Bombay High Court quashes IT notice stating no material available to conclude income escaped assessment
Prohibits the revenue department from taking any further steps
The Bombay High Court has provided relief to Maharashtra State Power Generation Company Limited by quashing the notice issued by the Assistant Commissioner of Income Tax under Section 148 of the Income Tax Act.
The Court prohibited any further steps to be taken by the tax authorities on observing a lack of tangible material to support that income had escaped assessment.
The Division Bench comprising Justice Dhiraj Singh Thakur and Justice Kamal Khata reiterated that Corporate Social Responsibility (CSR) expenditure was allowable under Section 37(1) of the Act. It stated that the insertion of Explanation 2 to Section 37(1) operated prospectively.
The bench clarified, “Explanation 1 will not be applicable, as CSR expenditure was incurred as required by Section 135 of the Companies Act, 2013, and its proposed disallowance would not constitute an offense.”
The petitioner, Maharashtra State Power Generation Company, is engaged in the business of electricity generation for the state.
The company filed its original Income Tax Return (ITR) for the Assessment Year 2013-2014 in November 2013. This was followed by a revised return in March 2014.
The case was selected for scrutiny, and during the proceedings, various details, including the Statement of Accounts with annexures and schedules, were submitted.
The controversy arose due to the inclusion of ‘Other Expenses’ of Rs.290,92,13,655 under the category of 'contribution towards assets not owned by the company/CSR expenditure' in note No. 20 annexed to the accounts. Additionally, a net prior period gain/loss of Rs.163,08,92,252 claimed as 'normal business expenditure' was recorded in the computation of total income.
In the assessment order passed on 30 December 2016, the Assistant Commissioner of Income Tax disallowed the claim of prior period expenditure. Subsequently, the audit department objected to the allowability of the expenditure and computed a potential loss of revenue amounting to a tax of Rs.87,27,64,095.
Respondent No.1 issued a notice under Section 148 of the Act to reopen the assessment, leading the petitioner to file its ITR under protest in response to the notice. The petitioner requested the reasons for reopening, which were supplied in December 2021 - after an eight-month delay. Further notices were issued to the petitioner seeking various details for assessment proceedings.
The petitioner objected and argued that all material facts were disclosed in the original assessment. The reopening was based on a change of opinion without any tangible material or escapement of income. Rejecting the objections raised by the petitioner, respondent No.2 issued a show-cause notice and a draft assessment order.
Thereafter, the petitioner approached the high Court. Respondent No.1 argued that the petitioner had an alternate efficacious remedy available through the National Faceless Assessment Centre (NFAC), which had already rejected the objections and passed an order. It contended that the original assessment did not fully and truly disclose the material facts.
The bench observed that the reasons recorded for reopening the assessment relied on facts and figures available from the audited accounts. However, it stated that all material particulars regarding the expenditure were disclosed in note No. 20, and based on those disclosures, in December 2016, an assessment order under Section 143(3) was passed.
The Judges also highlighted that the provision of Explanation 2 to Section 37(1), which disallowed the entire expenditure as CSR expenditure, was not applicable during the year under consideration. It was inserted with effect from 1 April 2015, for the Assessment Year 2015-2016.
Thus, while quashing both the reopening notice and the order issued by respondent No.1 for the assessment year 2013-2014, the Court ruled that the Assistant Commissioner of Income Tax exceeded the limits of jurisdiction in reopening the assessment.