dispute Resolution Panel (`DRP'). By an order dated 15th
June 2012, the DRP directed the AO to pass the final assessment order by
issuing certain directions. On that basis, on 6th July 2012, the AO framed the
assessment of the Assessee by the final order of assessment under Section
143(3) read with Section 144C of the Act assessing the total income of the
Assessee at Rs. 44,29,50,186 as against the returned income of Rs.
25,10,74,695.
10. Aggrieved by the above order, the Assessee went before the Income Tax
Appellate Tribunal (`ITAT') and the said proceedings are stated to be
pending.
Reassessment Proceedings
11. On 11th March 2013, the DCIT issued a notice to the Assessee under
Section 148 of the Act enclosing therewith the reasons proposed for
reopening of the assessment for the aforementioned AY 2008-09.
12. On 17th September 2013, the Petitioner filed its legal objections to the
reopening of the assessment. On 19th February 2014, an order was passed by
the DCIT dismissing the objections raised by the Petitioner to the reopening
of the assessment under Section 148 of the Act. Thereafter the present writ
petition was filed.
13. In the 'reasons to believe' accompanying the notice dated 11th March
2013, it was stated that a perusal of the assessment record revealed that the
Assessee had claimed substantial financial charges to the tune of Rs.
2,27,24,801 as compared to the interest outgo in the previous assessment
W.P. (C) No. 1707/2014 Page 4 of 25
year at Rs. 60,58,887. The increase in the interest cost was mainly on
account of the short term investments made through Nova Scotia Bank and
Kotak Mahindra Bank for transactions of mutual fund units. However, the
cost of interest expenditure related to the investment was not shown by the
Assessee as being related to the investment which was subject matter of the
disallowance under Section 14A of the Act. It was further stated that
although disallowance under Section 14A was made by the Assessee in
terms of Rule 8D and was noted in the original assessment order, but the
interest expenses directly related to the investment could not be taxed since
the Assessee failed to disclose the true particulars of its income in that
regard. It was concluded by the AO that "there is a direct nexus between the
interest expenses paid and the short term investments made by the
Assessee."
14. The 'reasons to believe' recorded under Section 148 of the Act proceeded
to set out, in a tabular form, the calculation of the interest expenses related
to short term capital gain. The interest to be disallowed was worked out as
Rs. 49,46,301.
15. The second aspect adverted to in the reasons to believe was that a sum of
Rs. 9,52,93,423 claimed by the Assessee as deduction on account of FE loss.
It was noted that the above figure included a sum of Rs. 1,71,43,726 which
pertained to FE derivatives claimed on mark to market (`MTM') basis . It
was noted that such a loss had been claimed by the Assessee for the first
time. As per the Instruction No. 3/2010 dated 23rd March 2010 issued by the
Central Board of Direct Taxes (`CBDT') "the notional loss incurred in case
W.P. (C) No. 1707/2014 Page 5 of 25
where no sale or settlement has actually taken place and the loss has been
marked on market basis resulting in reduction of book profits, will be
contingent in nature and cannot be allowed to be set off against the taxable
income". It was accordingly observed that a loss of Rs. 1,71,43,726, booked
on MTM basis, was not allowable.
16. The AO concluded in the 'reasons for reopening the assessment' that he
had reasons to believe that a sum of Rs. 49,46,301+ Rs. 1,71,43,726
aggregating to Rs. 2,20,90,027 had escaped assessment and there was a
failure on the part of the Assessee to disclose the true particulars of its
income by claiming expenses which were not paid.
Counter affidavit of the Respondents
17. In the counter affidavit filed on behalf of the Respondents it is stated:
(i) the Assessee had failed to prove that there was no nexus between the
interest paid and the investment made for earning the dividend of Rs.
8,46,024 as stated in Schedule 15- Other income as part of the audited
accounts for AY 2008-09.
(ii) None of the investments made by the Assessee during the AY in
question was for a period exceeding 23 days (i.e. less than a month),
whereas a Growth Plan investment is for a minimum of 12 months.
Therefore, it was evident that the Petitioner never had any intention of
making long-term investment in the Growth Plan. The fact that the Assessee
had earned dividend income meant that the Assessee would have made
certain investment to have the same. However, the Assessee failed to make
W.P. (C) No. 1707/2014 Page 6 of 25
disallowance under Section 14A of the Act for the administrative and
interest expenses incurred for earning of the said dividend of Rs. 8,46,024.
From a perusal of Schedule 7 of the audited accounts of the Assessee, it is
seen that the Assessee had invested both in growth funds as well as in the
dividend plan of Birla Mutual Funds and Reliance Mutual Funds, and had
earned the aforementioned dividend income of Rs. 8,46,024. This
investment in the mutual funds was not declared in the original assessment.
This amounted to not disclosing the full particular and complete details
during the concerned AY. The declaration of cumulative interest expenses
could not be considered as submitting the complete particulars. Also no
break up of interest expenses in regard to investment from borrowed funds
was disclosed.
(iii) After the AO had passed the final assessment order on 6th July 2012, the
CIT-II reviewed the file. A review report dated 15th January 2013 was issued
to the AO. The review report highlighted the erroneous judgment made by
the AO with regard to the disallowances under Section 14A of the Act by
making an addition of only Rs.59 and not considering the interest expenses
incurred on the borrowed funds utilised for the purpose of investment by the
Assessee. Further the AO failed to disallow the notional FE loss of Rs.
1,71,43,726 incurred on derivatives based on the MTM basis.
18. It is then disclosed in the counter affidavit as under:
"CIT-II made a noting on the order sheet of the review file to call for
the action taken report from the concerned officers. In view of this
direction, the ITO (hqrs.) Judicial-II issued a letter 04.03.2013 to
DCIT -5(1), requesting to take corrective action and action taken
report in this regard to be sent to the office of CIT-II by 07.03.2013
W.P. (C) No. 1707/2014 Page 7 of 25
without fail. In pursuance of the aforesaid administrative directions of
the CIT, which are binding on DCIT, the remedial action was taken
u/s- 147/148 and report dated 11.03.2013 was sent of the office of
CIT-II. The corrective action in view of review report of CIT-II, Delhi
was to be taken u/s 263, as erroneous order which was prejudicial to
the interest of Revenue was passed by the AO. In Petitioner's case, the
final assessment order was passed based on order of DRP, comprising
of three senior CITs. In view of this fact, the CIT-II i.e., one CIT
cannot override the decision of 3 CITs u/s-263. Thus, there was no
alternative with the AO to take remedial action u/s- 263. Hence, the
AO was left with no option but to take remedial action u/s 147/148".
Submissions of the Petitioner
19. It was submitted by Mr. Ajay Vohra, learned Senior counsel for the
Assessee, that in the course of the assessment proceedings, the relevant
queries regarding both the issues were raised by the Respondents. Replies
were filed by the Petitioner in response to such queries. It is only after an
exhaustive verification of the information supplied that the Respondents
passed the original assessment order dated 6th July 2012.
20. It was pointed out that in respect to the issue of disallowance under
Section 14A of the Act, the Respondents had even computed disallowance
in terms of Rule 8D of the Rules. This disallowance was in fact challenged
by the Petitioner before the Dispute Resolution Panel (`DRP') which
confirmed the said disallowance. There was no new tangible material in the
possession of the Respondents, which could have led to the formation of
reasons to believe that income had escaped assessment. In fact, the
reopening of the assessment was sought to be done only on the basis of
change in opinion upon review of the existing material on record. Referring
to the decision in CIT v. Kelvinator of India Ltd. (2010) 320 ITR 561 (SC)
W.P. (C) No. 1707/2014 Page 8 of 25
and CIT v. Usha International Ltd (2012) 25 Taxmann.com 200 (Del)
(FB), it was submitted that this was impermissible in law. Mr. Vohra
submitted that in respect of the disallowance under Section 14A of the Act,
the challenge by the Petitioner to the disallowance was still pending before
the ITAT when the impugned order was passed seeking to reopen the
assessment.
21. Mr. Vohra further submitted that, even assuming without admitting that
the entire funds borrowed from Nova Scotia Bank and Kotak Mahindra
Bank were invested in mutual funds, since the investment was made in a
Growth Plan which could not have yielded any exempt income, no
disallowance could have been made under Section 14A of the Act read with
Rule 8D of the Rules. Even as regards the disallowance of loss arising from
foreign exchange derivatives (`FED') on MTM basis, necessary disclosures
were duly furnished by the Assessee in the course of the original assessment
proceedings in Clause 2(a) of the notes of accounts contained in Schedule 22
of the audited financial statement. That note clearly states that the profits
were reduced in the relevant previous year on account of the loss of Rs. 1.71
crores being suffered on derivatives on MTM basis. By a letter dated 28th
November 2011, the queries raised by the Respondents by notice dated 26 th
September 2011 in this regard were replied to. There was a verification
undertaken by the Respondents and it is only thereafter the losses were
allowed by the AO.
22. It was pointed out by Mr. Vohra that the Petitioner had followed the
mercantile system and that in terms of the decision in Supreme Court in CIT
W.P. (C) No. 1707/2014 Page 9 of 25
v. Woodward Governor India P. Ltd. (2009) 312 ITR 254(SC), the loss
arising on account of FE fluctuation in respect of the outstanding liabilities
on revenue account was allowable revenue expenditure, notwithstanding that
the liability was to be discharged at a later stage. The aforesaid position
equally held good for derivative contracts entered into to hedge foreign
currency liabilities.
23. In terms of Accounting Standard (`AS')-30 on "Financial Instruments:
Recognition and Measurement" read with AS-11 on the "Effects of change
in Foreign Exchange rate" issued by the Institute of Chartered Accountants
of India (`ICAI'), the loss/gain on outstanding derivative contracts are to be
recognized on MTM basis. The term `Mark to Market' is a concept under
which the unmatured forward contracts are valued at market rate so as to
report their actual value on the reporting date. A corresponding loss is then
booked through the profit and loss account, being the difference between the
purchase price and the value as on the valuation date. It was submitted that
as per AS-11 read with AS-30 issued by the ICAI, the companies are
required to account for MTM losses in their books despite the fact that the
contract has not yet matured on the date of the balance sheet. Since the loss
arising out of the outstanding derivative contracts of foreign currency, on
MTM basis, was an ascertained liability at the end of the relevant year, the
loss was allowable as business deduction. It was submitted that the CBDT
Instruction No. 3/2010, dated 23rd March 2010 could not possibly override
the existing decisions of the Supreme Court and the High Court on the same
issue. A reference is made to the decision in CCE v. Ratan Melting &
Wire Industries (2008) 220 CTR (SC) 98. It is further submitted that if the
W.P. (C) No. 1707/2014 Page 10 of 25
CIT was of the view that the order of the AO was prejudicial to the interest
of the Revenue, then it is possible to invoke the powers under Section 263 of
the Act. Reliance was placed on the decisions in CIT v. DLF Power Ltd
(2012) 17 taxmann.com 269(Del) and Lahmeyer Holding GMBH v. DDIT
(2015) 376 ITR 70(Del).
24. Mr. Vohra further submitted that the ignorance of the AO could not be a
ground for reopening the assessment. He submitted that notes to the
accounts have to be read as part of the accounts which in turn were enclosed
with the returns filed and therefore it could not be said that the material and
true particulars were not disclosed by the Assessee. Reliance was placed on
the decision in CIT v. Sain Processing and Wvg. Mills (P.) Ltd (2010) 325
ITR 565 (Del.). It was further submitted that the reasons for reopening the
order had to be found in the order itself and cannot be supplied by an
affidavit filed subsequently. Reliance was placed on the decisions in Sheth
Brothers v. JCIT (2001) 251 ITR 270 (Guj) and Vijaykumar M.
Hirakhanwala HUF v. ITO (2006) 287 ITR 443 (Bom.).
Submissions of the Respondents
25. In response to the above submissions, it was submitted by Mr. Ashok
Manchanda, learned counsel for the Revenue, that it was only after the
original assessment proceedings were concluded that the AO learnt that the
expenditure was not on account of interest and that the financial charges in
the period relevant to AY 2008-09 had increased to Rs. 2,27,24,801 as
compared to the interest outgo of RS. 60,58,887 in the earlier AY 2007-08.
This increased interest cost was mainly due to making of short term
W.P. (C) No. 1707/2014 Page 11 of 25
investment through funds borrowed from Nova Scotia Bank and Kotak
Mahindra Bank for transactions of investment in mutual funds. According to
Mr. Manchanda, this interest expenditure of Rs. 49,46,301 which is included
in the total financial charges of RS. 2,27,24,801 had not been shown by the
Assessee as being related to the investments either in the returns filed or
even in the audited tax report. According to him, if it had been disclosed, the
income expenditure of Rs. 49,46,301 would not have escaped assessment.
26. Mr. Manchanda submitted that the Petitioner had surreptitiously claimed
the said sum of Rs. 49,46,301 as business expenditure while it was a direct
expense related to dividend and investments income from which it was
either exempt or chargeable as short term capital gains. It is stated that the
Assessee deliberately suppressed the material fact with a view to evade tax.
Since the interest expenditure related to the investments was not discussed
during the original assessment proceedings, the question of the AO changing
his opinion on the same fact did not arise.
27. As regards the FE loss of Rs. 1,71,43,726 on MTM basis, Mr.
Manchanda submitted that it was only a notional loss computed on the basis
of market value. It was not an actually realised loss and could not be allowed
as expenditure against any income. Even otherwise, the loss of any
speculative nature was not allowable for set off against any profits of non-
speculative nature. The loss of Rs. 1,71,43,726 to the Assessee had resulted
from derivative contracts and trading activities which were speculative. It
was claimed on notional MTM basis. The disclosure made in the audited
report was ambiguous and could not be understood clearly. Therefore, the
W.P. (C) No. 1707/2014 Page 12 of 25
said amount had to be added back to the return. In terms of Circular No. 3 of
2010, the Assessee was duty bound to declare the inadmissible loss in the
return filed by it. It did not do so. Even the tax audit report declared the
expenditure in this account as nil. Note No. 2(a) of Schedule 22 of the Final
Accounts contained an admission by the auditor of the deviation from the
previous year's policy. However, in the tax audit report, a false statement
was made that there was no change in the accounting method.
28. Mr. Manchanda submitted that any disclosure made in the financial
accounts or any other document during the course of the assessment
proceedings was not disclosure unless "it is appropriately mentioned at the
appropriate place in the return of income". Thus the Assessee had
deliberately concealed and furnished inadequate particulars of income with a
view to evade taxes.
Discussion and Reasons
29. The two questions that the Court proposes to examine is whether the
Assessee had made complete disclosure during the assessment proceedings
and whether there was any new tangible material available with the
respondents for forming reason to believe that income had escaped
assessment.
30. In the counter affidavit filed by the Respondents, reliance has been
placed on Instruction No. 15 dated 4th November 2008, in terms of which the
CIT had the administrative power to review the file and the assessment
order. The CIT-II made a noting on the order sheet of the review file to call
for an action taken report from the concerned officer. This was followed by
W.P. (C) No. 1707/2014 Page 13 of 25
a direction being issued by the ITO (hqrs.) Judicial-II on 4th March 2013 to
DCIT 5(1), asking that corrective action be taken and an action taken report
be sent to the office of the CIT-II by 7th March 2013 without fail. It is
admitted in the counter affidavit that pursuant to the above administrative
direction of the CIT "which are binding on DCIT, the remedial action was
taken u/s 147/148 and report dated 11th March 2013 was sent to the office of
CIT-II".
31. The CIT did have power under Section 263 of the Act, since the final
assessment order was passed based on the order of DRP, comprising of
three senior CITs, the "CIT-II i.e., one CIT cannot override the decision of
3 CITs". It is further added that "the AO was left with no option but to take
remedial action under Section 147/148".
32. It is obvious from the above admission by the Respondents in the
counter affidavit that the AO did not apply his mind independently and went
by the order of the CIT. It is a settled law that a quasi-judicial authority
cannot afford to act on the direction and in the present case on the direction
of a superior officer. In Anirudhsinhji Jadega v. State of Gujarat (1995) 5
SCC 302, it was reiterated by the Supreme Court that once a discretion is
vested with a certain authority, he alone should exercise that discretion
vested under the statute and if he acts in accordance with "the direction or
any compliance with some higher authorities instruction" it would be a case
of failure to exercise discretion altogether. In Commissioner of Income Tax
v. Greenworld Corporation (2009) 314 ITR 81 (SC) the AO issued an order
under Section 148 of the Act on the dictates of the CIT. The Supreme Court
held that without going into the question of the bona fides of the authorities
W.P. (C) No. 1707/2014 Page 14 of 25
under the Act, "the order of assessment passed by the Assessing Officer on
the dictates of the higher authority, being wholly without jurisdiction, was a
nullity".
33. In CIT v. SPL's Siddhartha Ltd. [2012] 345 ITR 223 (Del), it was
observed as under:
"7. Section 116 of the Act also defines the Income Tax Authorities as
different and distinct Authorities. Such different and distinct
authorities have to exercise their powers in accordance with law as
per the powers given to them in specified circumstances. If powers
conferred on a particular authority are arrogated by other authority
without mandate of law, it will create chaos in the administration of
law and hierarchy of administration will mean nothing. Satisfaction of
one authority cannot be substituted by the satisfaction of the other
authority. It is trite that when a statute requires, a thing to be done in a
certain manner, it shall be done in that manner alone and the Court
would not expect its being done in some other manner.
....
8. Thus, if authority is given expressly by affirmative words upon a
defined condition, the expression of that condition excludes the doing
of the Act authorised under other circumstances than those as defined.
It is also established principle of law that if a particular authority has
been designated to record his/her satisfaction on any particular issue,
then it is that authority alone who should apply his/her independent
mind to record his/her satisfaction and further mandatory condition is
that the satisfaction recorded should be "independent" and not
"borrowed" or "dictated" satisfaction. Law in this regard is now sell-
settled. In Sheo Narain Jaiswal & Ors. Vs. ITO, 176 ITR 35 (Pat.), it
was held:
`Where the Assessing Officer does not himself exercise his
jurisdiction under Section 147 but merely acts at the behest of
any superior authority, it must be held that assumption of
jurisdiction was bad for non- satisfaction of the condition
precedent.'"
W.P. (C) No. 1707/2014 Page 15 of 25
34. Nothing prevented the CIT from exercising powers under Section 263 of
the Act if it was felt that the order of the AO is prejudicial to the interest of
the Revenue. With that remedy not being availed of by the Revenue, the
reopening of the assessment on the basis of the same material would amount
to a change of opinion. What was also overlooked was the fact of the
pendency of the Assessee's appeal before the ITAT on one of the issues that
led to reopening of the assessment viz., the expenditure incurred for earning
of exempt income under Section 14A.
35. At this juncture it may be useful to recapitulate the law in relation to
reopening of assessments under Sections 147/148 of the Act. A Full Bench
of this Court in CIT v. Kelvinator of India Ltd. [2002] 256 ITR 1(Del) held
that an order purportedly passed without application of mind could not itself
confer jurisdiction upon the AO to reopen the proceeding "without anything
further" as that would amount to "giving a premium to an authority
exercising quasi-judicial function to take benefit of its own wrong". This
was upheld by the Supreme Court in CIT v. Kelvinator of India Ltd. (2010)
320 ITR 561(SC). The Supreme Court examined the amendment to the
proviso to Section 147 (1) of the Act with effect from 1st April 1989 and
observed that the power to reopen assessments was much wider. It went on
to observed:
"However, one needs to give a schematic interpretation to the words
"reason to believe" failing which, we are afraid, Section 147 would
give arbitrary powers to the Assessing Officer to re-open assessments
on the basis of "mere change of opinion", which cannot be per se
reason to re-open. We must also keep in mind the conceptual
difference between power to review and power to re-assess. The
Assessing Officer has no power to review; he has the power to re-
W.P. (C) No. 1707/2014 Page 16 of 25
assess. But re-assessment has to be based on fulfillment of certain pre-
condition and if the concept of "change of opinion" is removed, as
contended on behalf of the Department, then, in the garb of re-
opening the assessment, review would take place. One must treat the
concept of "change of opinion" as an in-built test to check abuse of
power by the Assessing Officer. Hence, after 1st April, 1989,
Assessing Officer has power to re-open, provided there is "tangible
material" to come to the conclusion that there is escapement of
income from assessment. Reasons must have a live link with the
formation of the belief."
36. In CIT v. Usha International Ltd [2012] 348 ITR 485(Del) a Full
Bench of this Court observed that there could be instances where an AO
may not have raise a query during the original assessment proceedings but
may have examined the subject matter because the aspect or question may
have been too apparent and obvious. In Swarovski India Pvt. Ltd. v. Deputy
Commissioner of Income Tax 368 ITR 601 (Del), it was held that the
escapement of income by itself is not sufficient for reopening the assessment
in a case covered by the first proviso to Section 147 of the said Act and
unless and until there was failure on the part of the assessee to disclose fully
and truly all the material facts necessary for assessment, the power to reopen
the assessment should not be invoked. It was insisted that the reasons for
reopening of the assessment should specifically indicate which material fact
was not disclosed by the Assessee in the course of the original assessment
under Section 143(3) of the Act failing which there should not be any
reopening of the assessment.
37. In Prabhu Dayal Rangwala v. Commissioner of Income-Tax 373 ITR
596 (Del) a Division Bench of this Court after reviewing the case law till
then held:
W.P. (C) No. 1707/2014 Page 17 of 25
"18. In view of the dictum of the Supreme Court in the case of
Kelvinator of India Ltd. (supra), the Full Bench of this court in
Kelvinator of India Ltd. (supra) and Usha International (supra), the
present case would fall in the category of "change of opinion" as the
"reasons to believe" proceed on the premise that the opinion formed in
the original assessment orders was wrong or erroneous. A wrong or
erroneous opinion is not a good ground for reopening. This would be
contrary to the jurisdictional requirements and the mandatory pre-
conditions which should be satisfied. The said aspect has been
highlighted in the aforesaid ratio by the Supreme Court and this court.
Erroneous decisions can be corrected by resort to exercise of power
under section 263 of the Act, which is the appropriate remedy. The
said power can be exercised if the order passed by the Assessing
Officer was erroneous and prejudicial to the interests of the Revenue.
The error and mistake made by the Assessing Officer/Revenue in the
present case is that it did not resort to and exercise the power under
section 263 of the Act but erringly selected to exercise the power of
reopening under section 147 of the Act. Exercise of the said power
under section 147 of the Act is faulty and flawed, as jurisdictional
preconditions are not satisfied."
38. Turning to the case on hand, the Court finds that in the original
assessment proceedings there was complete disclosure made by the Assessee
of the relevant particulars. The Revenue has been unable to counter the
assertion made by the Petitioner that the investment was in mutual funds and
made under the growth plan scheme that did not yield any exempt income.
The income accrued by appreciation in the net value of the units held.
Where the investors redeems such units before the expiry of twelve months
from the date of their purchase/acquisition, then capital gains are chargeable
in the hands of the investor at the maximum marginal rate prescribed under
Section 111A of the Act. The Assessee made a disclosure in Schedule 15 of
the profit and loss (`P&L') account, under the head "Other Income" of the
W.P. (C) No. 1707/2014 Page 18 of 25
dividend earned during the relevant previous year. The financial expenses
incurred by the Petitioner were reported in Schedule 20 to the P&L account.
Of the total financial expenses of Rs. 2,27,24,801, the interest charges paid
to the bank were Rs. 65,09,921, the interest paid to the others was in the
sum of Rs. 1,51,28,845 and the bank charges amount was Rs. 10,86,035.
Specific queries were raised by the AO during the course of the original
assessment proceedings as regards the interest expenses. The AO rejected
the contention of the Petitioner regarding low interest expense having been
incurred and made a disallowance of Rs.59 which was questioned by the
Assessee before the DRP unsuccessfully.
39. Apart from stating that on review, the CIT found that there should have
been a greater figure of disallowance, the Respondent did not point out what
tangible materials had come to their possession in order to form reasons to
believe that the income had escaped assessment on the above ground.
40. The Court's attention was drawn to Schedule 7 of the audited annual
accounts wherein the investments were reported. It shows that in the
beginning of the year, the Assessee's investment was Rs.9664 being 961
units of Birla Sunlight Mutual Funds. They were sold during the relevant
AY and therefore the balance at the end of the year was nil. The same
Schedule 7 gives details of the mutual funds and number of units purchased
and sold during the year. It is, therefore, not possible to accept the plea of
the Revenue that the full particulars in that regard were not disclosed by the
Assessee in the original assessment proceedings.
W.P. (C) No. 1707/2014 Page 19 of 25
41. It was sought to be contended by Mr. Manchanda that if the investment
was in growth funds and not in securities that might yield dividend, the sale
of such units of growth funds would in any event attract capital gains
exigible to tax. This is not one of the reasons for which the assessment is
sought to be reopened. It is rightly pointed out by the counsel for the
Petitioner that the reasons for reopening the assessment have to be confined
to those set out in the impugned order. It cannot be improved upon by filing
subsequent affidavits. The assumption of jurisdiction cannot said to be
justified by supplying reasons extraneous to the recorded reasons. IN this
cont4ext, the decision of this Court in Northern Exim (P) Ltd. v. DCIT
[2013] 357 ITR 586 (Del) is instructive. Para 14 of the said decision reads as
under:
"14. The learned Standing Counsel for the Income Tax Department
drew our attention to the entry made on 22.01.2001 in the proceedings
sheet recorded in the course of the re-assessment proceedings. We
have already seen that the said entry records that the authorised
representative of the petitioner was asked to show cause why the
difference in the amount of profit before tax and the amount declared
under the VDIS cannot be treated as its income for the assessment
year 1997-98 as no return of income had been filed. The entry made
in the proceeding sheet is perhaps more elaborate and informative
than the reasons recorded under Section 148(2) in the sense that it also
states one more reason for initiating re- assessment proceedings,
namely, that there is a difference between the profit before tax
(Rs.42,79,340/-) and the amount declared in the VDIS (Rs.7,23,490/).
The reasons recorded however are not so explicit and do not refer to
this fact. We are to be guided only by the reasons recorded for re-
assessment and not by the reasons or explanation given by the
Assessing Officer at a later stage in respect of the notice of re-
assessment.
...........
W.P. (C) No. 1707/2014 Page 20 of 25
The ratio laid down in all these cases is that, having regard to the
entire scheme and purpose of the Act, the validity of the assumption
of jurisdiction under Section 147 can be tested only by reference to
the reasons recorded under Section 148(2) of the Act and the
Assessing Officer is not authorised to refer to any other reason even if
it can be otherwise inferred and/ or gathered from the records. He is
confined to the recorded reasons to support the assumption of
jurisdiction. He cannot record only some of the reasons and keep the
others up his sleeves to be disclosed before the Court if his action is
ever challenged in a Court of law."
42. Even as regards the loss on account of FE fluctuation, there appears to
be a complete disclosure of all the relevant facts by the Assessee during the
original assessment proceedings. It must be recalled that the return was
picked up for scrutiny under Section 143(3) and in the balance sheet
accounts (together with notes) rendered by the Assessee, there was sufficient
disclosure on this aspect. Schedule 22 to the notes of accounts had a separate
disclosure under the heading as under:
"2. Statement of significant accounting policies
a) Basis of preparation
The financial statements have been prepared to comply in all material
respects with the Notified accounting standard by Companies
Accounting Standards Rules, 2006 and the relevant provisions of the
Companies Act, 1956. The financial statements have been prepared
under the historical cost convention on an accrual basis. The
accounting policies have been consistently applied by the Company
and except for the changes in accounting policy discussed more fully
below, are consistent with those used in the previous year.
Changes in Accounting Policies
Accounting for Derivatives
As per the ICAI Announcement, accounting for derivative contracts,
other than those covered under AS-11, are marked to market on a
portfolio basis, and the net loss after considering the offsetting effect
W.P. (C) No. 1707/2014 Page 21 of 25
on the underlying hedge item is charged to the income statement. Net
gains are ignored. In the previous year, no gains/losses were
recognised. Had the previous year policy been followed the profit
after tax would have been higher by Rs. 17,143,276 and current
liabilities would have been lower by Rs. 17,143,276.
................
j) Foreign currency transactions
.......
(iii) Exchange differences
Exchange differences arising on the settlement of monetary
items or on reporting company's monetary items at rates
different from those at which they were initially recorded
during the year, or reported in previous financial statements, are
recognised as income or as expenses in the year in which they
arise. Exchange differences arising in respect of fixed assets
acquired from outside India before accounting period
commencing on or after December 7, 2006 are capitalized as a
part of fixed asset.
(iv) Forward exchange contracts not intended for trading or
speculation purposes The premium or discount arising at the
inception of forward exchange contracts is amortised as
expense or income over the life of the contract. Exchange
differences on such contracts are recognised in the statement of
profit and loss in the year in which the exchange rates change.
Any profit or loss arising on cancellation or renewal of forward
exchange contract is recognised as income or as expense for the
year.
(v) Forward Exchange Contracts for trading or speculation
purposes A gain or loss on such forward exchange contracts is
computed by multiplying the foreign currency amount of the
forward exchange contract by the difference between the
forward rate available at the reporting date for the remaining
maturity of the contract and the contracted forward rate (or the
forward rate last used to measure a gain or loss on that contract
W.P. (C) No. 1707/2014 Page 22 of 25
for an earlier year). The gain or loss so computed is recognised
in the statement of profit and loss for the period. The premium
or discount on the forward exchange contract is not recognised
separately."
43. The submission of Mr. Manchanda that relevant and material facts have
to be specifically discussed in the returns of income of the tax audit report
appears to overlook the fact that the Assessee cannot be expected to guide
the AO on how he should scrutinize the accounts. In the letter dated 28th
November 2011 of the Assessee in reply to the query of the AO in the
original assessment proceedings, there was a whole note on exchange
fluctuation enclosed in the form of Annexure-B. Despite this it cannot be
said that the AO was ignorant of what the Assessee was doing in respect of
foreign exchange loss while accounting for derivatives contracts. The
change in the method of accounting and the consequential change in the loss
figure have been adequately explained by the Assessee. Under Note J in the
"Statement of significant accounting policy" in Schedule 22 to the audited
annual accounts, the Assessee had made a distinction between foreign
exchange contracts not intended for trading and speculative purposes and
those for trading and speculative purposes. It is, therefore not possible to
accept the plea of the Revenue that there was any deliberate failure on the
part of the Assessee to make full and true disclosure of the change in the
accounting policy that led to computation of loss as a result of fluctuation in
foreign exchange derivatives.
44. This has to be also appreciated in the context of the Assessee following
the mercantile system of accounting and Section 145 of the Act. The income
W.P. (C) No. 1707/2014 Page 23 of 25
of the Assessee is to be computed consistent with the regular method of
accounting followed by the Assessee. The Assessee has been following AS-
11 and AS-30 issued by the ICAI, in terms of which the loss/gains on
outstanding derivatives contracts are to be recognized on mark to market
basis. The Assessee is right in contending that CBDT Instruction No. 3 of
2010 cannot possibly override the existing decisions of the Supreme Court/
High Court on similar issues. The legal position in this regard has been
explained in Ratan Melting (supra) and has been reiterated in CIT v.
Nagesh Knitwears (P.) Ltd. [2012] 345 ITR 135 (Delhi) and CIT v. Indian
Oil Co. Ltd., (2012) 254 CTR 113 (Bom).
45. As pointed out by this Court in Lahmeyer Holding GMBH v. Deputy
Director of Income Tax (supra), a distinction has been made as to the
power to review and the power to re-assess. In the garb of reopening the
assessment, the AO cannot be permitted to review the original assessment.
That is in the domain of the CIT under Section 263 of the Act, subject of
course, to compliance with the mandatory requirements of that provision. In
the present case, apart from the fact that the CIT did not exercise such
power, it is plain from the admission of the Revenue in the counter affidavit
that the AO was acting on the direction of the CIT in terms of the
instructions of the CBDT.
Conclusion
46. For the aforementioned reasons, the notice dated 11th March 2013
issued by the Respondent under Section 148 of the Act and the order dated
19th February 2014, rejecting the Petitioner's objections are hereby quashed.
W.P. (C) No. 1707/2014 Page 24 of 25
47. The writ petition is allowed in the above terms but in the circumstances
with no order as to costs.
S. MURALIDHAR, J
VIBHU BAKHRU, J
FEBRUARY 22, 2016
dn/mg
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