Court blocks tax reopening based on change of opinion - adequate disclosure protects taxpayer

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Case Name

Cavinkare Pvt. Ltd Vs Deputy Commissioner of Income Tax (High Court of Madras)

W.P.No.8077 of 2015 and M.P.No.2 of 2015

Date: 2nd June 2021

Key Takeaways

1. Adequate Disclosure Protection: When a taxpayer makes full and proper disclosures in their original return, tax authorities cannot reopen assessments merely because they later change their opinion about the treatment of those disclosed items.
2. Consistency Requirement: Tax authorities cannot take contradictory positions for similar issues across different assessment years for the same taxpayer.
3. Commission vs. Dividend Distinction: Commission paid to directors for actual services rendered cannot be treated as disguised dividend distribution, and Section 36(1)(ii) (of Income Tax Act, 1961) won’t apply in such cases.
4. Time Limitation Significance: Reopening assessments at the “fag end of limitation” without fresh material evidence raises serious questions about the validity of such proceedings.

Issue

Can the Income Tax Department reopen a completed assessment under Section 148 (of Income Tax Act, 1961), when the taxpayer had made adequate disclosures in their original return and the reopening is based solely on a change of opinion regarding the treatment of those disclosed items?

Facts

• 2007: Cavinkare’s board decided that their Chairman cum Managing Director would receive remuneration including salary, commission (0.3% of net turnover), and perquisites.
• March 2007: The company’s financial statements clearly showed commission of Rs.1.4 crores paid to the Chairman cum Managing Director.
• December 2007: The company filed their tax return for 2007-08 with all necessary disclosures, including an audit report under Section 44AB (of Income Tax Act, 1961) showing details of the remuneration paid.
• December 2009: The Assessing Officer completed the regular assessment under Section 143(3) (of Income Tax Act, 1961), even making some disallowances and corrections under Section 154 (of Income Tax Act, 1961).
• March 2014: At the very end of the limitation period, the tax department issued a notice under Section 148 (of Income Tax Act, 1961) to reopen the 2007-08 assessment, claiming the Rs. 1.4 crore commission should be disallowed under Section 36(1)(ii) (of Income Tax Act, 1961).
• 2017: Interestingly, for assessment year 2008-09, the Commissioner of Income Tax (Appeals) had already dropped similar proceedings, ruling that there was no fresh material to justify reopening.

Arguments

Cavinkare’s Arguments:

• They had made complete and adequate disclosures in their original return, including detailed breakdowns in financial statements and audit reports.
• The reopening was based purely on a change of opinion, not on any failure to disclose material facts.
• The commission was paid for actual services rendered by the Chairman cum Managing Director, not as disguised dividend.
• A similar issue for 2008-09 had already been decided in their favor by the Commissioner of Income Tax (Appeals).

Tax Department’s Arguments:

• Under Explanation 1 to Section 147 (of Income Tax Act, 1961), mere production of documents doesn’t constitute adequate disclosure if material facts can be discovered only after due inquiry.
• Even though documents were filed, there wasn’t “true and full disclosure” at the time of filing returns.
• The reopening was justified under the amended provisions of the Income Tax Act.

Key Legal Precedents

The court relied on several important precedents:

1. CIT Vs. Kelvinator of India Ltd (2010) 320 ITR 561 - This Supreme Court decision was crucial in establishing that reopening assessments beyond 4 years without fresh material is not permissible.
2. Commissioner of Income Tax Vs. Convertech Equipments § Ltd [2013] 36 taxmann.com (Delhi) - This Delhi High Court decision held that commission paid for actual services rendered cannot be treated as disguised dividend under Section 36(1)(ii) (of Income Tax Act, 1961).
3. AMD Metplast § Ltd v. Dy. CIT [2012] 341 ITR 563/20 taxmann.com 647 (Delhi) - This case distinguished between commission (for services) and dividend (return on investment), ruling that Section 36(1)(ii) (of Income Tax Act, 1961) doesn’t apply to genuine service-based commission.
4. Assistant Commissioner of Income Tax vs. ICICI Securities Primary Dealership Ltd [2012] 24 taxmann.com 310 (SC) - Supreme Court precedent on assessment reopening principles.
5. Union of India Vs Kamalakshi Finance Corporation Limited 1991 (55) ELT 333 - Supreme Court decision on consistency in administrative decisions.

Judgement

The High Court ruled completely in favor of Cavinkare. Here’s the court’s reasoning:

Key Findings:

1. Adequate Disclosure Made: The court found that “the petitioner has made adequate disclosures and based on the same assessment was completed for the assessment year 2007-2008 by the assessing officer”.
2. Change of Opinion Not Permitted: The court emphasized that “reopening of the completed assessment based on change of opinion has been frowned upon by the Apex Court by its several decisions”.
3. Inconsistent Treatment: The court noted that for 2008-09, “the Commissioner of Income Tax (Appeals) vide order dated 15.12.2017 has dropped the proceeding” on similar grounds.
4. No Fresh Material: The revenue couldn’t show any fresh material that would justify reopening the assessment.

Final Order:

• The writ petition was allowed.
• The impugned notice dated 29.03.2014 under Section 148 (of Income Tax Act, 1961) and the consequential order dated 05.12.2014 were quashed.
• No costs were awarded.

FAQs

Q1: What does “change of opinion” mean in tax law?

A: It means the tax officer is taking a different view on the same set of facts that were already disclosed and considered during the original assessment. This is not a valid ground for reopening completed assessments.

Q2: Why is adequate disclosure so important?

A: When a taxpayer makes full and proper disclosures, they’re protected from reopening proceedings. The law assumes that if you’ve been transparent about all material facts, the tax officer had the opportunity to examine and decide on those issues during the original assessment.

Q3: Can commission paid to directors ever be disallowed under Section 36(1)(ii) (of Income Tax Act, 1961)?

A: Section 36(1)(ii) (of Income Tax Act, 1961) applies when payments are essentially disguised dividends. However, if the commission is paid for actual services rendered (as was the case here), it’s legitimate business expenditure and cannot be disallowed under this section.

Q4: What’s the significance of the 4-year limitation period?

A: Generally, assessments can only be reopened within 4 years unless there’s evidence of income escaping assessment due to failure to disclose material facts. Reopening “at the fag end of limitation” without fresh evidence suggests the action may be invalid.

Q5: How does this case affect future tax disputes?

A: This judgment reinforces that taxpayers who make proper disclosures are protected from arbitrary reopening of assessments. It also emphasizes that tax authorities must maintain consistency in their treatment of similar issues across different years for the same taxpayer.

Q6: What should taxpayers learn from this case?

A: Always ensure complete and detailed disclosures in your tax returns, including supporting schedules and audit reports. Proper documentation and transparency can provide strong protection against future reopening attempts based on change of opinion.

The petitioner has challenged the impugned notice dated 29.03.2014 issued under Section 148 (of Income Tax Act, 1961) seeking to re-open the Assessment for the year 2007-2008 and the consequential communication/speaking order dated 05.12.2014 over ruling the objection of the petitioner against the reopening of the assessment for the aforesaid Assessment year 2007-2008.

2.Regular scrutiny Assessment was completed under Section 143(3) (of Income Tax Act, 1961) an assessment order was passed on 31.12.2009. Thereafter, at the fag end of the limitation, the impugned notice dated 29.03.2014 was issued to the petitioner under Section 148 (of Income Tax Act, 1961). The reasons given for reopening of the assessment was communicated to the petitioner vide letter dated 06.08.2014 reads as under:-

During the A.Y.2007-2008, the assessee has paid a sum of Rs.1,40,00,000/- to Shri C.K. Ranganathan apart from directors remuneration of Rs.99,21,973/-. The same requires to be disallowed u.s 36(i)(ii). Since there is a failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment, there is a reason to believe that the income has escaped assessment.''

3.It is the case of the petitioner that reopening of the assessment

was based on the change of opinion for the year 2011-2012, and there

was no ground for reopening of the assessment under Section 148 (of Income Tax Act, 1961) of the

Income Tax Act for the purpose of Section 147 (of Income Tax Act, 1961), as

the petitioner had not suppressed any information required for

completing the assessment.

4.It is submitted that a similar proceedings was also initiated based

on a similar reasoning for the Assessment year 2008-2009. The

Commissioner of Income Tax(Appeals) by an order dated 15.12.2017 in

I.T.A.No.65/17-18 had dropped the demand with the following

observations:-

''During the appellate proceedings, the appellant raised a

significant ground that in the absence of any fresh material

in the possession of the AO and that too after the expiry of

four years, the issuance of notice under Section 148 (of Income Tax Act, 1961) for

reopening the already completed assessment is ao initio

void. In order to fortify this ground, the appellant relied on

the decision of the Hon'ble Apex Court in the case of CIT

Vs. Kelvinator of India Ltd (2010) 320 ITR 561.

It is a fact that the assessment was reopened beyond

the period of 4 years. Further as pointed out by the AR,

there were no fresh materials which would justify the

invocation of the provisions of Section 147 (of Income Tax Act, 1961). It is also true

that the AO has not brought on record any failure on the

part of the appellant to disclose fully and truly all material

facts necessary for its assessment.''

5.The learned counsel for the petitioner submits that similar

reasonings has to be adopted for the present case as well as for the

Assessment year 2007-2008. He further submits that for the Assessment

year 2011-12, an appeal before the Commissioner of Income Tax

(Appeals) was pending on the basis of change of opinion for the

reopening of the Assessment under Notification dated 29.03.2014 under

Section 148 (of Income Tax Act, 1961). It is fairly submitted that even

though, the petitioner had earlier filed a separate writ petition, the

petitioner could not obtained a stay from this High Court.

6.On merits, the learned counsel for the petitioner further submits

that the Minutes of the Meeting of the petitioner held on 01.08.2006

decided that the Chairman cum Managing Director of the petitioner

company will be paid a remuneration consisting of a salary, commission

and perquisites which reads as under:

''a.Salary:Rs.5,00,000/- per month (rupees five lakhs

only)

b.Commission:0.3% of the net turnover of the

company, {if the turn over is upto Rs.400,00,00,000/-

(Rupees four hundred crores only,} payable on a quarterly

basis and a fixed commission of Rs.20,00,000/- (Rupees

twenty lacs only) if the turnover exceeds Rs.400,00,00,000/-

(Rupees four hundred crores only)

c. Perquisites: The following perquisites shall be

allowed in addition to the salary.''

7.He further submits that this was also reflected in the Schedule

forming part of the Financial Statement for the year 31.03.2007 wherein

clearly the commission of Rs.1,40,00,000/- has been declared has

detailed below:

Schedules Forming Part of the Financial Statements for the year

ended 31st March 2007.

(b)(i)Remuneration to Chairman and Managing Director and a

Whole-time Director (key management Personnel)

Particulars For the year ended 31 March 2007

For the year ended 31 March 2006

Salaries and other Allowances 12,527 8,462

Contribution to Provident and other 867 720

Particulars For the year ended 31 March 2007

For the year ended 31 March 2006

Funds

Amount of Perquisites 1,564 1,705

Commission 14,000 3,883

Total 28,958 14,770

8.The learned counsel for the petitioner further submits that the

returns filed for the Assessment year 2007-2008 on 31.12.2019 along

with the annexures also gave the particulars of the commission paid to

the Chariman cum Managing Director of the petitioner.

9.It is further submitted that while passing the Assessment order

under Section 143(3) (of Income Tax Act, 1961), the Assessing Officer had

disallowed the several expenses and some of the other items which were

missed out were also sought to be rectified under Section 154 (of Income Tax Act, 1961) of the

Income Tax Act by exercising its jurisdiction under the aforesaid

provision vide order dated 09.3.2010.

No.3CA namely an Audit Report filed under section 44AB (of Income Tax Act, 1961),

wherein the particulars of the salary namely the remuneration,

contribution to provident funds, perquisites and the commission paid to

the Chairman cum Managing Director were disclosed.

11.He therefore submits that there is no case made out for invoking

extended period of limitation under proviso to section 147 (of Income Tax Act, 1961). On merits, the learned counsel for the petitioner placed the

reliance on the decisions of the Delhi High Court in Commissioner

of Income Tax Vs. Convertech Equipments (P) Ltd [2013]36

taxmann.com (Delhi) wherein held as follows:

7.This Court is of the opinion that in view of

the fact that no fresh circumstances have come to

notice to take a different view, no substantial

question of law arises on the point of the

disallowance under Section 36(1)(ii) (of Income Tax Act, 1961). The

decisions of the Income Tax authorities involved

concurrent findings on pure questions of fact.

Moreover, a Division Bench of this Court in AMD

Metplast (P) Ltd v. Dy.CIT [2012] 341 ITR 563/20

taxmann.com 647 (Delhi), after referring to the

judgment of the Bombay High Court in Loyal

Motors Services Co.Ltd Vs. CIT [1946] 14 ITR 647

opined that the commission, if found to be paid for

services rendered by the director as per the terms

of the appointment, cannot be said to be

distribution of dividend or profits in the guise of

commission. It was noticed that while commission

was paid as a form of remuneration for actual

services rendered, dividend is a return of

investment and is paid to all its shareholders

equally. It was thus held that if the commission is

paid for actual services rendered, section 36(1)(ii) (of Income Tax Act, 1961)

will not apply. This decision was followed by this

Court in CIT Vs.Career Launcher India Ltd [2012]

207 Taxman 28/20 taxmann.com 637 (Delhi).

These decisions apply to the present case. The

substantial question of law in ITA No.669/2012 is

answered in favour of the assessee.

12.That apart, reliance was placed on the decision of the Hon'ble

Supreme Court and other High Courts and specific reference was made to

the decision of the Hon'ble Supreme Court in Assistant Commissioner

of Income Tax vs. ICICI Securities Primary Dealership Ltd [2012] 24

taxmann.com 310 (SC). The learned counsel for the petitioner also relied

on the other following decisions:-

1.Fenner (India) P.Ltd Vs. DCIT (1999) 107 Taxman 53 (Mad),

2.Indian Bank Vs. SCIT (2015) 63 taxmann.con 145 (Madras),

3.Tractors & Farm Equipment ltd Vs. ACIT (2019) 102 taxmann.com 130 (Madras) and

4.PVP Ventures Ltd Vs. ACIT (2016) 65 taxmann.com 221(Madras).

13.An other decision of this Court in T.C.A.No.873 of 2013 dated

02.03.2021 in The Commissioner of Income Tax Vs. M/s.True Value

Homes (India) Pvt Ltd was also refered wherein it has been held as

follows:

2.2 The item of dispute was disallowance under

Section 36(1)(ii) (of Income Tax Act, 1961) and disallowance of deduction

underSection 801B(10). During the year, major

shareholding in respect of the assessee was held by

N.Ravichandran, to an extent of 95% and acted as

Chairman and Managing Director and the

remuneration was paid at Rs.7,47,59,772/-. The

breakup of the same was Director's remuneration

amounting to Rs.2,40,00,000/- and the commission

amounting to Rs.4,83,59,772/- and perquisite and

benefit amounting to Rs.24 lakhs was paid.

14. Defending the impugned order, the learned counsel for the

respondent submits that this High Court has settled the scope to Section

147 of the Income Tax Act, 1961 and the amendments and therefore

submits the respondents herein was justified in reopening for the

Assessment.

15.He submits that explanation 1 to section 147 (of Income Tax Act, 1961), makes it clear

mere production of documents and books of accounts or other evidence

from which material after due negligence facts can discovered by the

Assessing Officer does not amount to disclose within the meaning of

Section 147 (of Income Tax Act, 1961).

16.He therefore submits that, even though, the petitioner had filed

an audit report under Section 44AB (of Income Tax Act, 1961) and the annual

report and other documents along with the returns on 20.03.2009, it

could not be stayed that there was a true and full disclosure at the time of

filing of the returns.

17.It is therefore submitted that the present writ petition is liable to

be dismissed. He therefore submits that it is open for the petitioner to

produce the order passed by the Commissioner of Income Tax (Appeals)

passed on 15.12.2013 for the Assessment year 2008-2009 and have the

matter decided by the respondent. However, it cannot be said that the

reopening of the Assessment was without jurisdiction in view of the

amended provisions of the Income Tax Act.

18.I have considered the arguments advanced by the learned

counsel for the petitioner and the respondent. Facts are not in dispute.

The petitioner has made adequate disclosures and based on the same

assessment was completed for the assessment year 2007-2008 by

the assessing officer.

19.For the assessment year 2008-2009, the assessment was sought

to be reopened on similar grounds under a similar notice Section 148 (of Income Tax Act, 1961) of

the Income Tax Act, 1961. The Commissioner of Income Tax (Appeals)

vide order dated 15.12.2017 has dropped the proceeding.

20.Reopening of the completed assessment based on change of

opinion has been frowned upon by the Apex Court by its several

decisions. The decision cited by the petitioner are squarely applicable

facts and circumstances of the case. Even if the matter is remitted back to

the respondents to pass a speaking order, no useful purpose would be

served as the respondents appear to have accepted the views of the

Commissioner of Income Tax (Appeals) vide order dated 15.12.2017 for

the assessment years 2008-2009 under similar circumstances.

21.The respondents have also not produced any documents to

show that the said order of the Commissioner of Income Tax (Appeals)

has been appealed against before the Income Tax Appellate Tribunal and

an Appeal is pending as on dated. Therefore, even on merits it is not

permissible to the respondents to proceed with the impugned proceeding

contrary to the said order.

22.Further, as an assessing officer, the respondent cannot take a

different view for the assessment year 2007-2008 from the view is taken

for the assessment year 2008-2009 by the Commissioner of Income Tax

(Appeals) in the light of the decision of the Hon'ble Supreme Court,

Union of India Vs Kamalakshi Finance Corporation Limited 1991 (55)

ELT 333.

23.Under these circumstances, this Court is inclined to allow this

writ petition. Accordingly, this writ petition is allowed. No cost.

Consequently, connected Miscellaneous Petition is closed.