Court Quashes Reassessment Notice for Income Tax, Upholding Full Disclosure by Assessee

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Case Name:

Sandesh Procon LLP vs. Assistant Commissioner of Income Tax (High Court of Gujarat)

R/Special Civil Application No. 19990 of 2019

Date: 5th February 2021

Key Takeaways

• The court emphasized the importance of full and true disclosure of material facts by the assessee.
• It established that reopening assessments based on the same material without new evidence constitutes a “change of opinion,” which is not valid under Section 147 (of Income Tax Act, 1961).
• The ruling reinforces the principle that disallowance under Section 14A (of Income Tax Act, 1961) cannot exceed the exempt income.

Issue

Did the Assessing Officer have valid grounds to reopen the assessment under Section 147 (of Income Tax Act, 1961) based on the same material previously considered?

Facts

• Sandesh Procon LLP filed its income tax return for the assessment year 2012-13, declaring a loss of ₹3,66,93,809.
• The original assessment was completed under Section 143(3) (of Income Tax Act, 1961) on March 5, 2015, with a disallowance of ₹34,06,859 under Section 14A (of Income Tax Act, 1961), which was limited to the exempt income earned.
• On July 26, 2018, the Assessing Officer issued a notice under Section 148 (of Income Tax Act, 1961), claiming that income of ₹4,78,99,237 had escaped assessment due to the failure to disclose material facts.

Arguments

• For the Assessee (Sandesh Procon LLP): They argued that they had fully disclosed all relevant information during the original assessment. They contended that the disallowance under Section 14A (of Income Tax Act, 1961) should not exceed the exempt income, supported by judicial precedents.
• For the Revenue (Assistant Commissioner of Income Tax): The Revenue argued that the assessee failed to disclose material facts, justifying the reopening of the assessment. They claimed that the disallowance should be recalculated to ₹5,13,06,096 based on the provisions of Section 14A (of Income Tax Act, 1961).

Key Legal Precedents

• CIT Delhi Vs. Kelvinator of India Limited: Established that reopening assessments requires tangible new material, not just a change of opinion.
• Principal Commissioner of Income Tax Vs. State Bank of Patiala: Reinforced that disallowance under Section 14A (of Income Tax Act, 1961) cannot exceed the exempt income.

Judgement

The court ruled in favor of Sandesh Procon LLP, quashing the notice issued under Section 148 (of Income Tax Act, 1961). The court found that the Assessing Officer had no valid basis for reopening the assessment since the same material was already considered during the original assessment. The court emphasized that the assessee had made full and true disclosures, and the reopening was merely a change of opinion without new evidence.

FAQs

Q1: What does this ruling mean for Sandesh Procon LLP?

A: The ruling means that Sandesh Procon LLP will not face the reassessment and additional tax liability that the Revenue sought to impose.

Q2: Can the Revenue reopen assessments based on the same material?

A: No, the court clarified that reopening assessments requires new tangible evidence, not just a different interpretation of the same facts.

Q3: What is the significance of the disallowance under Section 14A (of Income Tax Act, 1961)?

A: The court confirmed that any disallowance under Section 14A (of Income Tax Act, 1961) cannot exceed the amount of exempt income earned, reinforcing taxpayer rights.

Q4: How does this case impact future assessments?

A: This case sets a precedent that emphasizes the necessity for full disclosure and the limitations on the Revenue’s ability to reassess based on previously considered information.

1. By filing this writ application under Article 226 of the Constitution of India, the writ applicant has assailed the legality and validity of the impugned notice dated 26.07.2018 issued under Section 148 (of Income Tax Act, 1961) (hereinafter referred to as “the Act” for short) proposing to re­assess the income of the writ applicant for the A.Y. 2012­13 on the ground that the income chargeable to tax for the said year had escaped assessment within the meaning of Section 147 (of Income Tax Act, 1961).

2. The brief facts leading to filing of the present writ application are as under:

1. The writ applicant is a Limited Liability Partnership (LLP) Firm carrying the business of real estate development.

2. The writ applicant filed its return of income for the A.Y. 2012­13 on 30.09.2012 declaring total income NIL and claimed loss of Rs.3,66,93,809/­. The case was selected for scrutiny and the same was finalized under Section 143 (of Income Tax Act, 1961) on 05.03.2015 determining the total loss at Rs.3,32,86,950/­ and subsequently, notice under Section 148 (of Income Tax Act, 1961) dated 26.07.2018 was issued and assessment was re­opened by recording the following reasons :

1. In this case, the assessee filed return of income for A.Y. 2012­13 on

30.09.2012 declaring a loss of Rs.3,66,93,809/­. During the period, the

assessee has shown loss from business and profession and income from capital gains & other sources. The assessee is engaged in the business of real estate development.

2. From the records, it is noticed that the assessee has debited interest expenses of Rs.9,77,80,572/­ and had shown exempt income of Rs.34,06,856/­.

3. The assessee was required to make a disallowance under Section 14 (of Income Tax Act, 1961) A of the Act r.w.r 8 D of the IT Rules in such case as per the following calculation: Average of investment: Rs.103,34,98,799/­ [1/2 of Rs.206,23,83,210/­ + Rs.46,14,388/­]

Average of total assets :

Rs.219,02,72,277/­ [1/2 of Rs.318,20,26,792//­ + Rs.119,85,17,757/­]

Total interest Expenditure :

Rs.9,77,80,572/­.

Disallowance :

(i) Nil

(ii) Rs.4,61,38,603/­ = (Rs.9,77,80,572/­

X 103,34,98,799//­) Rs.219,02,72,277/­

(iii) Rs.51,67,493/­ = 0.5 % of

Rs.103,34,98,799/­

Total disallowance = Rs.5,13,06,096/­.

4. The documents filed by the assessee

during the course of assessment was

perused.

5, The assessee was required to disallow an

amount of Rs 5,13,06,096/u/s 14A (of Income Tax Act, 1961)

r.w.r 8D of IT Rules which the assessee

failed to do.

6. The assessee was required to disallow an

amount of Rs 5,13,06,096/u/s 14A (of Income Tax Act, 1961)

r.w.r 8D of IT Rules which the assessee

failed to do. During the course of original

assessment, disallowance was made only for

Rs 34,06,859/­ restricting to the extent of

exempted income. Therefore, the income of

Rs 4,78,99,237/­ has escaped assessment.

Considering the above facts, I have reason

to believe that by omission on the part of

the assessee to disclose fully and truly

all material facts necessary for the

assessment, the ­income chargeable to tax

for AY 2012­13 has escaped assessment

within the meaning of Section 147 (of Income Tax Act, 1961).

“7. Not applicable.

8. The assessee was required to

disallow an amount of Rs 5,13,06,096/u/s

14A of IT Act r.w.r 8D of IT Rules which

the assessee failed to do. During the

course of original assessment, disallowance

was made only for Rs 34,06,859/­

restricting to the extent of exempted

income. Therefore, the income of Rs

4,78,99,237/has escaped assessment. .

Considering the above facts, I have reason

to believe that by omission on the part of

the assessee to disclose fully and truly

all material facts necessary for the

assessment, the Income chargeable to tax

for A.Y 2012­13 has escaped assessment

within the meaning of Section 147 (of Income Tax Act, 1961).

9. In this case, return of income was

filed for the AY 2012­13 by the assessee

and regular assessment u/s 143(3) (of Income Tax Act, 1961) was made

on 05/03/2015. Since, 04 years from the end

. of the relevant year has expired in this

case and the assessee has not truly and

correctly disclosed material facts

necessary for her assessment for the

assessment year under consideration. It is

pertinent to mention here that reasons to

believe that income has escaped assessment

for the year under consideration have been

recorded above (refer para 6 above). I have

carefully considered the assessment records

containing submissions made by the assessee

In response to various notices Issued

during the assessment proceedings and have

noted that the assessee has not fully and

truly disclosed the material facts related

to the disallowance to be made u/s 14A (of Income Tax Act, 1961) of

Income Tax Act r.w.r. Rule 8D (of Income Tax Rules, 1962)

necessary for his assessment for the year

under consideration. |

It is evident from the above facts that the

assessee had not truly: and fully disclosed

Material facts necessary for his assessment

for the year under consideration thereby

Necessitating reopening u/s 147 (of Income Tax Act, 1961).

It is true that the assessee has filed a

copy of annual report and audited P&L

account and balance­sheet alongwith return

of income where various information

/material were disclosed. However, the

requisite full and true disclosure of all

material facts necessary for assessment has

not been made as noted above. It is

pertinent to mention here that even though

the assessee has produced books of

accounts, annual report, audited par a/c

and balance sheet or other evidences as

mentioned above, the requisite material

facts as noted above in the reasons for

reopening were embedded in such a manner

that material evidence could not be

discovered by the AO and could have been

discovered with due diligence, accordingly

attracting provisions of Explanation 1 of

section 147 (of Income Tax Act, 1961).

It is evident from the above discussion

that in this case, the issues under

consideration were never examined by the AO

during the course of regular assessment.

This fact is corroborated from the contents

of notices issued by the AO u/s

143(2)/142(1) and order sheet entries

recorded during the assessment proceedings.

It is important to highlight here that

material facts relevant for the assessment

on the issue(s) under consideration were

not filed during the course of assessment

proceeding and the same may be embedded in

annual report, audited P&L A/c, Balance

sheet and books of accounts in such a

manner that it would require due diligence

by the AO to extract these Information. For

aforestated reasons, it is not a case of

change of opinion by the AO.

In this case more than four years have been

lapsed from the end of assessment year

under consideration. Hence necessary

sanction to issue notice u/s 148 (of Income Tax Act, 1961) has been

obtained separately from Pr Commissioner of

Income Tax as per the provisions of Section

151 of the act.”

3. Pursuant to the issuance of notice dated

26.07.2018 for re­opening of the

assessment, the writ applicant submitted

its objections dated 27.06.2019, which

reads thus:

“42. We are in receipt of the above

referred reasons recorded for re­opening of

assessment in our case for AY 2012­13

wherein the reason for re­opening is that

the disallowance u/s. 14 (of Income Tax Act, 1961) A r.w.r 8D ought to

have been Rs.5,13,06,096/­ instead of

Rs.34,06,859/­ made by the Assessing Officer

in the regular assessment u/s. 143 (of Income Tax Act, 1961) (3).

In this regard, we submit that the return of

income was filed on 30.09.2012 declaring

loss of Rs.3,66,93,809/­. The exempt income

earned during the year under consideration

of Rs.34,06,859/­ being in nature of

dividend from mutual funds was duly

disclosed in the return of income.

During the course of regular assessment u/s.

143 (3), the Assessing Officer proposed to

disallow interest expenses u/s. 14A (of Income Tax Act, 1961) r.w.r 8D

on the assumption that the expenses have

been incurred by us in earning exempt

income. In response to the said contention

of the Assessing Officer, we file our reply

dated 19.02.2015 wherein we explained that

the dividend from mutual funds get directly

accumulated in the fund and on redemption

entire invested amount along with the

dividend accrued till date is credited to

the bank account and thus no administrative

or other expenses have been incurred in

earning the same. The extract of the letter

dated 19.02.2015 are produced in the regular

assessment order dated 05.03.2015 u/s. 143 (of Income Tax Act, 1961)

(3) which is enclosed as Annexure 1 for year

reference.

In spite of the above referred submission,

the Assessing Officer disallowed

Rs.34,06,859/­ u/s. 14A (of Income Tax Act, 1961) (the Act) i.e. to the extent of

exempt income earned by us.

Further, as mentioned in the reason for re-

assessment, the disallowance u/s. 14A (of Income Tax Act, 1961) have

been re­computed by you at Rs.5,13,06,096/­,

which is much higher than the actual exempt

income earned by us. Further, it is well

settled law that the disallowance u/s. 14A (of Income Tax Act, 1961)

r.w.r. 8D (of Income Tax Rules, 1962) cannot exceed the exempt income.

The said contention is supported by judicial

decision in below mentioned cases:

a. PCIT Vs. State Bank of Patiala [99

taxmann.com 286 (SC)]

b. PCIT Vs. Caraf Builders &

Constructions (P) Ltd. [101 taxmann.com

167 (Del HC)]

The copies of the judgments are enclosed as

Annexure 2 for your reference.

In view of the above, it is unquestionable

beyond any doubt that the disallowance

cannot exceed the exempt income and

accordingly, the reason recorded for re-

assessment does nos stand valid. Therefore,

we request Your Honour to kindly drop the

re­assessment proceedings and oblige.”

4. On 04.10.2019, the order came to be passed

overruling the objections raised by the

assessee against the issuance of notice

under Section 148 (of Income Tax Act, 1961). The relevant

portion of the order reads thus:

3. The objection filed by the assessee

has duly. been considered. However, the

same is not found acceptable for the

following reasons.

1. The contention of the assessee that

the disallowed should be restricted to

the extent exempt income. In this

connection, it is stated that as per

Rule 8D (of Income Tax Rules, 1962) u/s . 14 the Act. The

expenditure in relation to income which

does not form part of the total income

shall be aggregate of following

amounts, namely-

2. The amount of expenditure directly

relating to income which does not form

part of total income.

3. In a case where the assessee has

incurred expenditure by way of interest

during the previous year Which is not

directly attributable to any particular

Income or receipt, an amount computed

in accordance with the following

formula namely

A* B/C

A means = amount of expenditure by

way of interest of other than the

amount of interest included in

clause(i) incurred during the

previous year:

B ­means = The average value of

investment, income from which does

not or shall not form _ part of the

total income, as appearing in the

balance sheet of the assessee, on the

first day and the last day of the

previous year.

C­means = the average of total assets

as appearing in the balance balance

sheet of the assessee, on the first

day and the last day of the previous

year

In the case of assessee, the expenditure

incurred by way of interest is not directly

attributable to any income and hence the

disallowance is to be worked as above per

above formula at Rs.5,13,06,096/­ as per

working given in the reasons recorded.

Moreover, the Submission on merits if any

will dealt with during the course of

assessment proceeding after considering the

evidence and submission made by the

assessee during the course Of reassessment

proceedings.

4. In view of the above facts, it

becomes evident that this case has been re-

opened only after following the due

procedures prescribed in the IT Act and was

based on the tangible material leading to

the conclusion that there was escapement of

income from assessment. It may also be

pointed out that mere furnishing of details

about income does not mean that all

material facts have been fully and truly

disclosed. In the case of Indo­Aden Salt

Manufacturing and Trading Co. (P) Ltd. Vs.

Commissioner of Income­tax 159 ITR 624 (SC)

the Hon'ble Supreme Court has held that

even if the assessee had supplied details

but if it had not disclosed true facts

which the ITO could have found by further

probing, the re­opening of the assessment

was valid. In the case of Olwin Tiles

(India) Pvt. Ltd. Vs. DCI in ITA No.17303,

18388 & 18389 of 2014, Hon'ble Gujarat High

Court vide its order dated 5th January 2016

has held that once the reasons are recorded

properly, the proceedings initiated u/s.147 (of Income Tax Act, 1961)

of the Act are valid. In the case of Shree

Krishna (P) Ltd. Vs. Income­tax Officer 221

ITR 538 (SC), the Hon'ble Supreme Court

reiterated that it was the duty of the

assessee to disclose material facts fully

and truly. The disclosure of a loan, which

was subsequently discovered to be false,

would make the re­assessment valid. In the

case of ITO Vs. Selected Dabur Bank Coal

Co. Pvt. Ltd. 217 ITR 597 (SC), the Supreme

Court had stated that on the failure to

disclose material facts, re­assessment-

could be resorted to.

Attention is also drawn to the case of

Phool Chand Vs Bajrang Lal Vs. Income Tax

Officer 203 ITR 456 (SC), wherein the

Hon'ble Supreme Court had laid down the

preposition that discovery of new and

important facts constitute information on

the basis of which re­assessment

proceedings could be initiated. In the case

of ITO Vs. Pashottamdas Bangar 224 ITR 362

(SC), the Hon'ble Supreme Court had held

that letter from DDIT (inv) constituted

good information for re­opening of

assessment.

5 In view of the above discussion and the

judicial pronouncements in Revenue's favor,

the objections raised b the assessee

against re­opening of assessment cannot be

entertained.as the same are without any

basis. It may be seen that while re­opening

the assessment, proper procedure as per

Income­tax law has been followed by the

Assessing Officer. The case has been re-

opened well within the time limit

prescribed as per the Provisions of the

Income­tax Act, 1961 and also on account of

the fact that there was reason {o believe

that the income chargeable to tax has

escaped assessment.

6. In view of the above discussion, I

reject the objections of assessee,

furnished vide letter dated 27.06.2019,

against re­opening of assessment. The

contentions raised by the assessee on

merits are required verification with

evidences produce by the assessee and hence

the same will be dealt with during the

course of reassessment proceedings.”

3. Being dissatisfied with re­opening of the

assessment, the writ applicant has come up

before this Court by filing present writ

application with the prayer as indicated above.

4. We have heard Mr. Bandish S. Soparkar, the

learned counsel appearing for the writ applicant

and Mr. M.M.Bhatt, the learned Sr. Counsel

assisted by Mrs. Mauna Bhatt, the learned

Sr.Standing Counsel appearing for the Revenue.

5. Mr. Soparkar, the learned counsel for the writ

applicant raised the following contentions :

1. Referring to the Sections 147 and 148 of

the Act, it was submitted that, the

Assessing Officer no doubt has the power to

reassess any income which escaped

assessment for the year under consideration

subject to the provisions of Section 148 (of Income Tax Act, 1961) to

153 of the Act, however, this power is

conditional upon effect that, the Assessing

Officer has some reason to believe that,

the income has escaped assessment.

Referring to the original assessment order

made under Section 143(3) (of Income Tax Act, 1961) and

the reasons for re­opening, it was

submitted that, the re­opening of the

assessment is bad on the ground that, the

issue of disallowance under Section 14(8A) (of Income Tax Act, 1961)

of the Act was thoroughly gone into by the

Assessing Officer and ultimately, the

disallowance limited to Rs.34,06,859/­,

which was the amount of exempt income

earned. Therefore, on the same material,

the Assessing Officer has formed his belief

with regard to the escapement of income,

which is nothing, but a change of opinion

on the part of the Assessing Officer and

therefore, he could not re­open the

assessment in the absence of any tangible

material.

2. It was further pointed out that, there is

no income chargeable to tax has escaped

assessment so far the disallowance under

Section 148 (of Income Tax Act, 1961) A of the Act is concerned. On

this ground, it was submitted that, the

interest to the extent of entire exempt

income already having disallowed at the

time of original assessment, no further

disallowance is permissible.

3. It was further pointed out that, the writ

applicant had made all disclosures

regarding the exempt income and the

interest expenses claimed during the

assessment proceedings, held under Section

143(3) of the Act and the issue of

disallowance under Section 14A (of Income Tax Act, 1961)

was discussed and after considering the

records available with him as well as

produced by the writ applicant, the

assessment was finally determined.

Therefore, no failure on part of the writ

applicant to disclose the facts fully and

truly.

4. Referring to the decision of the Supreme

Court rendered in the case of Patiyala Vs.

State Bank of Patiyala [(2018) 99

Taxmann.com 286 (SC)], it was submitted

that, the amount of disallowance under

Section 14A (of Income Tax Act, 1961) could be restricted

the amount of exempt income only and not at

a higher figure. Therefore, even on merits,

the interest to the extent of entire exempt

income already having disallowed at the

time of original assessment, no further

disallowance is permissible. As a result,

no income has escaped assessment and the

action for re­opening of assessment

initiated may kindly be quashed.

6. Making the above submissions, Mr. Soparkar, the

learned counsel appearing for the writ applicant

prayed that, the impugned notice and the

proceedings may be quashed and set aside.

7. Mrs. Mauna Bhatt, the learned Sr. Standing

Counsel appearing for the Revenue has vehemently

opposed this writ application. Relying upon the

contentions raised in the affidavit­in­reply by

the Revenue, she would submit that, there was an

omission on the part of the assesse to disclose

fully and truly material facts necessary for the

assessment. She urged that on the basis of

tangible material leading to conclusion that,

there was escapement of income for the year

under consideration and therefore, considering

the material available with the Assessing

Officer, he has reason to believe that, the

income has escaped assessment. Mrs. Bhatt, the

learned standing counsel for the revenue further

submits that, as per the statutory provisions,

while working out the disallowance under the

provisions, the amount of Rs.5,13,06,096/­ was

required to be stated by the assessee, however,

the assessee had incorrectly made disallowance

of Rs.34,06,859/­. In this context, she would

submit that, mere disclosure is not sufficient,

but it has to be true and full disclosure and

therefore, the Assessing Officer rightly come to

the conclusion that the income has escaped

assessment and such escapement occurred on

account of failure on the part of the assessee

to disclose fully and truly, all material facts

necessary for the assessment for the year under

consideration.

8. In the aforesaid circumstances, Mrs. Bhatt prays

that there being no merits, present writ

application may not be entertained.

9. We have carefully considered the contentions

raised by both the parties and perused the

materials placed on record.

10. It is the case of the Revenue that, the assessee

was required to disallow an amount of

Rs.5,13,06,096/­ under Section 14A (of Income Tax Act, 1961)

and during the original assessment, disallowance

was made only upto Rs.34,08,859/­ restricting

the extent of exempted income. Therefore, as per

the case of the revenue, the income

Rs.4,78,99,237/­ has escaped assessment for

which the assessee failed to disclose fully and

truly all material facts necessary for the

assessment for the year under consideration. It

is also undisputed fact that, the case of the

assessee selected for further scrutiny and

notice under Section 143(2) (of Income Tax Act, 1961) was

issued and thereafter, notice under Section

142(1) of the Act along with questionnaire was

served and pursuant to these notices, the

assessee had furnished required details along

with copy of return, audited accounts, balance

sheet, profit and loss account etc. The issue of

disallowance was considered by the respondent

authority at length and disallowance of interest

was restricted upto Rs.34,06,859/­. The

observations with regard to disallowance made in

the original assessment order reads thus:

“ 3. Disallowance u/s. 14A (of Income Tax Act, 1961)

On perusal of Balance sheet, it is observed that

the assessee has invested a sum of

Rs.2,04,22,70,664/­ in shares/securities of

different companies and he has earned dividend

income of Rs. 34,06,859/­. It is also seen that the

assessee has debited interest expenses of

Rs.9,77,80,572/­ in Profit and Loss account. As per

provisions of the section 14A (of Income Tax Act, 1961) of the 1.T. Act

deduction of the expenditure cannot be allowed, if

the same is incurred on account of exempt income

which does not form a part of total income, in the

instant case with a view to above facts, it is seen

that the assessee has incurred expenses in respect

to earned the Income which does not form a part of

the total Income. Hence, provisions of section 14A (of Income Tax Act, 1961)

would be applicable.

3.1. In view of the above, a show cause notice

dated 19.02.2015 was issued and served to the

assessee. For a ready reference relevant Para of

the same Is reproduced below :

“On perusal of your balance sheet as on

31.03.2012, it is observed. that you have

invested a sum of Rs.2,04,22,70,664/­ in

shares/securities of different companies, it

is noticed that you have earned tax free

dividend income of Rs.34,06,859/­. Hence, you

are requested to explain as to why

disallowance should not be made as per

provision of section 144 (of Income Tax Act, 1961) to the

extent of tax free income and added back to

the total income of the assessment year under

consideration.

3.2. In response to the show cause notice assessee

filed its reply dated 19.02.2015, For a ready

reference the reply of the assessee is reproduced

below :

“1. Vide your letter dated 19" February 2015 you

have invited our attention to the exempt income of

Rs 34,06,859 from Mutual Fund and our investment in

shares of Apple woods Estate Private Limited. You

have further sought our explanation in regard to

disallowance of relevant expenditure, as per the

provisions­of Section 14A (of Income Tax Act, 1961) of Income. tax Act, read

with Rule 8 (of Income Tax Rules, 1962).

2. In the above regard we wish to inform you that

Sandesh Procon LLP is in the business of

development of Real Estate. Applewoods Estate

Private Limited is developing one of the largest

township Project in Ahmedabad. To expand our

presence. in Real Estate Market, we have

strategically and in the ordinary course of

business, acquired 70.79% stake in the said

company. The business of Sandesh Procon LLP and

Applewoods Estate Private Limited are very similar

and therefore, our strategic investment in the same

is business investment.

3. In the above regard, we wish to rely on the

direct ratio of the decision of the Hon'ble Delhi

High Court in the case of CIT vs, Ho/cim (india)

(P.) Ltd. (copy attached herewith), wherein it was

held as under: |

It is an undisputed position that respondent

assessee is an investment company and had invested

by purchasing a substantial number of shares and

thereby securing right to management. Possibility

of sale of shares by private placement etc. cannot

be ruled out and is not an improbability. Dividend

mayor may not be declared. Dividend is declared byt

the company and strictly in legal sense, a

shareholder has no control and cannot insist on

payment of dividend. When declared, it is subjected

to dividend distributor tax...

Further whether income earned in a subsequent year

would or would not be taxable, made depend upon the

nature of transaction entered into in the

subsequent assessment year. For example, long term

capital gain on sale of shares is presently not

taxable where security transaction tax has been

paid, but a private sale of shares in an off market

attracts capital gains tax.

4. We also wish to invite your kind attention to

the fact that we have not received any dividend

income from the investment made by us in the shares

of Applewoods Estate Pvt. Ltd, In this regard, we

wish to rely on the direct ratio of a number of

judicial pronouncements of various High Courts,

including the Jurisdictional ‘Gujarat High Court,

wherein, it has­been clearly hald that­.no-

disallowarice can be mate u/s, 144A, where the

relevant Investment has not given rise to any

exempt income. In this connection, we wish to

reproduce the relevant observations of the latest

decision of the Hon'ble Delhi High Court in the

case of Haicim (Supra).

On the issue whether the respondent assessee could

have earned dividend and disallowance of

expenditure can be made, there are three decisions

of the different High Courts directly on the issue

and against the appellant revenue. No contrary

decision of a High Court has been shown to us. The

Punjab and Haryana High Court in Commissioner of

Income Tax, Faridabad Vs. Mis. Lakhani Marketing

Incl. ITA No.97012008, decided on 02.04.2014, made

reference to two earlier decisions of the same

Court in CIT Vs. Hero Cycles Limited, {2010} 323

ITR 518 and CIT Vs. Winsome Textile Industries

Limited, [2009} 319 ITR 204 to hold that Section

14A cannot be invoked when no exempt income was

earned. The second decision is of the Gujarat High

Court in Commissioner o Income Tax­I Vs. Corrtech

Energy P. Ltd, 20141 223 Taxmann 130 (Guj.). The

third decision is of the Allahabad High Court in

Income Tax Appeal No. 88 of 2014, Commissioner of

Income Tax (li) Kanpu, Vs. M/s. Shivam Motors (P)

Ltd. decided on 05.05.2014.

In the said decision it has been held: "As regards

the second question, Section 144 (of Income Tax Act, 1961)

provides that for the purposes of computing the

total income under the Chapter, no deduction shall

be allowed In respect of expenditure incurred by

the assessee in relation to income which does not

form part of the total income under the Act. Hence,

what Section 14A (of Income Tax Act, 1961) provides is that if there is any

income which does not form part of the income under

the Act, the expenditure which is incurred for

earning the income Is not an allowable deduction.

For the year in question, the finding of fact Is

that the assessee had not earned any tax free

income. Hence, in the absence of any tax free

income, the corresponding expenditure could not be

worked out for disallowance.

5. As regard the dividend income of RS.34,06,859/­

received from mutual funds, it virtually does not

require any administrative expenditure. Dividend is

accumulated in the fund and on redemption entire

invested amount along with dividend accrued till

date is credited to our bank account. It is only

for the accounting purposes that the portion of

dividend accrued is credited to investment

account.”

3.3. The submission of the assessee has been

perused and considered carefully. However, same is

not acceptable. On perusal of the Balance Sheet, it

is verified that assessee has invested amount of

Rs.2,04,22.70,664/­ in shares/securities of

different companies. The assessee firm has claimed

interest expenses of Rs. 9,77,80,572/­. It is also

ascertained that assessee has incurred expenses

relatable partly to the taxable income and partly

to be exempt income which does not form a part of

the total income. The contention of the assessee

that firm has earned exempt income of Rs.

34,06,859/­ which is dividend income received from.

the Mutual fund, for the same the assesses firm has

not made any expenses, is not acceptable because

the assessee firm has invested Rs. 2,04,22.70,664/­

in shares/securities of different companies and the

assessee firm has claiming interest expenses of

Rs. 9,77,80,572/­ which are relatable to the

investment made by the assessee firm which

generates the income which does not form part of

the total income. Hence, same ate required to

disallowed as per the Provision of section 14 (of Income Tax Act, 1961) A of

the I.T. Act. Therefore, disallowance of Rs.

34,06,859/­ has been made to the extent of dividend

income eared which is claimed as an exempt income

and added to the total income.”

5. Subject to the above remarks and data made

available, the total income of the assessee is

computed as under:

Total income from business or (­)Rs.2,51,48,441/­

profession as per the

computation of income

(current year business loss)

Add: Long term Capital Loss (­)Rs.1,15,45,388/­

carried forward

Total carried forward loss (­) Rs.3,66,93,809/­

Add: Additional/Disallowance as discussed above

1. Addition u/s. 14A (of Income Tax Act, 1961)

as discussed above Rs.34,06,859/­

Total assessed loss (­)Rs.3,32,86,950/­

11. We have perused the reasons for re­opening,

wherein, the Assessing Officer observed that,

during the course of original assessment,

disallowance was made only Rs.34,06,859/­

restricting to the extent of exempted income, as

a result, income of Rs.4,78,99,237/­ has escaped

assessment on the ground that, there was an

omission on the part of the assessee to disclose

fully and truly all the material facts. It was

further observed by the Assessing Officer that;

“it is true that the assessee has filed copy of

annual report and audited P&L account and

balance­sheet along with return of income where

various information /material were disclosed.

However, requisite full and true disclosure of

all material facts necessary has not been made,

but it would require due diligence by the AO to

extract these information. For aforesaid

reasons, it is not a case of change of opinion.

12. A bare perusal of the reasons and original the

assessment order made under Section 143(3) (of Income Tax Act, 1961) of

the Act, the facts emerge that, the respondent

authority had determined the issue of

disallowance after considering the material

available and now again without any tangible

material available with the Assessing Officer

based on the same materials, which were relied

at the time of original assessment proceedings,

has reason to believe that there is escapement

of income. Therefore, in this circumstances, we

are of the view that, the material available

with the Assessing Officer, at the relevant

point of time, while making original assessment

under Section 143(3) (of Income Tax Act, 1961) and at the time

of re­opening of the assessment, the materials

available with the Assessing Officer were the

same and there was no any new material surfaced

during the reassessment proceedings.

13. After close scrutiny of the reasons for re-

opening of assessment, we are of the view that,

all the material facts relating to Section 14(A) (of Income Tax Act, 1961)

of the Act were before the Assessing Officer

during the course of the original assessment and

now, he could not re­open the assessment after 4

years where there is no failure on the part of

the assessee to disclose fully and truly all the

facts necessary for assessment. It is settled by

the Apex Court in the case of CIT Delhi Vs.

Kelvinator of India Limited. [(2010) 320 ITR

577] that the existence of tangible material is

essential to safeguard against the arbitrarily

exercised of power. Therefore, as discussed

above, at the time of recording the reasons,

there were no fresh materials on which the

Assessing Officer could have formed a requisite

belief with regard to the escapement of the

assessment. The record further indicates that,

the assessee had disclosed all materials fully

and truly before the respondent at the time of

original assessment. Even on merits, it is

settled that, disallowance under Section 14A (of Income Tax Act, 1961) of

the Act cannot exceed the exempt income of the

assessee. Thus, the twin conditions as provided

under Section 147 (of Income Tax Act, 1961), which are

condition precedent for re­opening of the

assessment made after 4 years are not satisfied.

14. We have examined the contentions raised by the

learned counsel appearing for the writ applicant

with regard to disallowance under Section 14A (of Income Tax Act, 1961) of

the Act would restrict to the amount of exempt

income and not at a higher figure. In this

regard, reliance has been placed on the case of

Principal Commissioner of Income Tax Vs. State

Bank of Patiala [(2018) 99 Taxmann.com 286],

wherein, the Apex Court has dismissed the SLP

after considering the case of Principal CIT Vs.

Case of State Bank of Patiala held that, the

amount of disallowance under Section 14A (of Income Tax Act, 1961) of the

Act was restricted to the amount of exempt

income only and not at a higher figure.

Therefore, applying the same principle to the

facts of the present case, the proposed amount

is exceed the exempt income of the assessee. In

that view of the matter on merits, invoking the

provisions for re­opening of the assessment

under Section 147 (of Income Tax Act, 1961) is bad in law.

15. We may also refer to and rely upon the case of

State of U.P. Vs .Aryaverth Chaval Udhyog [2015

(17) 324]. Paras 28 and 29 thereof reads thus:

“28. .In case of the same material being

present before the assessing authority during

both, the assessment proceedings and the

issuance of notice for reassessment

proceedings, it cannot be said by the

assessing authority that "reason to believe"

for initiating reassessment is an error

discovered in the earlier view taken by it

during original assessment proceedings. (See

DCM v. State of Rajasthan : [1980] 4 SCC 71).

29. The standard of reason exercised by the

assessing authority is laid down as that of an

honest and prudent person who would act on

reasonable grounds and come to a cogent

conclusion. The necessary sequitur is that a

mere change of opinion while perusing the same

material cannot be a "reason to believe" that

a case of escaped assessment exists requiring

assessment proceedings to be reopened. (See:

Binani Industries Limited, Kerala v. Assistant

Commissioner of Commercial Taxes, VI Circle,

Bangalore : [2007] 15 SCC 435 : [2007] 6 VST

783 (SC) and A.L.A. Firm v. Commissioner of

Income­tax : [1991] 2 SCC 558 : [1991] 189 ITR

285 (SC). If a conscious application of mind

is made to the relevant facts and material

available or existing at the relevant point of

time while making the assessment and again a

different or divergent view is reached, it

would tantamount to "change of opinion". If an

assessing authority forms an opinion during

the original assessment proceedings on the

basis of material facts and subsequently finds

it to be erroneous; it is not a valid reason

under the law for reassessment. Thus, reason

to believe cannot be said to be the subjective

satisfaction of the assessing authority but

means an objective view on the disclosed

information in the particular case and must be

based on firm and concrete facts that some

income has escaped assessment.”

16. Considering the facts and circumstances of the

present case as well as legal principles on the

subject “change of opinion” as propounded by the

Apex Court, we have no hesitation to hold that,

there was no basis or jurisdiction for assessing

officer to form a belief that, any income of the

assessee chargeable to tax for the year under

consideration had escaped assessment within the

meaning of Section 147 (of Income Tax Act, 1961) and the

reasons recorded could not have led to formation

of any belief that income had escaped assessment

within the meaning of the aforesaid provision.

Therefore, the impugned notice dated 26.07.2018

issued under Section 148 (of Income Tax Act, 1961) is required

to be quashed and set aside and accordingly, the

same is hereby quashed and set aside.

17. In view of the aforesaid foregoing reasons, the

present writ application is allowed. There shall

be no order as to costs.

(J. B. PARDIWALA, J)

(ILESH J. VORA,J)