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TMI Blog2011 (4) TMI 823X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of the provisions of sub-section (2) of section 32 and in fact no income chargeable to tax can be stated to have escaped assessment - thus the very assumption of jurisdiction by the AO under section 147 is, therefore, invalid - In favour of assessee. - 3994 OF 2001 - - - Dated:- 11-4-2011 - MS. HARSHA DEVANI AND MS. BELA TRIVEDI, JJ. J.P. Shah for the Petitioner. M. R. Bhatt and Mrs. Mauna M. Bhatt for the Respondent. JUDGMENT Ms. Justice Harsha Devani. By this petition under article 226 of the Constitution of India, the petitioner has challenged the notice dated 28-3-2000 issued by the respondent in exercise of powers under section 148 of the Income-tax Act, 1961 (the Act) for reopening the assessment for assessment year 1997-98. 2. The petitioner, a limited company, is assessed to tax under the provisions of the Act. The petitioner company filed its return of income for assessment year 1997-98 wherein it claimed set off of carried forward depreciation of Rs. 2,44,94,386 against the short term capital gain which according to the respondent is Rs. 231.47 lakhs. Alongwith the return of income, the petitioner had filed relevant notes in the statement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accepted the position of law that for assessment year 1997-98, depreciation carried forward from earlier years can be set off against short term capital gain of assessment year 1997-98, the present Assessing Officer was of a different opinion and had, therefore, given the notice. Being aggrieved, the petitioner has approached this Court by way of the present petition challenging the aforesaid notice. 3. Mr. J.P. Shah, learned advocate for the petitioner submitted that the assumption of jurisdiction by the respondent Assessing Officer under section 147 of the Act is invalid on the ground that in the facts of the present case, no income has escaped assessment so as to vest in the Assessing Officer the jurisdiction to reopen the assessment. It was pointed out that this is the first assessment year after sub-section (2) of section 32 of the Act came to be substituted by the Act 33 of 1996 with effect from 1-4-1997. Under sub-section (2) of section 32 of the Act as it stood prior to its substitution, if while making assessment full effect could not be given to any allowance under clause (ii) of sub-section (1) in any previous year, owing to there being no profits and gains chargeable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t off, such amount shall be carried forward to the following assessment year not being more than eight assessment years immediately preceding the assessment year for which the allowance was first computed. It was, accordingly, submitted that the Assessing Officer while making assessment under section 143(1) of the Act has rightly accepted the claim of the petitioner for deduction of depreciation allowance as per the return filed by the petitioner against the income from short term capital gain, because in view of the provisions of clause (ia) of sub-section (2) of section 32 of the Act, the petitioner was entitled to set off the unabsorbed depreciation for assessment year 1997-98 against income under any head in case where the unabsorbed depreciation could not be set off under clause (i). It was submitted that the unabsorbed depreciation of the earlier years, by virtue of the deeming provision already formed part of the allowance for the previous year relating to assessment year 1997-98, hence the action of the Assessing Officer of reopening the assessment on the ground that the petitioner was not entitled to set off the unabsorbed depreciation for assessment years 1993-94 to 1996- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation allowance of assessment year 1996-97 shall be added to the allowance of 1997-98 and will be deemed to be the allowance of that year. The limitation of eight years shall start from the assessment year 1997-98. It was submitted that the CBDT Circular being binding on all revenue officers, the respondent Assessing Officer is also bound by the same and cannot take a stand contrary to the said Circular. In support of his submissions, the learned advocate placed reliance upon the decision of the Supreme Court in the case of Navnitlal C. Jhaveri v. K.K. Sen, AAC [1965] 56 ITR 198, for the proposition that circulars issued by the Central Board of Revenue would be binding on all officers and persons employed in the execution of the Income-tax Act. Reliance was also placed upon the decision of the Supreme Court in the case of Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706/132 Taxman 373, for the proposition that circulars issued by the Central Board of Direct Taxes are binding on the revenue authorities. 3.4 Mr. Shah next submitted that for the purpose of invoking jurisdiction under section 147 of the Act, the first and foremost requirement is that income chargeable to tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent reason, cannot be overruled. If the Assessing Officer honestly comes to a conclusion that a mistake has been made, it matters nothing. So far as his jurisdiction to initiate the proceedings under section 147 is concerned, though he may have come to an erroneous conclusion whether on law or on facts, the Court will not, in exercise of its extraordinary jurisdiction under the Constitution, examine the sufficiency of the reasons which led the Assessing Officer to believe that the income has escaped assessment. 4.2 Mr. Bhatt submitted that the language of sub-section (2) of section 32 of the Act is clear and unambiguous, namely that when depreciation allowance for any previous year cannot be give effect to under clause (ii) of sub-section (1) of section 32 of the Act, under clause (i) of sub-section (2) of section 32, the same can be set off against profits and gains of any business or profession carried on by him. In case, it is not possible to wholly set off such unabsorbed depreciation against profits and gains of business or profession, under clause (ia) of sub-section (2) the same can be set off against income under any other head. However, if it is not possible to set off t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e basis of explanatory notes. In conclusion, it was submitted that even assuming that there is a mistake in recording the reasons, if the Assessing Officer honestly believes that income has escaped assessment, this Court in exercise of powers under article 226 of the Constitution of India would not ordinarily interfere. It was urged that in the aforesaid premises, the Assessing Officer was justified in reopening the assessment. 4.5 Dealing with the contention regarding the binding effect of the CBDT Circular, it was submitted that the same is only in the nature of an explanatory note which, at best, can be taken as an aid to interpreting the provisions of section 32(2) of the Act but would not override the provisions of section 32(2) of the Act. It was submitted that since the dispute involves interpretation of a statutory provision, the same be left to the Assessing Officer to decide the same in accordance with law and this Court in exercise of powers under Article 226 of the Constitution of India may not interfere at this stage. 5. In rejoinder, Mr. J.P. Shah, learned advocate for the petitioner invited attention to the provisions of sub-section (2) of section 72 of the Act t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Brokers (P.) Ltd. (supra), there would be no question of any change of opinion. In the present case, for the purpose of assuming jurisdiction under section 147 of the Act, the only condition precedent is that income chargeable to tax should have escaped assessment. Hence, the scope of the present petition lies in a very narrow compass and all that the Court is required to examine is as to whether there was any material for the Assessing Officer to form the belief that income chargeable to tax has escaped assessment. 8. Examining the facts of the present case in the light of the aforesaid legal position, it may be necessary to refer to the reasons recorded by the Assessing Officer for reopening the assessment which read thus:- "Reasons for reopening the case In this case, assessment of the assessee company for the assessment year 1997-98 was completed at a loss of Rs. 24.22 lakhs under section 143(1)(a). The returned income included short term capital gain at Rs. 231.47 lakhs which was allowed to be set off against unabsorbed depreciation aggregating Rs. 244.94 lakhs relating to assessment years 1993-94 to 1996-97. The assessee had current years business loss of Rs. 4.41 lakhs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 and sub-section (3) of section 73, the allowance or part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following previous year and deemed to be part of that allowance, or if there is no such allowance for that previous year, be deemed to be the allowance for that previous year, and so on for the succeeding previous years." Sub-section (2) of section 32 as substituted by Finance (No. 2) Act, 1996 with effect from 1st April, 1997 insofar as the same is relevant for the purpose of the present petition reads thus:- "(2) Where in the assessment of the assessee full effect cannot be given to any allowance under clause (ii) of sub-section (1) in any previous year owing to there being no profits or gains chargeable for that previous year or owing to the profits or gains being less than the allowance, then, the allowance or the part of allowance to which effect has not been given (hereinafter referred to as unabsorbed depreciation allowance), as the case may be,- (i) shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion for the succeeding year. 12. Thus, in the light of the provisions of sub-section (2) of section 32 of the Act as it stood prior to 1-4-1997, any unabsorbed depreciation allowance which could not be given effect to in the previous year, was required to be added to the allowance for depreciation for the following previous year and was deemed to be part of the allowance of that year. In the circumstances, insofar as the unabsorbed depreciation for assessment years 1993-94 to 1996-97 is concerned, in each of the years, the part of the allowance which could not be given effect to in any previous year, was added to the amount of allowance for depreciation for the following previous year and was deemed to be part of the allowance of that previous year. In the circumstances, once the unabsorbed depreciation allowance was for a particular assessment year, deemed to be the allowance for the following previous year, it ceased to have any independent existence. The unabsorbed depreciation allowance for assessment years 1993-94 to 1996-97, by operation of the provisions of sub-section (2) of section 32 as it stood prior to 1-4-1997 was deemed to be part of the allowance for the previous y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht years immediately succeeding the assessment year for which the said allowance is first computed. However, insofar as the first year when the provision comes into operation, namely as on 1-4-1997, the unabsorbed depreciation would be the unabsorbed depreciation for the previous year relating to assessment year 1997-98, which as noticed hereinabove, by operation of the provisions of the sub-section (2) of section 32 as it stood prior to 1-4-1997 included the unabsorbed depreciation of the earlier assessment year which, in the present case, relates to assessment years 1993-94 to 1996-97. In the circumstances, while making the assessment of the petitioner under section 143(1) of the Act, the Assessing Officer had rightly accepted the return filed by the petitioner and permitted the petitioner to set off the unabsorbed depreciation against the short term capital gains. According to the respondent, the petitioner was not entitled to set off the unabsorbed depreciation for assessment years 1993-94 to 1996-97 against short term capital gains. However, the respondent Assessing Officer has overlooked the fact that in the light of the operation of sub-section (2) of section 32 as it stood ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f that allowance for that previous year, and so on for the succeeding previous years. The net effect is that unabsorbed depreciation allowance of one year is added to the depreciation allowance of the next year. Thus, the unabsorbed depreciation allowance, in a case where profits are insufficient in the subsequent years, is carried forward indefinitely. On the other hand, the business losses are allowed to be carried forward for a period of eight years only. By an amendment the business loss and the unabsorbed depreciation have been brought at par for the purposes of set off and carry forward notwithstanding the fact that sub-section (2) of section 72 maintains a distinction between them regarding the priorities. 23.5 Sub-section (2) of section 32, as it existed upto assessment year 1996-97, provided that the unabsorbed depreciation of a year shall be added to the amount of the allowance for depreciation of the following previous year and deemed to be part of that allowance. Therefore, the unabsorbed depreciation allowance, if any, of assessment year 1996-97 shall be added to the amount of the allowance for depreciation of assessment year 1997-98 and deemed to be part of the allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eopen the assessment under section 147 of the Act. 18. In the light of the aforesaid discussion, it is not possible to state that any income chargeable to tax has escaped assessment as is sought to be contended on behalf of the respondent Assessing Officer who has reopened the assessment on the ground that the unabsorbed depreciation for assessment years 1993-94 to 1996-97 could not be set off against short term capital gain in the year under consideration. The reopening by the Assessing Officer is based upon an erroneous interpretation of the provisions of sub-section (2) of section 32 of the Act, and in fact, as discussed hereinabove, no income chargeable to tax can be stated to have escaped assessment. The very assumption of jurisdiction by the Assessing Officer under section 147 of the Act is, therefore, invalid. The impugned notice under section 148 of the Act, therefore, cannot be sustained. 19. For the foregoing reasons, the petition succeeds and is accordingly allowed. The impugned notice dated 28-3-2000 seeking to reopen the assessment of the petitioner for assessment year 1997-98 (Exh.B to the petition) is hereby quashed and set aside. Rule is made absolute accordingl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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