The Hindu Business Line : When reopening turns revolting

EVERY Finance Act brings in a spate of amendments to the law and some of these have retrospective effect. Completed cases are reopened on the basis of such retrospective legislation. Is this fair?

The matter came up before the Gujarat High Court in Denish Industries Ltd vs ITO (271 ITR page 340). The company had filed its return for the assessment year (AY) 1983-84 calculating investment allowance and depreciation on capitalisation of interest payable over contracted periods on term loans received from financial institutions. The assessment was completed under Section 143(3) in January 1984. Subsequently, in March 1994, the income-tax officer (ITO) reopened the assessment under Sections 147 and 148 of the Income-Tax Act, 1961 stating that the company had capitalised a sum of Rs 33,87,725, being the interest paid on loans taken for the acquisition of fixed assets.

Explanation 8 to Section 43(1) was introduced by the Finance Act, 1986 with retrospective effect from April 1, 1974. As per the Explanation, any amount which is paid or payable as interest in connection with the acquisition of the asset, so much of such amount as is relatable to any period after such asset was put to use shall not be included and shall be deemed never to have been included in the actual cost of such asset. By virtue of this amendment, the cost of assets became overstated to the extent of Rs 33,87,725, resulting in excess depreciation and investment allowance. The I-T department justified the re-assessment notice.

On a writ petition filed by the company, the Gujarat High Court pointed out that the only provision invoked by the AO was that, in view of the statutory amendment with retrospective effect, the assessee had failed to disclose fully and truly all material facts necessary for the assessment for that assessment year. However, when the assessee had filed the return for the AY 1983-84, that is, in 1983, apart from the fact that Explanation 8 was not in existence, the deponent-AO had admitted in his affidavit in-reply that there was controversy as to whether the interest paid after the date on which the machinery was installed and first put to use was required to be captialised or treated as revenue expenditure.

The assessee was claiming depreciation allowance and investment allowance on capitalisation of interest for the post-installation period. In view of this, there was no culpability on the part of the assessee. On the contrary, by capitalising such interest, the assessee did not claim the same as revenue expenditure, which the assessee otherwise could have claimed and obtained 100 per cent deduction of the amount as revenue expenditure. Instead, the assessee restricted its claim to investment and depreciation allowances on capitalisation of that interest which taken together was much less than the benefit which the assessee would have got as revenue expenditure.

It is true that when there is a statutory amendment with retrospective effect, the statutory amendment has to operate as if the law as amended was there on the statute book. However, as per the settled legal position, the fiction is to operate within the field for which it is meant.

Hence, if the proceedings were pending on April 1, 1986, when the statutory amendment was made, whether assessment proceedings or proceedings by way of appeal or revision or reference, Explanation 8 would have certainly operated.

However, on the question whether the assessee had failed to disclose fully and truly all material facts necessary for assessment, it is obvious that when the assessee had filed its return in 1983 it could not have assumed that such a legislative amendment was going to be made in 1986 with retrospective effect from 1974.

The court declared that no assessee can be imputed with clairvoyance about future retrospective amendments. The court quashed the reassessment notice.

This means that re-opening a completed assessment on the basis of a retrospective legislation can be done only within four years and not beyond.

Some more retrospective amendments can be expected in the ensuing Finance Bill, 2005. The Gujarat judgment should come in handy to ward off reassessments beyond four years.

(The author is a former Chief Commissioner of Income-tax.)

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