MEGHDOOT LAMIRART (PVT.) LTD. VS RAJIV SINHA, 2000 PTD-GUJARAT-HIGH-COURT-INDIA 3659 (1999)

(a) Income-tax---

----Remission of liability---Takes place when dispute as to liability ultimately settled---Refund of excise duty received by assessee---Appeals against refund orders pending in Supreme Court---No remission of liability in year of receipt of refund as there was no final order---Indian Income. Tax Act, 1961, S.41 (1).

The Assessing Officer issued notices on February 1, 1999, for re opening the assessments for the assessment years 1988-89, 1989-90, 1990-91 and 1991-92 on the ground that receipt of excise duty -refunds during the aforesaid assessment years was not shown as income on accrual/receipt basis in the relevant assessment year. Admittedly, the allowance of excise duty paid as trading liability as deduction in earlier assessment years, the receipt of refund amount during the assessment year in question and pendency of an appeal against the order resulting in refund with plea of the assessee about its non-adjustment, were all disclosed in the return. On a writ petition:

Held, allowing the petitioner, (i) that receipt of refund during the relevant assessment year at that stage when appeals against the refund orders were pending did not result in cessation of the liability so as to make the receipt of amount within the purview of the term "the assessee has obtained a benefit as a result of remission or cessation of trading liability" in section 4101) of the Income Tax Act, 1961.

CIT v. Sugauli Sugar Works (P.) Ltd. (1999) 236 ITR 518 (SC) and CIT v.-Bharat Iron and Steel Industries (1993) 199 ITR 67 (Guj) fol.

(b) Income-tax---

----Reassessment---Limitation---Failure to disclose material facts---Receipt of excise duty refund and pendency of appeal therefrom disclosed in return-- That receipt not shown as income---Not failure to disclose material fact-- Extended period of limitation not available---Indian Income Tax Act, 1961, S.147.

(ii) That the reason disclosed in the note recorded by the Assessing Officer before assuming jurisdiction stated that receipt of excise duty refunds during the aforesaid assessment years were not shown by the assessee as income on accrual or receipt basis. It was not the case 'that the receipt of excise duty was not disclosed during the relevant proceedings of the assessment years in question. The primary facts were disclosed. Therefore, even if there was room for the Assessing Officer to hold a belief bona fide that the actual receipt was liable to be taxed in the assessment year relevant to the previous year in which refund had actually been received, there was no escape from the conclusion that initiation of action under section 147 on February 1, 1999, in respect of the assessment years 1988-89 to 1991-92 did not fall within the province of a case where such escapement could be held to be by reason of failure on the part of the assessee to disclose truly and fully all material facts necessary for the assessment, nor could such belief be entertained by the Assessing Officer in the reasons recorded by him for the purpose of initiating action under section 147. The notices were liable to be quashed.

Calcutta Discount Co. Ltd. v. ITO, (1961) 41 ITR 191 (SC) and CIT v. Rashmi Trading Co. (1976) 103 ITR 312 (Guj.) ref.

D.A. -Mehta for R.K. Patel, M.K. Patil and B.D. Karia for Petitioner.

P.G. Desai for Manish R. Bhatt for Respondent No. 1.

JUDGMENT

R. BALIA, J.---Rule Service of rule is waived by learned counsel for the respondent. Heard learned counsel for the parties.

The petitioner challenges the notices issued under section 148 of the Income Tax Act, 1961, for reopening the assessment for the assessment years 198$-89, 1989-90, 1990-91 and 1991-S2, by issuing notices on February 1, 1999. The contention of the assessee has been two-fold. Firstly, there being no failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment during the assessment proceedings, recourse to section 147 for reassessment could not have been taken after the expiry of four years from the end of the relevant assessment year. As four years have already expired since the end of each of the relevant assessment years in respect of which notices have been issuer, initiation of proceedings and assumption of jurisdiction by the Assessing Officer is wholly without authority of law. It has also been urged that reasons recorded before issuance of notices go to show that they are a mere pretence and the Assessing Office, could riot reasonably hold the belief that income for the relevant assessment years has escaped assessment for the reasons stated in the order. Learned counsel for the Revenue has supported the assumption of jurisdiction. The reasons disclosed for initiating proceedings under section 147 read as under:

"On account of receipt of excise duty refunds during the aforesaid assessment year which were not shown by you as income on accrual/receipt basis in the relevant assessment year consequently there was underassessment of income to the tune of excise duty refund and import duty refund."

The assessee pointed out that the assessee had received the refund on account of excess payment of excise duty as a result of the orders of the appellate, authority. However, further appeals against the orders of refund were pending before the Supreme Court. The amount of refund which' could be made subject to tax under the provision of section 41(1) could be made. subject to tax only on final determination and not at the interim stage when appeal was pending against the order which resulted in refund before the higher forum. The law in that regard is well-settled. A Full Bench of this Court in CIT v. Bharat Iron and Steel Industries (1993) 199 ITR 67, in which in the like circumstance when remission of a trading liability, also of the excise duty as in the present case, was made the subject-matter of review/revision were sought to be taxed in the assessment year 1974-75 in pursuance of the refund order made in August; 1975, having recourse to section 41(1) of the Income-tax Act was not held liable to be taxed in the assessment year 1974-75 but was held liable to tax. under section 41(1) only after April, 1976, when the proceedings in review revision were dropped. Until then the claim of refund was held to be in jeopardy. not liable to be taxed under section 41(1). The Court held (head note):

"In view of the pendency of the review or revisional proceedings, the assessee's claim for refund of the excise duty was in jeopardy. In other words, there was no final decision on the question whether or not the assessee was entitled to claim refund of excise duty of Rs.1,81,427 It was only when the review or revisional proceedings were dropped on April 30, 1976, that the assessee became finally entitled to claim refund of Rs.1,81,427. The year of account of the assessee was the financial year and, therefore, the refund of excise duty of Rs.1,81,427 was not includible in the assessee's total income for the assessment year 1974-75 under section 41(1)."

The aforesaid judgment of this Court has since been approved by the Supreme Court in CIT v. Sugauli- Sugar Works (P.) Ltd. (1999) 236 ITR 518. The following observation in Bharat Iron and Steel -Industries (1993) 199 ITR 67 (Guj.) page 79 were quoted with approval (page 522):

"In our opinion, for considering the taxability of amount coming within the mischief of "section 41(1) of the Act, the system of accounting followed by the assessee is of no relevance or consequence. We have to go by the language used in section 41(1) to find. out whether or not the amount was obtained by the assessee or whether or not some benefit in respect of trading liability by way of remission or cessation thereof was obtained by the assessee and it is in the previous year in which the amount or benefit, as the case may be, has been obtained that the amount or the value of the benefit would become chargeable to income-tax as income of that previous year. "

The Supreme Court further approved the decision of this Court in CIT v. Rashmi Trading (1976) 103 ITR 312 that (page 523) 'it must be the obtaining of the actual amount which is contemplated by the Legislature when it used the words 'has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure in the past'.

The apex Court in Sugauli Sugar Works (1999) 236 ITR 518, while interpreting the provision, in which the Legislature has used the expression "has obtained some benefit in respect of a trading liability by way of remission or cessation" has laid down that the section contemplates the obtaining by the assessee of an amount either in cash or in any other manner whatsoever by way of remission or cessation and it should be of a particular amount obtained by, him. Thus,, obtaining by the assessee of an amount or a benefit by virtue of remission or cessation is sine qua non for the application of this section. It is in this context that it becomes important to notice,, at the pains of repetition, that this Court in Bharat Iron and Steel Industries (1993) 199 ITR 67 has laid down that ultimate cessation of the liability is on the final decision which culminates the dispute between the Revenue and the assessee and not at the intermediary stage notwithstanding that a refund of amount has become due as a result of prevailing orders at that stage and the same has in fact been actually received by the assessee. That decision has been approved by the Supreme Court while considering the meaning o_ f the "assessee having obtained some benefit on remission or cessation of a particular trading liability". We. may also notice that in Bharat Iron and Steel Industries' case (1993) 199 ITR 67 (Guj.) the Court was considering an identical situation as in the case at hand, viz., the assessee had in fact received refund of tax during, the previous year relevant to the assessment year in dispute, but the challenge to the order under which refund had become due and was granted was the subject-matter of appeal before the Supreme Court.

Thus, we find, in the facts of this case, that the controversy as to the liability of the assessee to be taxed under section 41(1) stands concluded by the aforesaid two decisions and the issue as to the escapement of income from tax during the relevant assessment year on account of receipt of refund at that stage when the appeal against the refund orders were pending did not result in cessation of the liability so as to make the receipt of amount within the purview of the term "the assessee has obtained a benefit as a result of remission or cessation of a trading liability".

Apart from the aforesaid legal position, we are further clearly of the opinion that, on the facts of the case, initiation of action in respect of the assessment years 1988-89 to 1991-92 on February 1, 1999, was clearly inhibited by the proviso to section 147 with reference to which the power has been exercised by the Assessing Officer. The proviso to section 147 envisages that "where an assessment under subsection (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return or to disclose fully and truly all material facts necessary for his assessment, for that assessment year". The reason disclosed in the note recorded by the Assessing Officer before assuming jurisdiction states that receipt of excise duty refunds during the aforesaid assessment years were not shown by the assessee as income on accrual or receipt basis. It is not the case that the receipt of excise duty was not disclosed during the relevant proceedings of the assessment years in question. As a matter of fact, it has been pointed out by learned counsel for the petitioner that the receipt of the said particular sum had specifically been disclosed in the audited balance-sheet filed -alongwith the return under auditor's note to have been received as a refund of excise duty, but as the matter has been taken into appeal against the orders, as a result of which refund has become due, the amount has not been adjusted. For the purpose of bringing a receipt within the purview of section 41(1), the material facts are only the earlier allowance of the trading liability as deduction and the receipt or actual obtaining of the. benefit by way of cash or otherwise as a result of the trading liability during the relevant succeeding assessment year or years. As noticed above, the system of accounting, whether mercantile or on receipt basis, does not affect the liability to tax of such receipts under: section 41(1) once the actual obtaining of benefit is complete. In this connection, learned counsel for the respondent vehemently urged that, though receipt of a particular sum as result of refund of excise duty was disclosed in the note attached to the balance sheet, but the fact that the receipt has been made under the orders of the High Court in special civil application filed by the petitioner on condition of furnishing the bank guarantee has not been disclosed. We fail to see any link between furnishing of bank guarantee by way of security for restitution of the sum which the petitioner may become ultimately liable to refund as a result of his failure in the pending proceedings has anything to do with chargeability of the amount of receipt to tax. At best, what can, be stated in favour of the respondent at this stage is whether actual receipt of the amount, as distinct from the right to receive the amount at the intervening stage, would make any difference as to the liability to be brought to tax under section 41(1). This is so because, while the decision of this Court in Bharat Iron and Steel Industries' case (1993) 199 ITR 67 was considering the case of actual receipt, was rendered in favour of the assessee by holding that actual receipt, while the dispute was pending with the higher echelon of the remedial forums, cannot be considered equivalent to having obtained benefit on cessation of liability and such benefit can be said to have been obtained only when ultimately in the pending proceedings the matter is decided in favour of sustaining such refund and the liability to tax would arise only in the assessment year relevant to that decision, whereas the Supreme Court decision in which the Full Bench decision. of this Court has been approved was a case where actual cash refund has not been received. Thus, even for the sake of argument assuming that there was a room for the Assessing Officer to hold a belief bona fide that the actual receipt was liable to be taxed in the assessment year relevant to the previous year in which refund has actually been rived, there is no escape from the conclusion that initiation of action under section 147 on February 1, 1999, in respect of the assessment years 1988-89 to 1991-92 was not falling within the province of a case where such escapement can be held to be by reason of failure on the part of the assessee to disclose truly and fully all material facts necessary for the assessment, nor such belief has been held to be entertained by the Assessing Officer in the reasons recorded by him for the purpose of initiating action under section 147. The disclosure of primary facts, viz., allowance of excise duty paid as trading liability as deduction in earlier assessment years, the receipt of refund amount during the assessment year in question and pendency of art appeal against the order resulting in refund with plea of the assessee about its non-adjustment are not disputed. Law is-well-settled. When primary facts are disclosed, the duty of the assessee ends; he is not further required to instruct the Assessing Officer what inference of law and fact may be or are to the drawn there from (See Calcutta Discount Co. Ltd. v. ITO (1961) 41 ITR 191 (SC)) We are further informed that, as a matter of fact, ultimately a major portion of the refunds claimed by the assessee have been set at naught in appeals before the Supreme Court, which decision has been reported in (1987) 91 ELT 13, and on further review filed by the assessee against that order has also been dismissed on September 3.0, 1997. Thus, the assessee as a matter of fact, to the extent refund order has not been sustained, has obtained no benefit.

As a result, this petition succeeds. The impugned notices under section 148 relating to the assessment years 1988-89 to 1991-92 are quashed. Rule is made ab4olute. There shall be no order as to costs.

M.B.A./171/FCPetition allowed.