The Gujarat High Court quashed the Income Tax reassessment proceedings initiated after 4 years on deduction claim under Section 80IA(4)(iv) of the Income Tax Act, 1961.
The assessee, Facets Gems Polishing Works Private Limited, operates in the manufacturing and cutting of polished diamonds on a job work basis. Additionally, the company engages in diamond trading and generates power through windmills. It filed a writ petition challenging the notice issued under Section 148 of Income Tax Act, 1961 for A.Y. 2014-15.
During the Financial Year 2013-14, relevant to Assessment Year 2014-15, the assessee-petitioner disclosed income tax deductions under section 35DD for amortisation of expenditure due to amalgamation or demerger, and claimed a deduction of Rs. 76,27,934/- under section 80IA(4)(iv) of the Income Tax Act.
The company filed its income tax return for A.Y. 2014-15 on 25.09.2014, declaring a total income of Rs. 2,76,59,430/- after including these deductions. The assessee’s case was selected for scrutiny assessment, and after providing requested details, the Assessing Officer issued notices under section 142(1) of the Act, seeking further clarifications.
Despite submissions by the assessee, the Income Tax Assessing Officer made a disallowance of Rs. 2,28,898/- in expenses through an assessment order under section 143(3) on 30.11.2016.
Subsequently, the respondent-income tax department issued a notice under section 148 of the Act on 19.03.2020 to reopen the assessee’s assessment for the year in question.
In response, the petitioner filed its income tax return on 05.05.2020 and raised objections upon receiving the reasons for reopening. Despite objections raised by the assessee in a detailed submission dated 16.09.2020, the respondent disposed of these objections on 23.02.2021.
The assessee, having been amalgamated with M/s. Tirupati Organizers Private Limited and renamed as FACETS GEMS POLISHING WORKS PRIVATE LIMITED, decided to challenge these proceedings before this Court.
In response to the notice for reopening beyond the four-year period, Senior Advocate Mr. Tushar Hemani, representing the assessee, argued that there was no failure on their part to disclose all necessary material facts for income assessment.
He stated that the claim of deduction under section 80IA(4)(iv) of the Income Tax Act was fully supported by disclosures in the tax audit report, audited annual accounts, Form 10CCB, and the income tax return.
These documents had undergone detailed scrutiny by the Assessing Officer before the issuance of the final order under section 143(3) of the Act. Mr. Hemani pointed out that various notices and replies during the regular assessment proceedings had adequately addressed the deduction claim under section 80IA(4).
Moreover, the counsel contended that the tax deduction had been legitimately availed for an eligible undertaking under section 80IA of the Income Tax statute. He argued that according to the scheme of amalgamation or demerger, the transferee company would not be eligible to claim deduction for the remaining period post-transfer, starting from April 1, 2007.
He clarified that the Income Tax deduction under Income Tax section 80IA(4)(iv) had not been claimed by the amalgamating company prior to amalgamation. It was only after the amalgamation that the petitioner, now the amalgamated company, began claiming the deduction from the Assessment Year 2013-14 onwards.
Mr. Hemani asserted that this context rendered sub-sections (12) and (12A) inapplicable since the eligible undertaking had not been transferred during the period when the deduction was already claimed by the amalgamated company.
Mr. Sanghani, representing the respondent Income Tax Department, argued that the petitioner’s claim of deduction under section 80IA(4)(iv) of the Income Tax Act was incorrect and contrary to the Act’s provisions.
He pointed out that during the income tax assessment for A.Y. 2017-18, it was discovered that one of the petitioner’s windmill enterprises, claimed as an eligible unit for deduction, originally belonged to the amalgamated company, M/s. Facet Polishing Works Pvt Limited. This unit was transferred under an amalgamation scheme with M/s. Tirupati Organizers Private Limited, now known as M/s. Facets Gems Polishing Works Private Limited—the petitioner.
The opposing government counsel referenced Circular No. 3/2008 issued by the CBDT, which stipulates that deduction under section 80IA(4)(iv) of Income Tax Legislation is not applicable if the eligible enterprise is transferred in a merger or demerger after April 1, 2007.
He argued that the petitioner did not fully disclose these material facts, resulting in an alleged escapement of income amounting to Rs. 76,27,934/-. Therefore, he asserted that the Income Tax Department rightly exercised its jurisdiction to reopen the assessment beyond the four-year period.
After considering the arguments from both sides, the High court noted that the Assessing Officer’s observations in the recorded reasons were based on comprehensive assessment records, including the Profit and Loss account, Balance-sheet, Tax audit report, and Form 10CCB submitted by the petitioner.
The court noted that there was no contention from the respondent that the assessee had not provided complete details regarding the claim for deduction under section 80IA. On the contrary, the assessee had submitted all requisite documents, including a statutory declaration in Form 10CCB and audited accounts, demonstrating no failure on their part to fully and truthfully disclose all relevant material facts necessary for the assessment.
Furthermore, the Gujarat High Court noted that the Income Tax Assessing Officer had thoroughly examined the petitioner’s claim under section 80IA(4)(iv), raising various queries that were duly addressed by the petitioner.
While it was acknowledged that the specific query regarding the issue of deduction under section 80IA due to amalgamation may not have been explicitly considered by the Assessing Officer, the court noted that the entire claim made by the assessee under section 80IA had been presented and processed during the assessment proceedings culminating in the order under section 143(3) of the Income Tax Law.
Thus, the division bench of Justices Bhargav D. Karia and Niral R. Mehta observed that the income tax notice for reopening issued beyond the period of 4 years cannot be sustained. It was added that “In that view of the matter, it is not necessary to examine the rival contention with respect to validity or otherwise of the claim for deduction under section 80IA(4)(iv) of the Act.”
Subsequently, the challenged income tax notice was set aside and quashed.
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