Court blocks tax reopening: No change of opinion allowed after original assessment

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Case Name

Rich Feel Health and Beauty Private Limited vs Income Tax Officer & Others (High Court of Bombay)

Writ Petition No. 3263, 3264 & 3296 of 2019

Date: 15th November 2021

Key Takeaways

• No Change of Opinion Rule: Tax officers cannot reopen assessments simply because they’ve changed their mind about how to interpret the same facts
• Full Disclosure Protection: When taxpayers fully disclose all material facts during original assessment, they’re protected from arbitrary reopening
• Time Limits Matter: Reopening assessments after 4 years requires stricter justification than within 4 years
• Thorough Original Assessment: If the tax officer properly examined an issue during original assessment, they can’t revisit it later without new evidence

Issue

Can the Income Tax Officer reopen a completed tax assessment based on the same facts and materials that were already considered during the original assessment, simply because they now have a different opinion about how those facts should be treated?

Facts

The Company: Rich Feel Health and Beauty Private Limited is in the hair care business - they sell products and provide consultancy services.

Original Assessment (2012-2014):

• The company filed their tax return in September 2012, showing revenues of ₹37+ crores from product sales and ₹15+ crores from services
• Their case was selected for detailed scrutiny by the tax department
• During this process, the tax officer specifically asked for details about advertising expenses through a notice dated 14/8/2014
• The officer even asked them to differentiate between depreciation/amortization expenses versus advertising/marketing expenses
• The company was required to provide copies of agreements with Times of India (BCC) containing advertising details
• All required documents, including actual advertising invoices, were submitted and discussed at length
• The assessment was completed on 12/11/2014 under Section 143(3), accepting the company’s return

The Reopening Attempt (2019):

• On 29/3/2019 (more than 4 years later), the tax officer issued a notice under Section 148 to reopen the assessment
• The reason given: advertising expenses weren’t deductible under Section 37 because the company was allegedly prohibited from advertising under medical regulations
• The company objected, but their objections were rejected on 25/9/2019

Arguments

Company’s Arguments (Petitioner):

• The assessment couldn’t be reopened on a “mere change of opinion”
• The tax officer had already applied his mind to advertising expenses during the original assessment
• All material facts were fully and truly disclosed in the original assessment
• There was no fresh or tangible material to justify reopening
• The medical regulations only restrict registered medical practitioners, not companies like them

Tax Department’s Arguments (Respondent):

• Advertising expenses were shown under “other sources” without proper disclosure of their nature
• The company didn’t explain the connection between expenses and business
• They later discovered the company was soliciting patients, which is prohibited under medical regulations
• The company should get a chance to present their case before the tax officer

Key Legal Precedents

The court relied heavily on several important precedents:

Ananta Landmark (P.) Ltd. vs Deputy Commissioner of Income Tax (Division Bench of the same High Court):

• Established that reopening after 4 years requires reasonable belief that income escaped assessment due to failure to disclose material facts
• Held that reopening based on change of opinion about computation methods is not justified
• Confirmed that when primary facts are fully disclosed, no change of opinion is allowed

Jainam Investments vs Assistant Commissioner of Income Tax:

• Applied the principle that even within 4 years, reopening cannot be based on mere change of opinion
• Established that tangible material is required to conclude income escaped assessment

Aroni Commercial Limited vs Dy. CIT and Marico Limited vs. The Assistant Commissioner of Income Tax:

• Both cases supported the view that once an officer has applied their mind to an issue during original assessment, reopening is not permitted

Sections Referenced:

• Section 37(1) of the Income Tax Act: Prohibits deduction of expenses for illegal purposes
• Section 143(3): Regular assessment procedure
• Section 148: Notice for reopening assessment
• Section 142(1): Notice for information during assessment

Judgement

The Court Ruled in Favor of the Company

Legal Reasoning:

The court carefully examined the original assessment records and found that:

1. Proper Original Examination: The tax officer had clearly applied his mind to advertising expenses during the original assessment, as evidenced by the detailed notices and discussions
2. Full Disclosure: The company had provided all required documents including agreements and actual invoices, and the matter was discussed at length
3. Change of Opinion Not Allowed: The court applied the established principle that “when on consideration of the material on record, one view is conclusively taken by the Assessing Officer, it would not be open for the Assessing Officer to reopen assessment based on the very same material and to take another view”
4. Binding Precedents: The court noted that coordinate bench decisions were binding

Court’s Orders:

The court quashed and set aside:

• All reopening notices dated 29/3/2019 and 31/3/2019
• All consequential orders dated 25/9/2019 rejecting the company’s objections
• The rule was made absolute in favor of the petitioners

FAQs

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

A: It means when a tax officer, after completing an assessment based on certain facts, later decides to interpret those same facts differently without any new evidence. This is not allowed under tax law.

Q2: Can tax assessments ever be reopened?

A: Yes, but only when there’s genuine reason to believe income escaped assessment due to new facts or failure by the taxpayer to disclose material information. It cannot be done just because the officer changed their mind.

Q3: What’s the difference between reopening within 4 years vs after 4 years?

A: After 4 years, the standards are much stricter - there must be failure by the taxpayer to disclose material facts. Within 4 years, the standards are somewhat relaxed, but still no change of opinion is allowed.

Q4: What protection do taxpayers have?

A: If you fully disclose all material facts during your original assessment and the tax officer examines the issues, you’re protected from arbitrary reopening based on the same facts.

Q5: Does this case apply to all businesses?

A: The legal principles established here apply broadly - any taxpayer who has fully disclosed facts during original assessment is protected from reopening based on change of opinion.

Q6: What should taxpayers do during original assessments?

A: Ensure complete and truthful disclosure of all material facts, maintain proper documentation, and cooperate fully with the assessment process to gain this protection.

Rule. Rule is made returnable forthwith.

2. These petitions arise in similar background of facts. They have been heard together and disposed by this common judgment. We note primary facts from Writ Petition No. 3263 of 2019.

3. Petitioner has invoked the power of this Court under

Article 226 of the Constitution of India by challenging notice dated

29/3/2019 issued by respondent No.1 under section 148 of the

Income-tax Act, 1961 (said Act, for the sake of brevity) seeking to

reopen the assessment for the Assessment Year 2012-2013 and

consequential order dated 25/9/2019 passed by respondent No.2

disposing of all objections of Petitioner.

4. Petitioner is a private limited company engaged in the

business of selling hair care products, providing consultancy services,

treatment in the hair care and beauty sector.

5. Petitioner filed its return of income on 28/9/2012

declaring revenue of Rs.37,02,86,962/- from the sale of products and

revenue of Rs.15,34,79,584/- from the provision of services. Return of

Income was processed, and intimation under Section 143(1) of the

said Act was issued. Subsequently, Petitioner's case was selected for

scrutiny assessment by respondents. During the assessment, a notice

under section 142(1) of said Act was issued whereby inter alia details

of advertisement was sought. Thereafter, the Assessing Officer

discussed with authorized representative of Petitioner. Assessing

Officer vide order sheet entry dated 9/10/2014 called for the copy of

the agreement with Brand Equity Treaties Limited containing

securities premium and advertisement details. Petitioner provided the

same. The assessment order was passed on 12/11/2014 under

Section 143(3) of the Act accepting the return of income of Petitioner.

6. On 29/3/2019, respondent No.1 issued a notice under

Section 148 of the said Act stating that he had reason to believe that

Petitioner's income chargeable to tax for the Assessment year 2013-

2014 had escaped assessment. Petitioner, in response to the said

notice, filed its return of income on 18/4/2019. Petitioner, thereafter,

filed a reply dated 22/4/2019 seeking reasons for reopening of

assessment to enable Petitioner to file its objections. Respondent No.1

vide letter dated 1/7/2019 provided reasons to Petitioner. The

principal reason was that advertisement and marketing expenditure

incurred by Petitioner was not deductible in view of provisions of

Section 37 of the said Act, as Petitioner was prohibited from

advertising under the provisions of the Indian Medical Council Act,

1956 read with Indian Medical Council (Professional Conduct,

Etiquette and Ethics) Regulations, 2002 (the Regulations, for the sake

of brevity). On 25/9/2019, respondent No.2 passed an order rejecting

the objections of Petitioner. Section 37 (1) of the Act provides any

expenditure incurred for a purpose which is an offence or which is

prohibited by law shall not be allowed.

7. Petitioner has therefore filed the present writ petition

challenging the notice dated 29/3/2019 issued under Section 148 of

the said Act and order dated 25/9/2019 of rejecting the objections of

Petitioner.

8. This Court on 6/12/2019 granted time to the advocate for

Respondents to take instructions and file affidavit-in-reply and, in the

meantime, granted ad-interim stay to the impugned notice.

9. Respondents filed their reply stating that Petitioner had

claimed advertisement and marketing expenditure of

Rs.5,93,74,322/- under the head of other sources but had not

disclosed the nature of expenses and its connection to its business in

the original assessment. Subsequently, Assessing Officer ascertained

from the site of Petitioner that Petitioner was soliciting the patients

directly or indirectly by a physician or by a group of physicians or by

institutions or organizations, prohibited as per the said Regulations,

2002. Assessing Officer, therefore, reopened the case of Petitioner

relying on Section 37 of the said Act.

10. We have heard Mr. Sukhsagar Syal i/b Mr. Sujit B. Shelar

for Petitioner and Mr. Akhileshwar Sharma for Respondent. Mr.

Sukhsagar Syal for Petitioner submitted that the assessment could not

be reopened on a mere change of opinion. Assessing Officer in

original assessment had applied his mind to the fact of Petitioner

incurring advertisement and marketing expenditure. Petitioner had

fully and truly disclosed material facts in the original assessment.

There is no fresh/tangible material on record to reopen the

assessment nor reason to believe that the income had escaped

assessment. The bar under the said Regulation, 2002 is attracted only

to restrict a registered medical practitioner. Petitioner being a

company, such bar is not attracted.

11. Per contra Mr. Akhileshwar Sharma for Respondent

submitted that advertisement expenses were disclosed under the head

other sources in the original assessment. Petitioner has not disclosed

the nature of expenses and their connection to the business. He

submitted that the Assessing Officer subsequently ascertained from

the site of Petitioner that Petitioner is soliciting patients, prohibited

as per Regulation of 2002. He, therefore, submitted that Petitioner

would get an opportunity to make out the case before the Assessing

Officer, and there is no need to interfere at this stage.

12. On careful scrutiny of the documents placed on record,

particularly notice dated 14/8/2014, it appears that the Assessing

Officer had applied his mind in the original assessment to the fact

that Petitioner had incurred advertisement and marketing

expenditure. It also appears from the contents of the notice dated

14/8/2014 that Petitioner was called upon to differentiate between

the nature of expenses shown under the head depreciation and

amortization vis-a-vis advertisement and marketing expenses shown

in Profit and Loss Account. It was claimed by revenue in the original

assessment that a substantial portion of the brand building was done

by way of advertisement and marketing. Further vide order sheet

entry dated 9/10/2014, Petitioner was called upon to file a copy of

agreement with BCC (Time of India) containing details of securities

premium and advertisement. The requisite details, including a copy

of agreement, actual advertising invoices, were filed and the issue

was discussed with the Assessing Officer at length before passing the

order under Section 143(3) of the Act.

13. It is not in dispute that in Writ Petition No.3264/2019 and

Writ Petition No.3263/2019, the assessment is sought to be reopened

after a period of 4 years. The criteria’s for reopening of assessment

after a period of 4 years are no longer Res-Integra in view of the

judgment of Division Bench of this Court in the case of Ananta

Landmark (P.) Ltd. vs Deputy Commissioner of Income Tax

this Court held that where assessment was not sought to be reopened

on reasonable belief that income had escaped assessment on account

of failure of assessee to disclose truly and fully all material facts that

were necessary for computation of income but was a case wherein

assessment was sought to be reopened on account of change of

opinion of Assessing Officer about manner of computation of

deduction under Section 57, reopening was not justified. It is also

held that when the primary facts necessary for assessment are fully

and truly disclosed, the Assessing Officer is not entitled to a change of

opinion for commencing proceedings for reassessment. It is also held

that when on consideration of the material on record, one view is

conclusively taken by the Assessing Officer, it would not be open for

the Assessing Officer to reopen assessment based on the very same

material and to take another view.

14. In Writ Petition No.3296/2019, the primary issue

involved is identical. The only difference is that the proceeding for

reassessment is within four years. This Court in the case of Jainam

Investments vs Assistant Commissioner of Income Tax

in paragraph 13 held that the Assessing Officer could not reopen the assessment even within a period of 4 years merely on the basis of change of

opinion and the Assessing Officer has no power to review the

assessment which has been concluded unless there is tangible

material to come to the conclusion that there is escapement of income

from assessment.

15. In the facts of the present case, in view of notice dated

14/8/2014 and order sheet entry dated 4/10/2014, it is clear that the

Assessing Officer in the original assessment was aware of the issue of

expenses incurred on advertisement and marketing by the Petitioner.

Once the Assessing Officer had applied his mind in the regular

assessment proceedings of Petitioner having incurred advertisement

and marketing expenditure, it is not open for the Assessing Officer to

reopen the assessment. This Court in Aroni Commercial Limited vs

Dy. CIT and in Marico Limited vs. The Assistant Commissioner of

Income Tax had taken a similar view. The pronouncements of the co-

ordinate Bench of this Court are binding on us.

16. We are therefore satisfied that the Assessing Officer could

not have reopened the assessment merely on the basis of change of

opinion and could not have issued a notice of reopening of

assessment to Petitioner.

17. Since we are setting aside notices on the ground of change

of opinion, it is unnecessary to go into other contentions raised by

Petitioner, which are kept open to be adjudicated in appropriate

proceedings. We, therefore, pass following order:

ORDER

Notice dated 29/3/2019 issued by respondent No.1

(Exhibit F) and consequential order dated 25/9/2019

(Exhibit K) in Writ Petition No.3263/2019, Notice dated

29/3/2019 issued by respondent No.1 (Exhibit H) and

consequential order dated 25/9/2019 (Exhibit M) in Writ

Petition No.3264/2019 and Notice dated 31/3/2019

issued by respondent No.1 (Exhibit F) and consequential

order dated 25/9/2019 (Exhibit K) in Writ Petition

No.3296/2019 are quashed and set aside.

18. Rule is made absolute in the above terms.

(AMIT B. BORKAR, J) (K. R. SHRIRAM, J.)