Reassessment proceedings against Castrol India initiated due to change in opinion are quashed by the Bombay High Court
Case Title:- Castrol Indian Limited Versus Deputy Commissioner of Income-tax Circle-1(2)(1), Mumbai and others
Case No: Writ Petition No.3079 OF 2022
Decided on: 5th March, 2024.
Quorum:
K. R. SHRIRAM & DR. NEELA GOKHALE, JJ.
Facts of the Case:-
The petitioner is a firm that was established under the Companies Act of 1956 and is involved in the production and marketing of specialty oils, greases, lubricating oils, and brake fluids. Under Section 135 of the Companies Act, 2013, the petitioner incurred expenses of Rs. 10,54,06,706/- towards Corporate Social Responsibility (“CSR”) during the assessment year 2016–17. According to the petitioner’s income return for the relevant assessment year, which has been updated from time to time, their total income was Rs. 10,51,29,97,660. In accordance with Explanation 2 Section 37 of the Act, a disallowance was given for the amount of CSR in the income return. Additionally, the petitioner contended that Section 80G of the Act permitted the deduction of Rs. 1,79,41,595/- or 50% of the total donation. The petitioner’s income return was chosen for examination. In accordance with Section 142(1) of the Act, a notification was sent on September 14, 2019, following the start of assessment procedures, asking specifics and corroborating data regarding the deduction claim. In response, the petitioner sent a letter dated November 30, 2019, inviting another notice dated November 14, 2019, under Section 142(1) of the Act, asking for documentation of donations to support the deduction claim. The letter was likewise replied on November 30, 2019.A Section 143(3) of the Act assessment order was made on January 14, 2020, completely allowing the claimed reduction. Nevertheless, the petitioner was notified on March 27, 2021, in accordance with Section 148 of the Act, providing grounds for suspecting that income assessed for taxation during the applicable assessment year has evaded payment. Evaluation and mandated that the petitioner submit a return for the specified evaluation year. Petitioner agreed, filing its return on April 27, 2021, but asked for a copy of the documented grounds for reopening assessment from the Assessing Officer (“AO”). The petitioner filed its objections on August 28, 2021, in response to a letter dated July 30, 2021, which presented reasons to think that income was being fled. The AO dismissed the objections by the contested ruling dated December 21, 2021. This order, together with a notice dated March 27, 2021, claiming that income has evaded assessment.
Appellant Contentions:-
The reopening of the assessment was challenged by Mr. Parmarwala (learned Senior Advocate), appearing for the petitioner, on the ground that the jurisdictional conditions had not been met in the present case. As the AO had formed his belief on the grounds of an audit objection, which did not meet an objective criterion. He also argued that the assessment could not be reopened based on a change of view, and that the belief should be based on new and tangible material that had a rational and living connection to the belief. Parmarwala aligned the legal arguments with the facts of the case, stating that: The petitioner had not asserted that the expenses incurred as business expenses could not be deducted under Section 80G. Section 80G does not require deductions to be made in respect of expenditure incurred outside of the scope of the Act. The AO had formed its belief regarding the diversion of income as a result of an audit objection applications of mind and had previously rejected the audit’s objection. Petitioner had provided sufficient information regarding expenditure by way of corporate social responsibility (CSR) and deduction under Section 80G of the Act, which were made available in its annual accounts, tax audit report, and the calculation of income which had already been considered by the AO when passing the initial assessment order. Deduction under section 80G of the law was expressly mentioned in the calculation sheet which formed the basis of the assessment order. Petitioner has not been satisfied with the satisfaction of the sanctioning authority, which suggests that there was no such approval. Mr Pardiwalla submits that the notice and order at issue are unreasonable and disclose an arbitrary exercise of powers. He therefore requests the Court to annual and set aside the order.
Respondent Contentions:-
Mr. Suresh Kumar, learned counsel appears for the revenue and justifies the impugned order by contending that since the deduction of CSR expenses are specifically disallowed under Section 37(1) read with Explanation 2 of the Act, the same cannot be allowed under Section 80G of the Act. While candidly admitting the audit objection, he however, asserts that the same itself is a source of Gaikwad RD information and constitutes ‘fresh tangible material’. Mr. Suresh Kumar further points out that although an amount of Rs.10,54,06,706/- appears in the profit and loss account showing debit on account of CSR expenses under the head ‘other expenses. This includes donation expenses of Rs.3,58,83,189/-. This amount has not been separately debited in the profit and loss account which was never disclosed by petitioner directly or indirectly. Mr. Suresh Kumar relies on the affidavit in reply filed by the department to buttress the objectives of providing for CSR which is to share the burden of the Government in providing social services by companies having a net worth. Mr. Suresh Kumar has tried to unveil an alleged strategy by which petitioner firstly incurs CSR expenses, without claiming any deduction since the same are disallowed as business expenditure, but thereafter adding back the expenditure in the computation of income. Thus, the CSR expenses are treated by petitioner under two different heads, defeating the very public welfare purpose by converting the same as a tax saving tool. Mr. Suresh Kumar, thus, urges us to dimiss the petition.
Court Analysis and Judgement:-
From the perusal of the documents, two glaring facts emerge. One is that all material/documents necessary for computing the income was disclosed and submitted by petitioner during the course of assessment proceedings leading to an irrefutable conclusion that there was no failure on the part of petitioner to disclose fully and truly all material facts. Secondly, there is a notable absence of any fresh tangible material coming to the knowledge of the AO and the reopening of assessment is purely on a re-examination of the very same material on the basis of which the original assessment order was passed. However, Assessing Officers without appreciating the true import of the aforesaid decision of the Supreme Court, continue to reopen assessments on the ground of income having escaped assessment despite the fact that all the material and information was already available with him while passing the original assessment order.
Furthermore, while conclusive proof of escapement of income may not be necessary to reopen an assessment, the least that is required is a requisite belief based on fresh and tangible material which was not accessible to the AO or that which was deliberately withheld by Assessee, which then would amount to non-disclosure of relevant information. The finding of the Apex Court in Rajesh Jhaveri (supra) must not be used by AO to reopen assessments to review the original assessment order on the basis of a change of opinion of the AO, as done in the present case. Further, the reasons to believe notice itself indicates that the AO was already seized with information prior to passing of the original assessment order and as such, there is no tangible information on the basis of which he has allegedly formed the requisite belief. In these circumstances, we have no hesitation in holding that the notice dated 27th March 2021 under Section 148 of the Act in respect of income having escaped assessment and the order dated 21st December 2021 passed by the AO rejecting the objections of petitioner impugned herein, are untenable and cannot be sustained in law. The Petition is allowed.
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Judgement Analysis Written by – K. Immey Grace
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