No Material Available To Conclude Income Had Escaped Assessment:Bombay HC Quashes Income Tax Notice

The Division Bench comprising Justice Dhiraj Singh Thakur and Justice Kamal Khata reiterated that Corporate Social Responsibility (CSR) expenditure is allowable under Section 37(1) of the Act. The bench further noted that the insertion of Explanation 2 to Section 37(1) operates prospectively.

It clarified that, “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 Limited, is primarily engaged in the business of electricity generation for the state of Maharashtra. The company filed its original return of income for the assessment year 2013-14 in November 2013, 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" in the sum of INR 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 INR 163,08,92,252 claimed as 'normal business expenditure' was recorded in the computation of total income. In an assessment order passed on December 30, 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 INR 87,27,64,095 as tax.

Respondent No.1 issued a notice under Section 148 of the Act to reopen the assessment, leading the petitioner to file a return of income under protest in response to the notice. The petitioner requested the reasons for reopening, which were supplied in December 2021, after an 8-month delay. Further notices were issued to the petitioner seeking various details for assessment proceedings.

The petitioner objected to the proposed action, arguing that all material facts were fully and truly disclosed in the original assessment and that 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.

Subsequently, the petitioner approached the High Court by filing a petition challenging the notice and order. In response, 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 material facts.

After considering the submissions, the Bombay High Court found that the reasons recorded for reopening the assessment relied on facts and figures available from the audited accounts. However, the court noted that all material particulars regarding the expenditure were disclosed in Note No. 20, and an assessment order under Section 143(3) was passed in December 2016, based on those disclosures.

The court 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, as it was inserted with effect from April 1, 2015, for the Assessment Year 2015-16.

Based on these findings, the High Court concluded that the Assistant Commissioner of Income Tax had exceeded the limits of jurisdiction in reopening the assessment. As a result, the court quashed both the reopening notice and the order issued by Respondent No.1 for the assessment year 2013-14.

Case Title: Maharashtra State Power Generation Company Limited v. Assistant Commissioner of Income Tax and Ors. Writ Petition No. 3011 of 2022.

Click Here To Read/Download Order