Court Quashes Reassessment Notice Issued After Four Years Due to Full Disclosure by Assessee

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Case Name:

Sky Diamonds vs. Assistant Commissioner of Income Tax (High Court of Gujarat)

Special Civil Application No. 18004 of 2014

Date: 21st January 2015

Key Takeaways

- Reassessment Time Limit:

The court emphasized that under Section 147 (of Income Tax Act, 1961), reassessment after four years is only permissible if the assessee failed to fully and truly disclose all material facts necessary for the assessment.

- Full Disclosure:

The court found that Sky Diamonds had made full and true disclosures during the original assessment, including submitting an audit report and details about partner remuneration.

- Jurisdiction:

The court ruled that the reassessment notice issued after the four-year period was without jurisdiction and thus invalid.

Issue

Can the bar of four years provided by the first proviso of Section 147 (of Income Tax Act, 1961) be applied to the facts of this case?

Facts

- For the assessment year 2008-2009, Sky Diamonds underwent a scrutiny assessment under Section 143(3) (of Income Tax Act, 1961).

- During the assessment, Sky Diamonds submitted various documents, including an audit report and details about partner salaries.

- On January 17, 2014, the assessing officer issued a notice under Section 148 (of Income Tax Act, 1961), stating that income had escaped assessment for the year 2008-2009.

- Sky Diamonds objected, arguing that they had made full disclosures and that the four-year limitation period had expired.

Arguments

- Petitioner (Sky Diamonds):

Argued that they had fully disclosed all material facts during the original assessment, including the audit report and partner remuneration. Therefore, the four-year bar should apply, making the reassessment notice invalid.

- Respondent (Revenue):

Could not dispute that full disclosure was made by Sky Diamonds, including the audit report and details about partner remuneration.

Key Legal Precedents

- Section 147 (of Income Tax Act, 1961):

Allows the Assessing Officer to reopen assessments if income has escaped assessment, subject to provisions of Sections 148 to 153. However, the first proviso to Section 147 (of Income Tax Act, 1961) states that no action can be taken after four years unless the assessee failed to disclose fully and truly all material facts necessary for the assessment.

Judgement

The High Court found that Sky Diamonds had made full and true disclosures during the original assessment. Therefore, the reassessment notice issued after the four-year period was without jurisdiction and invalid. The court quashed the notice and the subsequent proceedings.

FAQs

Q1: What was the main legal question in this case?

A1: Whether the four-year limitation period for reassessment under Section 147 (of Income Tax Act, 1961) could be applied, given the facts of the case.

Q2: What did the court decide?

A2: The court decided that the reassessment notice issued after four years was invalid because Sky Diamonds had fully and truly disclosed all material facts necessary for the assessment.

Q3: What is the significance of this case?

A3: This case reinforces the importance of the four-year limitation period for reassessment under Section 147 (of Income Tax Act, 1961) and underscores the necessity for the Revenue to prove a failure in disclosure by the assessee to reopen assessments after this period.

Q4: What happens if a reassessment notice is issued after four years without proper grounds?

A4: Such a notice would be considered without jurisdiction and invalid, as was the case here.

Q5: Did the court impose any costs?

A5: No, the court did not impose any costs considering the facts and circumstances of the case.

1. Rule. Mr. Mehta, learned Standing Counsel, waives notice of Rule. The matter is finally heard with the consent of the learned advocates appearing for both the sides.

2. The only question which may arise for consideration in the present matter is “Whether the bar of four years provided by first proviso of section 147 (of Income Tax Act, 1961) can be made applicable to the facts of the present case or not?

3. The relevant facts are that as per the petitioner, for the assessment year 2008­2009, the scrutiny was made under section 143(3) (of Income Tax Act, 1961) (hereinafter referred to as the “Act”) and the petitioner submitted detailed letter on various points connected with the return of income tax filed under section 139 (of Income Tax Act, 1961). On 18.11.2010, during the course of regular assessment, in reply to the notice under section 142(1) (of Income Tax Act, 1961), the Chartered Accountant of the petitioner, vide letter, had submitted various documents including the audit report and the details about the salary of the partners. On 28.12.2010, the assessing officer passed a scrutiny assessment order under section 143(3) (of Income Tax Act, 1961) and while passing the said order, the survey made on 22.08.2008 and other relevant aspects were considered and the order was passed.

4. On 17.01.2014, the assessing officer issued notice under section 148 (of Income Tax Act, 1961) informing the petitioner that the income has escaped assessment for the assessment year 2008­2009 and vide letter dated 01.04.2014, the respondent provided reasons recorded for reopening of the assessment. On 17.06.2014, the petitioner filed objections against the reasons and it was contended inter alia that full disclosure was made including the points on the basis of which the assessment is sought to be reopened and the period of limitation of four years expired was also contended by way of objection. On 10.10.2014 the respondent passed the order, whereby the objections filed by the petitioner were disposed of and the notice for reopening of the assessment was maintained. Under the circumstances, the present petition before this Court.

5. We have heard Mr.J.P. Shah, learned counsel appearing with M.J.Shah for the petitioner and Mr. Sudhir Mehta, for the respondent Revenue.

6. As such, apart from the aspect as to whether income escaped assessment, we find that one of the major point which may go to the root of the matter is the bar operating on the power of Revenue to reopen the assessment after the expiry of the period of four years from the end of the relevant assessment year. Section 147 (of Income Tax Act, 1961) upto first proviso which is relevant for the purpose of this petition reads as under:

“147. Income escaping assessment.­ If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year) : Provided that where an assessment under sub- section (3) of section 143 (of Income Tax Act, 1961) or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 (of Income Tax Act, 1961) or in response to a notice issued under sub- section (1) of section 142 (of Income Tax Act, 1961) or section 148 (of Income Tax Act, 1961) or to disclose fully and truly all material facts necessary for his assessment, for that assessment year”

7. Section 147 (of Income Tax Act, 1961) enables the AO to reopen the assessment subject to the provisions of sections 148 to 153 of the Act, but the first proviso to the very section 147 (of Income Tax Act, 1961) provides that no action shall be taken under this section (147) after the expiry of the period of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by the reason of failure on the part of assessee to disclose full and truly all material facts necessary for assessment for the respective assessment year.

8. The aforesaid shows that unless the case falls in the exceptional category of “failure to disclose fully and truly all material facts necessary for the assessment”, the action after the expiry of four years for reopening of the assessment is not permissible. As we are not required to examine other contingencies of failure, we do not deal with the same.

9. As per the learned counsel Mr.Shah for the petitioner, full and true disclosure of all material facts relevant to the reasons which is the ground for reassessment were disclosed before the AO at the time when the scrutiny of the assessment had taken place. He submitted that not only that but the audit report was also produced which included the remuneration to the partners from the disclosed item of Rs.74,90,834/­ and during the course of the assessment, this aspect is deemed to have been considered and the assessment order was passed. He submitted that once the petitioner succeeds to satisfy that full and true disclosures were made of the relevant material and thereafter, if the assessment order is passed, the bar of four years would apply. Apart from the aforesaid contention, as per Mr.Shah, it cannot be said that the income escaped the assessment and therefore section 147 (of Income Tax Act, 1961) cannot be invoked by the Department.

10. Whereas, Mr. Mehta, learned counsel appearing for respondent is not in a position to dispute the factual aspect that the true disclosure was made by the assessee for the remuneration paid to the partners and computed while computing the business income. He is also unable to dispute that the audit report showing the aforesaid details were produced.

11. In view of the above, we find no reason to believe that true and full disclosure was not made by the assessee to come out from the bar of four years as provided by first proviso to section 147 (of Income Tax Act, 1961). Once the bar operates upon the power by express statutory provision, the action can be said as without jurisdiction. If the action of issuance of notice is without jurisdiction, it would be a case for interference under Article 226 of the Constitution.

12. In view of the above, we find that the impugned action under section 147 (of Income Tax Act, 1961) and consequently issuance of notice under section 148 (of Income Tax Act, 1961) (Annexure­E) including disposal of the objection dated 10.10.2014 (Annexure­I) may not stand in the eye of law. Hence, they are quashed and set aside.

13. The petition is allowed to the aforesaid extent. Rule made absolute accordingly. Considering the facts and circumstances, no order as to costs.

(JAYANT PATEL, J.)

(S.H.VORA, J.)