High Court Quashes Income Tax Reassessment Notice, Upholds Merger Principle

Case Name:

Gujarat Enviro Protection and Infrastructure Limited vs Deputy Commissioner of Income Tax

Key Takeaways:

1. The court emphasized the importance of the proviso to Section 147 of the Income Tax Act.

2. Reassessment notices issued beyond four years require proof of failure to disclose material facts.

3. The principle of merger prevents reassessment when a higher authority has already decided on the matter.

4. The Assessing Officer cannot reopen an assessment to disallow part of a claim already allowed in full by the Commissioner (Appeals).

Issue:

Was the Income Tax Department's notice to reopen the assessment of Gujarat Enviro Protection and Infrastructure Limited for the 2010-2011 tax year valid and legal?

Facts:

1. The assessee filed a return for the 2010-2011 tax year, claiming a deduction under Section 80IA of Rs.20.77 crores.

2. They later revised the claim to Rs.21.30 crores

3. The Assessing Officer initially rejected the entire claim under Section 80IA(4).

4. The Commissioner (Appeals) allowed the claim in its entirety.

5. The Assessing Officer then issued a notice to reopen the assessment, focusing on Rs.57.01 lakhs of interest income included in the Section 80IA claim.

6. This notice was issued beyond the four-year limit from the end of the relevant assessment year.

Arguments:

Assessee's arguments:

1. There was no failure to disclose material facts, making the notice invalid.

2. The issue was already considered during the original assessment.

3. The principle of merger applies as the Commissioner (Appeals) had allowed the entire claim.

Revenue's arguments:

1. The Assessing Officer recorded proper reasons for reopening.

2. The Commissioner (Appeals) didn't specifically address the eligibility of interest income for the deduction.

3. Interest income doesn't arise from infrastructure development and maintenance business.

Key Legal Precedents:

The judgment doesn't mention specific case laws, but it refers to:

1. Section 147 of the Income Tax Act

2. Section 80IA(4) of the Income Tax Act

3. The principle of merger in tax law

Judgement:

The High Court quashed the reassessment notice, ruling in favor of the

assessee. Key points:

1. The Assessing Officer failed to satisfy the proviso to Section 147 of the Act.

2. There was no failure by the assessee to disclose material facts fully and truly.

3. The principle of merger applies, as the Commissioner (Appeals) had allowed the entire claim.

4. Reopening the assessment to disallow part of a claim already allowed in full by the Commissioner (Appeals) is not permissible.

FAQs:

Q1: What is the significance of the four-year limit mentioned in the case? A1: Reassessment notices issued beyond four years require proof that the assessee failed to disclose material facts, which wasn't the case here.

Q2: What is the principle of merger in this context?

A2: It means that once a higher authority (like the Commissioner (Appeals)) has decided on a matter, the lower authority (Assessing Officer) can't reopen the same issue.

Q3: Could the Revenue have challenged the Commissioner (Appeals)' decision?

A3: Yes, the court mentioned that the Revenue could have appealed the Commissioner's decision instead of trying to reopen the assessment.

Q4: What does this judgment mean for taxpayers?

A4: It reinforces protection against arbitrary reopening of assessments, especially when higher authorities have already ruled on the matter.

Q5: Why didn't the court accept the argument of "change of opinion"?

A5: The court clarified that since the Assessing Officer initially rejected the entire claim, there was no "opinion" on the specific interest income to be changed.

1. Petitioner has challenged Notice dated 31st March 2017 issued by the respondent-Assessing Officer to reopen the petitioner's assessment for Assessment Year 2010-2011, which was originally framed after scrutiny. Such notice is therefore issued beyond the period of four years from the end of relevant assessment year. In order to do so, the Assessing Officer had recorded the following reasons :

“The assessee company was engaged in the business of manufacturing of man-made textile and POY. The assessee filed its Return of Income for AY 2010-11 on 30.09.2010 declaring total income of Rs. 1,37,75,660/= after claiming deduction under Section 80IA of Rs. 20,77,91,893/=. The assessee filed revised return of income on 30.03.2012 revising the claim of deduction under Section 80IA to Rs. 21,30,61,976/=. The income was assessed to Rs. 23,23,79,770 under Section 143 [3] on 19.03.2013 of IT Act. Due to some typographical errors in the Assessment Order, rectification order was passed under Section 154 of the I.T Act on 02.5.2013 revising the assessed income at Rs. 23,61,54,765/=.

2. Section 80-IA [1] of the Income Tax Act, 1961 says : “Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (4) [such business being hereinafter referred to as the eligible business], there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to hundred per cent of the profits and gains derived from such business for ten consecutive assessment years].”

On perusal of records, it is seen that the assessee had claimed exemption of Rs. 21,30,61,976/= u/s. 80IA of the Act includes the interest income of Rs. 57,01,229/= assessable under the head “Income from other sources”. On verification of bifurcation of interest income, it is clear that this interest income was not derived from the infrastructure development activity of the undertaking. Hence, in view of the above, it was not to be considered for the purpose of deduction under Section 80IA of the Act. Thus, deduction so allowed on the interest income is not allowable. Hence, same is required to be disallowed, as same is claimed against the provision of law. Hence, the assessee company concealed the income of Rs. 57,01,229/=.

In view of the above facts, I have reason to believe that the assessee has concealed the income to the extent of RS. 57,01,229/= which is an escaped assessment within the meaning of Section 147 of the Act. Thus, it is a fit case for issuing Notice u/s. 148 of the Act.”

The petitioner raised objections to the notice of reopening under a letter dated 6th July 2017. Its objections were rejected by the Assessing Officer by an Order dated 31st July 2017. Hence, this petition. Taking us through the materials on record, counsel for the petitioner raised the following contentions :

[i] there was no failure on the part of the assessee to disclose truly and fully all material facts necessary for assessment. Notice of reopening which has been issued beyond the period of four years from the end of relevant assessment year was therefore invalid.

[ii] During the scrutiny assessment, this very question had come up for consideration. The Assessing Officer had raised certain queries which were replied by the assessee and only thereupon, the order of assessment was passed. Any attempt on the part of the Assessing Officer to disallow the claim would amount to change of opinion.

[iii] The order of assessment to the extent it was adverse to the assessee was challenged before the Commissioner [Appeals]. The Commissioner of Income- tax [Appeals] allowed the assessee's claim of deduction under Section 80IA [4] of the Act. On the ground of merger also therefore, the Assessing Officer now cannot resort to reopening of the assessment on an issue which is relatable to the assessee's claim of deduction under Section 80IA [4] of the Act. On the other hand, learned counsel for the Revenue opposed the petition contending that the Assessing Officer has recorded proper reasons. The Commissioner [Appeals] though allowed the assessee's claim of deduction under Section 80IA [4] of the Act, did not make any observations with respect to the eligibility of interest income of the assessee for the purpose of such deduction. He submitted that the interest income cannot be said to be arising out of assessee's business of infrastructure development and maintenance.

The facts undisputed, as they are, are somewhat peculiar. We may therefore notice such facts.

For the Assessment Year 2010-2011, the assessee filed return of income on 30th September 2010 declaring total income of Rs. 1.37 Crores [rounded off], after claiming deduction of Rs. 20.77 Crores [rounded off] under Section 80IA [4] of the Income-tax Act, 1961 [“the Act” for short]. This return was revised on 30th March 2012 where the claim of deduction was revised to Rs. 21.30 Crores. The return of the assessee was taken in scrutiny by the Assessing Officer. During such scrutiny assessment, the Assessing Officer examined the assessee's claim of deduction under Section 80IA of the Act as well as the assessee's treatment to interest income. In his letter dated 5th February 2013, he had raised the following two queries in this respect :

“2. Upon verification of the computation sheet submitted, it is noticed that deduction u/s. 80IA amounting to Rs. 20,77,91,893/= is claimed by you. You are required to give working of the same after due bifurcation for the respective units which you have claimed deduction under section 80IA. You are further requested to justify your claim under Section80IA [4] and furnish the copies of various agreements in regard to the units in respect of whom deduction under Section 80IA is claimed.

3. Complete details and evidence in regard to interest income of Rs. 2,00,86,970/= may please be submitted mentioning name of the person to whom loans are given, date of transaction, copy of bank statement through which such loans were advanced, rate of interest at which interest is calculated and ledger of accounts thereto.”

The assessee filed a detailed reply to the said communication of the Assessing Officer on 16th February 2013. In such communication, in addition to justifying the claim of deduction under Section 80IA [4] of the Act, the assessee made the following disclosures with respect to the interest income of Rs. 2 Crores [rounded off] : Sr. No

Unit Name of Person to whom interest Given Interest Amount Rate of Interest

A. Interest on Unsecured Loans :

1 Gabhen

i Luthra Dyeing & Printing Mills 3868043 10.50%

2 Gabhen

i Gujarat Eco Textile Park Limited 7069664 6.00% 3 Gabhen

i Salem City Integrated Waste Management Co 51954 10.50% 4 Gabhen i Gujarat Enviro Protection & Infra [DNH] Pvt Ltd 6119464 10.50% 5 Gabhen

i Gujarat Eco Infra Developers Private Limited 2076813 10.50% 6 Gabhen

i Gujarat Enviro Protection & Infra [Haryana] 1977710 7.00% 7 Gabhen

i Gujarat Eco Resorts & Hotels Private Limited 82265 10.50% 8 Gabhen

i Bapu Laxman Thorat 101613 10.50% Total Interest Income on Unsecured Loan 21347526 B. Interest on FDR Gabhen

i Bank of India 1854152 Gabhen i Bank of Baroda 44565 Gabhen i SIDBI 269436 Gabhen i Surat Peoples Coop Bank Limited 708139 Gabhen i IDBI 1564340 Total Interest income on FDR 440632 C. Interest on IT Refund 40 Total Interest Income [A+B+C] 2578819 9 Less : Interest Income considered as Business income Interest income on Loan to DNH 1,492,501 Interest on FDR for Business 4,208,728 Total: 5701229 5701229 Total Interest Income for Gabheni Unit 2008697 0 As regards evidence of income, copy of party ledger from our books of account alongwith the Bank statement tracing out transaction with above mentioned person is enclosed, marked Annexure “C”. Statement showing FDR wise interest income and eligible for 80IA is also enclosed.”

The above quoted portion of the assessee's reply to the Assessing Officer would show that out of the total interest income of Rs. 2 Crores, the assessee had attributed a sum of Rs. 57.07 lakhs [rounded off] as business income. It is this claim of the assessee of the interest income of Rs. 57.07 lakhs, as being part of its business income which is a focal point of the reasons recorded by the Assessing Officer for reopening the assessment. He contends that the interest income cannot be treated as arising out of the assessee's business, and therefore, deduction under Section 80IA [4] of the Act would not be allowable. However, this is for later. For the present, we may record that the Assessing Officer passed an order of assessment on 19th March 2013 in which he rejected the assessee's claim of deduction under Section 80IA of the Act. He therefore had no occasion to separately comment on the assessee's claim of interest income being eligible for such deduction. Be that as it may, the assessee carried entire issue in appeal before the Commissioner. The Commissioner [Appeals] by his order dated 14th May 2015, allowed the assessee's claim of deduction under Section 80IA [4] of the Act in toto. Record is not clear whether the Revenue has carried the order of Commissioner [Appeals] before the Tribunal or not. However, this by itself may not be a determinative factor.

At that stage, after the Commissioner allowed the assessee's appeal, the Assessing Officer issued the impugned notice. Since the notice was issued beyond the period of four years from the end of relevant assessment year, the requirement of the assessee to make true and full disclosure, and the failure to make such disclosures leading to income chargeable to take escaping the assessment becomes crucial. In this context, the record would show that the crucial requirement arising out of the proviso to Section 147 of the Act is not satisfied. The Assessing Officer has, in fact, in the reasons recorded itself proceeded on the basis of “on verification of record.” Thus, clearly the Assessing Officer proceeded on the basis of disclosures forming part of the original assessment. Even otherwise, as noted, during the original assessment, the Assessing Officer had called upon the assessee to clarify on the interest income of Rs. 2 Crores which include the assessee's claim of Rs. 57.01 lacs as business income and therefore, eligible for deduction under Section 80IA [4] of the Act. There was no failure on the part of the assessee to disclose fully and truly all relevant facts.

There is yet another and equally strong reason for us to quash the impugned notice. Before we elaborate on this, we may record that we are not accepting the assessee's contention of possible change of opinion. The Assessing Officer had rejected entire claim of deduction under Section 80IA [4] of the Act. He, therefore, had no occasion to thereafter comment on a part of such claim relatable to the assessee's interest income. Had the Assessing Officer accepted in principle the assessee's claim of deduction under Section 80IA [4] of the Act and thereafter, after scrutiny not made any disallowance for interest income forming part of such larger claim, the principle of change of opinion would apply. In the present case, once the Assessing Officer rejected the claim of deduction under Section 80IA [4] of the Act in its entirety, there was thereafter no occasion and any need for him to dissect such claim for rejection on some additional ground.

The second reason which we referred to in the previous paragraph is of merger. The Assessing Officer having rejected the claim of deduction under Section 80IA [4] of the Act, the issue we may recall was carried in appeal by the assessee. The Commissioner [Appeals] allowed the claim in its entirety. It would thereafter be not open for the Assessing Officer to reopen this very claim for possible disallowance of part thereof. When the Commissioner [Appeals] was examining the assessee's grievance against the order of Assessing Officer disallowing the claim, it was open for the Revenue to point out to the Commissioner [Appeals] that even if in principle the claim is allowed, a part thereof would not stand the scrutiny of law. It was open for the Commissioner to examine such an issue, even suo motu. If we allow the claim in its entirety, the Assessing Officer thereafter cannot re-visit such a claim and seek to disallow part thereof. This would be contrary to the principle of merger statutorily provided and judicially recognized. Even after the Commissioner [Appeals] allow such a claim and the Revenue was of the opinion that he has not processed it and committed an error, it was always open for the Revenue to carry the matter in appeal. At any rate, reopening of the assessment would simply not be permissible. Re- assessment carries an entirely different connotation.

Once an assessment is reopened, the same gives wider jurisdiction to the Assessing Officer to examine the claims which had been formed part of the reasons recorded, but which were not originally concluded. In the result, impugned Notice is quashed. Petition is allowed and disposed of accordingly.

[Akil Kureshi, J.]

[B.N Karia, J.]