Court Quashes Income Tax Reassessment Notice, Citing Change of Opinion

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Case Name:

Saurabh Natvar Lal Soparkar Vs Assistant Commissioner of Income Tax Circle 4(2) (High Court of Gujarat)

R/Special Civil Application No. 8143 of 2019

Date: 2nd February 2021

Key Takeaways

• The court emphasized that reopening assessments based solely on a change of opinion is not permissible.
• The decision reinforced the principle that all material facts must be fully disclosed by the assessee for reassessment to be valid.
• The ruling highlighted the importance of tangible material in justifying the reopening of assessments under Section 147 (of Income Tax Act, 1961).

Issue

Did the Income Tax Department have valid grounds to reopen the assessment for the assessment year 2012-13 based on the notice issued under Section 148 (of Income Tax Act, 1961)?

Facts

• The petitioner filed an original return of income on September 19, 2012, declaring a total income of ₹4,81,02,130.
• The case was selected for scrutiny, and an assessment order was passed on February 26, 2015, confirming the declared income.
• In 2018, the department issued a notice under Section 148 (of Income Tax Act, 1961) to reopen the assessment, claiming that income had escaped assessment due to the non-disallowance of certain expenses related to exempt income under Section 14A (of Income Tax Act, 1961).
• The petitioner argued that the issue had already been examined during the original assessment, and no disallowance was warranted.

Arguments

Petitioner’s Arguments:

• The petitioner contended that the reopening of the assessment was merely a change of opinion, which is not a valid ground for reassessment.
• They argued that all material facts had been disclosed during the original assessment, and the assessing officer had already formed an opinion on the matter.
• The petitioner cited the Supreme Court’s ruling in Kelvinator of India Ltd. (2010) 320 ITR 561 (SC), asserting that reopening assessments based on a change of opinion is impermissible.

Respondent’s Arguments:

• The Income Tax Department argued that the petitioner failed to disclose fully and truly all material facts necessary for the assessment, particularly regarding the disallowance of expenses under Section 14A (of Income Tax Act, 1961).
• They claimed that the reopening was justified based on tangible material that indicated income had escaped assessment.

Key Legal Precedents

• Kelvinator of India Ltd. (2010) 320 ITR 561 (SC): This case established that reopening assessments based on a mere change of opinion is not permissible.
• Indo-Aden Salt Manufacturing and Trading Co. § Ltd. vs. Commissioner of Income Tax 159 ITR 624 (SC): This case reiterated that even if details are provided, if true facts are not disclosed, reopening is valid.
• Shree Krishna § Ltd. vs. Income-Tax Officer 221 ITR 538 (SC): This case emphasized the duty of the assessee to disclose material facts fully and truly.

Judgement

The court ruled in favor of the petitioner, quashing the notice issued under Section 148 (of Income Tax Act, 1961). The court reasoned that the reassessment was based on a mere change of opinion and that the petitioner had fully disclosed all material facts during the original assessment. The court highlighted that the reopening of the assessment was not sustainable in law, especially since it was beyond the four-year limit for scrutiny assessments under Section 143(3) (of Income Tax Act, 1961).

FAQs

Q1: What does this ruling mean for the petitioner?

A: The ruling means that the petitioner is no longer subject to the reassessment notice, and their original assessment stands.

Q2: Can the Income Tax Department reopen assessments in the future?

A: Yes, but they must have valid grounds based on tangible material, not just a change of opinion.

Q3: What is the significance of the four-year limit?

A: The four-year limit is a safeguard to prevent the Income Tax Department from reopening assessments without valid reasons after a reasonable time has passed.

Q4: How does this case impact future assessments?

A: This case reinforces the principle that the Income Tax Department must have substantial grounds to reopen assessments and cannot do so based on previously considered issues.

1. By this writ application under Article 226 of the Constitution of India, the writ applicant has prayed for the following reliefs;

“(A) quash and set aside the impugned notice at Annexure-A to this Petition.

(B) pending the admission, hearing and final disposal of this petition, to stay implementation and operation of the notice at Annexure-A to this petition and stay further proceedings for assessment for A.Y. 2012-13.

(C) any other and further relief deemed just and proper be granted in the interest of justice.”

2. The writ applicant seeks to challenge the legality and validity of the notice issued by the respondent under Section 148 (of Income Tax Act, 1961) (for short “the Act, 1961”) proposing to reopen the assessment for the year 2012-13 under Section 147 (of Income Tax Act, 1961). It appears that the writ

applicant filed his original return of income on 19th September, 2012, declaring total income at Rs.4,81,02,130/-. The case was selected for scrutiny and an order under Section 143(3) (of Income Tax Act, 1961) was passed on 26th February, 2015, determining the total income at Rs.4,81,02,130/-. Thereafter, an order under Section 154 (of Income Tax Act, 1961) was passed dated 25th May, 2018, determining the total income of Rs.4,81,18,350/-. In the original return of income, the TDS deducted by some of the parties was not included in the income and was also not claimed as TDS. In such circumstances, the amount of Rs.16,270/- was added to the total income of the assessee and

the TDS of the same was also given under the order passed under Section 154 (of Income Tax Act, 1961) and, ultimately, the income was determined at Rs.4,81,18,350/-.

3. The reasons for reopening furnished to the writ applicant are as under;

“The assessee has filed original return of income on 19.09.2012 declaring total income of Rs.4,81,02,130/-. The case was selected for scrutiny and order u/s.143(3) (of Income Tax Act, 1961) was passed on 26.02.2015 determining total

income of Rs.4,81,02,130/-. Thereafter, order u/s.154 (of Income Tax Act, 1961) was passed on 2.5.05.2010 determining total income of Rs.4,81,18,350/-. In the said order the TDS deducted by concerned parties was inadvertently not

included in the income and only net of TDS income was offered in the return of income. Therefore, the amount of Rs.16270/- was added to the total income of the assessee. Accordingly, the revised total income has been determined at Rs.,4,81,18,350/-.

2. Subsequently, it was revealed that the assessee has claimed exempt income of Rs.27,43,265/- on account of dividend. As per profit & loss account, the assessee has claimed administrative and other expenses. However, no disallowance u/s. 14A (of Income Tax Act, 1961) r.w.r. 8D(2)(iii) (of Income Tax Rules, 1962) was made. The investment as per balance sheet as on 31.03.2011 and 31.03.2012 is Rs.12,92,89,822/- and

Rs.19,90,90,993/- respectively. The average investment worked out to Rs.164190407/- (1⁄2 of Rs.12,92,89,822/- and Rs.19,90,90,993/-). Hence, 0.5% of average investment is worked out to Rs.8,20,952/- (Rs.1641900407 / 0.5%). The assessee has not disallowed Rs.8,20,952/- u/s. 14A (of Income Tax Act, 1961) r.w.r. 8D(2)(iii) (of Income Tax Rules, 1962) which resulted into under assessment of Rs.8,20,952/.

3. Therefore, I have reason to believe that income chargeable to tax has escape assessment within the meaning of section 147 (of Income Tax Act, 1961) and the assessee failed to disclose fully and truly all material facts necessary for its assessment for the A.Y. 2012-13. Therefore, I am satisfied that it is a fit case for reopening the assessment under section 147 (of Income Tax Act, 1961).

4. In this case, assessment order u/s.143(3) (of Income Tax Act, 1961) has been passed and hence the case is covered by explanation 2(c) to section 147 (of Income Tax Act, 1961).

5. In this case, four years have elapsed 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 the Pr. Commissioner of

Income Tax-4, Ahmedabad as per the provisions of

section 151(1) (of Income Tax Act, 1961).”

4. The writ applicant lodged his objections to the above

noted reasons as under;

“The issue of investments and exempt income was

examined at the time of original assessment and as

opinion was formed that no disallowance u/s.14A (of Income Tax Act, 1961) was

called for. It is therefore submitted that an opinion once

formed is not open to change and therefore the notice

u/s. 148 (of Income Tax Act, 1961) is bad and must be dropped . It is submitted that

vide letter dated 2.07.2014 the then assessing officer

had called various details including the details about the

income claimed exempt and the expenses incurred for

earning such exempt income. Vide letter dated

19.08.2014, I had replied to the same giving details of

the exempt income earned and also stated that no

expenditure was incurred to earn such income. Further,

pursuant to personal hearing a specific submission was

made regarding non-applicability of section 14A (of Income Tax Act, 1961) r.w.r. 8D (of Income Tax Rules, 1962)

vide letter dated 11.09.2014. It is submitted that the

issue was scrutinized in detail at the time of original

assessment and therefore by issue of notice u/s. 148 (of Income Tax Act, 1961) an

opinion that was originally formed is sought to be

change which is not permissible in law. It is therefore

submitted that the notice is bad and be dropped. The

law on this point is explained by the Supreme Court in

Kelvinator of India Ltd. (2010) 320 ITR 561(SC). I annex

herewith the copy of letter dated 25.07.2014, 19.8.2014

and 11.09.214 as Annexure-A.

4.2 For the impugned Assessment Year 2012-13 the

assessment order u/s.143(3) (of Income Tax Act, 1961) was passed on 26.02.2015.

As per the proviso to section 147 (of Income Tax Act, 1961), no action can be taken

under this section after the expiry of four years from the

end of the assessment year, unless the 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 of a notice issued u/s.142(3) (of Income Tax Act, 1961) or 148 or to

disclose fully and truly all material facts necessary for

his assessment, for that assessment year. It is

submitted that in the reasons recorded, there is no

allegation of the assessee not having disclosed fully

and truly all material facts necessary for his

assessment. It is submitted that the reasons are recorded

on the basis of all facts already available with the

assessing officer originally disclosed during the

assessment proceedings. It is therefore submitted that

the notice is time barred as no action can be taken

under this section after the expiry of four years from the

end of the assessment year. The law on this point is

explained by the Supreme Court in Lakhmani Mewal Das

(1976) 103 ITR 437 (SC).

4.3 It is further submitted that the notice u/s. 148 (of Income Tax Act, 1961) is

issued due to revenue audit objection. It is submitted

that view expressed by revenue audit / internal audit

party on a point of law could not be regarded as

“information” for purposes of initiating proceedings

under section 147 (of Income Tax Act, 1961). An opinion ought to be formed by

the assessing officer alone. The law on this point is

explained by the Supreme Court in Indian & Eastern

Newspaper Society (1979) 119 ITR 996 (SC).

5) It is therefore submitted that the reasons recorded

and the subsequent notice issued are bad and illegal and

therefore may be dropped at once.

6) In view of the decision of the Apex Court in the case

of GKN DRIVE SHAFT (INDIA) LTD. vs. ITO (259 ITR 19). It

is requested that you pass a speaking order dealing with

the objection raised against the reasons recorded by

you.”

5. It appears that the writ applicant was asked to clarify why

no disallowance with respect to the expenses were made

under Section 14(A) (of Income Tax Act, 1961) read with Rule 8D (of Income Tax Rules, 1962).

In this regard, the writ applicant clarified vide letter dated

11.09.2014. The same reads as under;

“I state that I have received tax free income from Shares/

mutual fund and Bond. You have asked me to clarify why

no disallowance with respect to expenses has been

made under section 14A (of Income Tax Act, 1961) read with

Rule 8D (of Income Tax Rules, 1962). In this regard I would like to

state that no disallowance is required because of

following reasons.

On facts Section 14A (of Income Tax Act, 1961) and rule 8D (of Income Tax Rules, 1962) are not applicable in

any case as I have incurred almost no expenditure to

earn the exempt income. Further, large part of the

income is received through ECS hence no expenditure is

incurred to earn such income at all.

On Law: Pleader refer rule 8D (of Income Tax Rules, 1962). Relevant para is produced

hereunder for reference.

“(1) Where the Assessing Officer, having regard to the

accounts of the assessee of a previous year is not

satisfied with-

(a) the correctness of the claim of expenditure made

by the assessee, or

(b) the claim made by the assessee that no

expenditure has been incurred.

In relation to income which does not form part of the

total income under the Act for such previous year, he

shall determine the amount of expenditure in relation to

such income in accordance with the provisions of sub-

rule (2).

The clause 1(b) states that the sub-rule 2 (of Income Tax Rules, 1962) 8D (of Income Tax Rules, 1962) is

only applicable if the A.O. Is not satisfied with claim that

no expenditure is incurred.

In my case from the perusal of the profit and loss it is

clear that I have not made payment of interest and

further no expenditure for earning tax free income is

incurred. Hence calculation under rule 8D (of Income Tax Rules, 1962) is not

applicable. Please note that all the expenses incurred by

me are for professional activity only. No part of any

expenses pertain to my investment at all. Whatever

little expenditure that I might have incurred like Dmat

expenditure, the same have been directly taken to

capital account and not charged to Income and

Expenditure Account. The details thereof are attached

hereto.

Please refer direct decision of Mumbai ITAT Bench “J” in

the case of Justice Sam P. Barucha vs. Addl. Conm. Of

Income Tax 53 SOT 192. The head note is as under;

“ Section 14A (of Income Tax Act, 1961) read with Rule

8D of Income-tax Rules, 1942- Expenditure incurred in

relation to income not includible in total income-

Assessment year 2008-09- Whether section 14A (of Income Tax Act, 1961) has

within it implicit notion of apportionment in cases where

expenditure is incurred for composite indivisible

activities in which taxable and non-taxable income is

received. Held, yes- Whether , however, when it is

possible to determine actual expenditure in relation to

exempt income or when no expenditure has been

incurred in relation to exempt income, then principle of

apportionment embedded in section 14A (of Income Tax Act, 1961) has no

application- Held yes- whether where assessee had not

incurred any expenditure on earning dividend and other

exempt income and expenses- claimed by assessee

were in nature of expenditure for earning professional

income section 14A (of Income Tax Act, 1961) had no application- Held yes [in

favour of assessee]”

The said decision is recently followed in the case of a

Senior Advocate of Mumbai viz. Shri Iqbal M. Chagla

(ITA No.877/Mum./2013) where the facts are identical to

the facts of my case. A copy of the said order is attached

hereto.

From the above it is clear that the no disallowance is

required under Section 14A (of Income Tax Act, 1961).”

6. Ultimately, the objections raised by the writ applicant

came to be disposed of vide order dated 25th April, 2019, which

reads as under;

“The objection filed by assessee has duly been

considered. However, the same is not found acceptable

on following grounds;

a) Regarding the contention of the assessee that he

has disclosed all details and facts with documentary

evidence is not acceptable. In this connection, it is

stated that in the original assessment order, the

Assessing Officer has not formed any opinion regarding

disallowance u/s. 14A (of Income Tax Act, 1961) r.w.r 8D. Therefore, when no

opinion has been formed by the Assessing Officer, the

question of change of opinion does not arise.

b) Regarding disclosure of all material facts necessary

for the assessment, it is stated that in view of the facts ,

this case has been re-opened only after following the

due procedure 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 Indo-Aden Salt

Manufacturing and Trading Co.(P) Ltd. vs. Commissioner

of Income Tax 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 proving, the reopening of the

assessment was valid. In the case of Olwin Tiles (India)

Pvt. Ltd. vs. DCIT in ITA No.17303, 18388 & 18389 OF

2015, 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.

Income-Tax Offier 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 Debur Bank Coal Co. Pvt. Ltd. 21 ITR 597

(SC), the Supreme Court had stated that on the failure

to disclose material facts, re-assessment could be

resorted to. Attention is also drawn to the case of Phool

Chand Bajrang Lal vs. Income Tax Officer 203 ITR 456

(SC), wherein the Hon'ble Supreme Court had laid down

the proposition that discovery of new and important

facts constitute information on the basis of which re-

assessment proceedings could be initiated. In the case

of ITO vs. Parshottamdas Bangar 224 ITR 362 (SC), the

Hon'ble Supreme Court had held that letter from DDIT

(Inv) constituted for re-opening of assessment.

c) The next objection is that the reassessment is

invalid as the same is made merely on the basis of audit

objection. The above objection is not acceptable. The

assessment has not been reopened merely on the basis

of audit objection. But after receipt of audit objection,

the Assessing Officer has applied his mind and found

that the information given by the audit party is correct.

The Revenue Audit is constituted by the constitution of

India to find out any mistake of law or of facts. Therefore,

the mistake pointed out by the Audit is to be considered

as information. However, such information should not

be followed blindly by the Assessing Officer. In the

instant case, the Assessing officer has taken cognizance

of the information given by the Revenue Audit Party and

thereafter to facts pointed out by the Audit has been

verified and after applying the mind found that the

mistake pointed out was correct. Therefore, after

following due procedure, the assessment was reopened.

Therefore, the reopening of the assessment is valid as

per law.

5. In view of the above discussion and the judicial

pronouncements in Revenue's favour, the objections

raised by 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 income tax law has been

followed by the Assessing Officer. The case has been

reopened well within the time limit prescribed as per the

provisions of the Income Tax Act, 1961 and also on

account of the fact that there was reason to believe that

the income chargeable to tax has escaped assessment.

6. In view of the above facts, it becomes evident that

this case has been reopened 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 Indo-Aden Salt

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

Commissioner of Income Tax 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. DCIT in ITA

No.17303, 18388 & 18389 of 2015, 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) are valid. In the

case of Shree Krishna (P) Ltd. vs. Income Tax 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 re-

assessment valid. In the case of ITO vs. Selected Debut

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

Court had stated that on the failure to disclose material

facts, re-assessment could be resorted to. Attention is

also drawn to the case of Phool Chand Bajrang Lal vs.

Income tax Offier 203 ITR 456 (SC) wherein the Hon'ble

Supreme Court had laid down the proposition that

discovery of the new and important facts constitute

information on the basis of which re-assessment

proceedings could be initiated. In the case of ITO vs.

Parshottamas Bangar 224 ITR 362 (SC), the Hon'ble

Supreme Court had held that letter from DDIT (Inv.)

constituted good information for reopening of

assessment.

7. In view of the above discussion and the judicial

pronouncements in Revenue's favour, the objections

raised by 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 income tax law has

been followed by the Assessing Officer. The case has

been reopened well within the time limit prescribed as

per the provisions of the Income Tax Act,1961 and also

on account of the fact that there was reason to believe

that the income chargeable to tax has escaped

assessment. It is not a case that there is no reason for

reopening of the assessment.”

7. Being dissatisfied with the above, the writ applicant is

here before this Court with the present writ application.

8. Mr. B.S. Soparkar, the learned counsel appearing for the

writ applicant vehemently submitted that the case on hand is

nothing but a mere change of opinion. Mere change of opinion

would not constitute a sufficient ground to reopen the

assessment proceedings and that too beyond the period of

four years in a case of scrutiny assessment under Section

143(3) of the Act. Mr. Soparkar submitted that during the

course of the original assessment proceedings, the Assessing

Officer, vide his letter dated 25th July, 2014, had called for

various details including the details about the income claimed

exempt and the expenses incurred for earning such exempt

income. He pointed out that vide letter dated 19th August,

2014, the writ applicant had replied to the same, furnishing

details of the exempt income earned and had also clarified

that no expenditure was incurred to earn such income. He

further submits that in the course of the personal hearing, a

specific submission was made regarding the non-availability of

Section 14A (of Income Tax Act, 1961) read with Rule 8D (of Income Tax Rules, 1962). He would argue that the issue

regarding the non-applicability of Section 14A (of Income Tax Act, 1961) read with Rule

8D was scrutinized in detail at the time of the original

assessment. In such circumstances, according to Mr.

Soparkar, it could be said that the Assessing Officer

consciously took a particular decision and now such decision is

sought to be changed based on the same set of facts.

9. The second argument of Mr. Soparkar is that there is no

failure on the part of the writ applicant to disclose truly and

fully all the material facts. He would argue that merely

because the Assessing Officer has a reason to believe that

income had escaped would not be sufficient to reopen the

assessment beyond the period of four years. The escapement

of income must also be occasioned by a failure on the part of

the writ applicant to disclose fully and truly all the material

facts. The third argument of Mr. Soparkar is that the

reopening is on the basis of audit objection. Mr. Soparkar

would submit that the same would not be a sufficient ground

to reopen the assessment proceedings. Mr. Soparkar placed

reliance on two decisions (i) Adani Exports vs. Deputy

Commissioner of Income Tax (Assessment), (1999) 240

ITR 224 and (ii) Indian & Eastern Newspaper Society vs.

CIT, (1979) 119 ITR 996 (SC). By placing reliance on these

two decisions, it is submitted that the opinion expressed by

the internal audit party is not “information” for the purpose of

Section 147 (of Income Tax Act, 1961).

10. In the last, Mr. Soparkar submitted that even otherwise

no income has escaped assessment. In such circumstances,

Section 14A (of Income Tax Act, 1961) will have no applicability.

11. On the other hand, this writ application has been

vehemently opposed by Mr. Manish Bhatt, the learned senior

counsel appearing for the Revenue. Mr. Bhatt would submit

that in the return filed by the writ applicant, the assessee

claimed exempt income of Rs.2,743,265/- on account of the

dividend and also claimed administrative and other expenses

in the profit and loss account. However, the assessee failed to

make dissallowance of expenditure related to the exempt

income under Section 14A (of Income Tax Act, 1961) read with Rule 8D(2) (of Income Tax Rules, 1962)\(iii) . He would

argue that the Assessing Officer has reason to believe that the

income chargeable to tax has escaped assessment within the

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

disclose fully and truly all the material facts necessary for its

assessment for the A.Y.2012-13.

12. Mr. Bhatt would argue that cogent reasons have been

assigned while overruling all the objections raised by the writ

applicant to the reasons assigned for the purpose of reopening

of the assessment.

13. Mr. Bhatt would argue that in the case on hand, the

escapement of income was noticed relying upon some

tangible material.

14. Mr. Bhatt invited the attention of this Court to few

relevant averments made in the affidavit-in-reply filed on

behalf of the Revenue. We quote the relevant averments relied

upon by Mr. Bhatt;

“3.2 With reference to para 2.3, it is submitted that the

contention of the petitioner is not correct. Regarding

disclosure of all material facts necessary for the

assessment, it is submitted that mere furnishing of

details about income does not mean that all material

facts have been fully and truly disclosed. In the case of

Indo-Aden Salt Manufacturing and Trading Co. (P) Ltd. Vs.

Commissioner of Income-tax 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. DCIT in ITA

No.17303, 18388 & 18389 of 2015, Hon’ble Gujarat High

Court vide its order dated Sth January 2016 has held that

once the reasons are recorded properly, the proceedings

initiated u/s.147 (of Income Tax Act, 1961) are valid. In the case of Shree

Krishna (P) Ltd. Vs. Income-tax 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 re-assessment

valid. In the case of ITO vs. Selected Dabur Bank Coal

Co. Pvt. Ltd. 21 ITR 59 (SC), the Supreme Court had

stated that on the failure to disclose material facts, re-

assessment could be resorted to. Attention ts also drawn

to the case of Phool Chand 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 re-assessment proceedings could be

initiated. In the case of ITO Vs. Parshottamas Bangar, 224

ITR 362 (SC), the Hon'ble Supreme Court had held that

letter from DDIT (Inv) constituted good information for re-

opening of assessment.

In this case escapement was noticed relying upon the

tangible material. The notice u/s.148 (of Income Tax Act, 1961) was issued as the

income chargeable to tax has escaped assessment on

account of failure on part of the assessee to disclose fully

and truly all material facts.

With reference to para 2.4, it is submitted that the

assessment was reopened as the assessee has claimed

exempt income of dividend and also incurred

administrative and other expenses. However the

assessee failed to disallow the expenses related to

exempt income under rule 8D (of Income Tax Rules, 1962)(2(iii). Thus, though the

assessee was aware about the disallowance of

administrative and other expenses under rule 8D(iii) (of Income Tax Rules, 1962), the

same was not disallowed in the original return filed which

has resulted in to escapement of income. Therefore the

A.O. Issued notice u/s 148 (of Income Tax Act, 1961). The disallowance of

expenditure was worked out at 0.5% of average

investment as per Balance Sheet as on 31.03.2011 and

31.03.2012 at Rs.8,20,952/-. Therefore,

reopening of the assessment is valid as per law.

3.4 With reference to para 3.1, it is submitted that the

assessment was reopened on the basis of tangible

materials leading to the conclusion that income

chargeable to tax has escaped assessment u/s.147 (of Income Tax Act, 1961) of the

I.T. Act. The assessee failed to disallow the expenses

related to exempt income in the return of income filed for

the A.Y. 2012-13. Therefore, the reopening of the

assessment was valid as per law.

3.5 With reference to para 3.2, it is submitted that the

above contention of the assessee is not acceptable. It is

submitted that the assessment was reopened only after

following the due procedure described under the Income

tax Act and was based on tangible materials leading to

the conclusion that income chargeable to tax has

escaped assessment Further, it is submitted that mere

furnishing of details about income does not means that

all material facts have been fully and truly disclosed.

Further, during the course of original assessment

proceedings the Assessing Officer has not formed any

opinion regarding issue of disallowance of expenses

related to exempt income u/s.14A (of Income Tax Act, 1961). Therefore, the

question of change of opinion does not arise.

3.6 With reference to para 3.3 and 3.4, it is submitted

that contention of the assessee is not correct. It is

submitted that the assessment was reopened on the

basis of tangible materials leading to the conclusion that

there was escapement of income from the 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 Indo-Aden

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

Commissioner of Income-tax 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. DCIT in [TA

No.17303, 18388 & 18389 of 2015, Hon’ble Gujarat High

Court vide its o1der dated Sth January 2016 has held that

once the reasons are recorded properly, the proceedings

initiated u s.147 of the Act are valid. In the case of Shree

Krishna (P) Ltd. Vs. Income-tax 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, re-

assessment could be resorted to. Attention is also drawn

to the case of Phool Chand 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 re-assessment proceedings could be

initiated. In the case of ITO Vs. Parshottamas Bangar, 224

ITR 362 (SC), the Hon'ble Supreme Court had held that

letter from DDIT (Inv) constituted

good information for re-opening of assessment.

With reference to para 3.5, it is submitted that the

contention of the petitioner that the assessment was

reopened merely on the basis of Audit Objection is not

correct. It is submitted that the assessment has not been

reopened merely on the basis of audit objection. But

after receipt of information by way of audit objection, the

Assessing Officer has applied her mind and found that

the information given by the audit party is correct. The

Revenue Audit is constituted by the constitution of India

to find out any mistake of law or of facts. Therefore, the

mistake pointed out by the Audit is to be considered as

information. However, such information should not be

followed blindly by the Assessing Officer. In the instant

case the Assessing Officer has taken cognizance of the

information given by the Revenue Audit Party and

thereafter to facts pointed out by the Audit has been

verified and after applying her mind found that the

mistake pointed out was correct. Therefore, after

following due procedure the assessment was reopened.

Therefore the reopening of the assessment is valid as per

law.

With reference to to para 3.6, it is submitted that the

contention of the petitioner is that he has not incurred

any expenses for earning tax free income is not correct

The assessee has claimed exempt income of dividend of

Rs.2743265/- and also claimed administrative and other

expenses in Profit & Loss account. However, the assessee

failed to make disallowance of expenditure related to the

exempt income u/s.14A (of Income Tax Act, 1961) r.w.r. 8D(2)(iii) (of Income Tax Rules, 1962). The disallowance

was worked out under Rule 8D(2)(iii) (of Income Tax Rules, 1962) at Rs.8,20,952 -

being 0.5% of average investment as per Balance Sheet

as on 31.03.2011 and 31.03.2012. Therefore, the

provision of Rule-8D(2)(iii) (of Income Tax Rules, 1962) is applicable to the petitioner

case. Hence, the disallowance under rule-8D(2)(ili) (of Income Tax Rules, 1962) has

been correctly worked out.

3.9 With reference to para 4, it is submitted that the

contention of the petitioner is not correct. It is submitted

that the petition is filed at a pre-mature stage inasmuch

as only a notice u/s.148 (of Income Tax Act, 1961) read with section 147 (of Income Tax Act, 1961) of the

Income Tax Act (‘the Act’ for short) has been issued. In

the event, the petitioner is aggrieved by the

reassessment, alternative efficacious remedy is available

by way of an Appeal to the CIT(A) and thereafter to the

Tribunal as per the provisions of the Act. On this ground

alone, I humbly submit that the petition is devoid of any

merits and be summarily rejected.”

15. In such circumstances, referred to above, Mr. Bhatt prays

that there being no merit in this writ application, the same be

rejected.

ANALYSIS

16. Having heard the learned counsel appearing for the

parties and having gone through the materials on record, the

only question that falls for our consideration is whether the

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

sustainable in law.

17. We are of the view that the writ applicant should succeed

on the first two contentions i.e. (i) change of opinion and (ii) no

failure to truly and fully disclose all the material facts. We take

notice of the fact that a notice under Section 142(1) (of Income Tax Act, 1961),

1961 dated 25th July, 2014 was issued to the writ applicant,

calling for certain information. One of the informations called

for, as contained in Clause (5), reads thus;

“(5) Please provide details of working and documentary

evidence in respect of income claimed exempt. You are

also requested to provide what expenses you have

incurred for earning such exempt income.”

18. The following information was furnished by the writ

applicant vide letter dated 19th August, 2014.

“During the year I have received following tax free

income.

a. PPF interest Rs.336423/-

b. Dividend from Mutual Fund and Indian Companies

Rs.2743465/-

c. Interest on IFFCL Tax Free Bond Rs.458950/-

d. Long Term Capital Gain Rs.2507836/-

Copy of accounts and documentary evidence attached

herewith. I have not expended any amount to earn above

mentioned income.”

19. Thus, from the aforesaid information, it is evident that a

specific query was raised by the Assessing Officer with respect

to Section 14A (of Income Tax Act, 1961) and the same was appropriately replied by the

writ applicant. The same was accepted at the relevant point of

time. Once again the very same issue is sought to be raised

for the purpose of reopening which is otherwise not

permissible in law on mere change of opinion. It cannot be

said that there was any failure on the part of the assessee to

fully and truly disclose all the material facts. This writ

application, in our opinion, could be said to be squarely

covered by the decision of the Supreme Court rendered in the

case of CIT vs. Kelvinator India, reported in (2010) 2 SCC

723, wherein the Supreme Court observed as under;

“5. On going through the changes, quoted above, made

to Section 147 (of Income Tax Act, 1961), we find that, prior to the Direct

Tax Laws (Amendment) Act, 1987, reopening could be

done under the above two conditions and fulfillment of

the said conditions alone conferred jurisdiction on the

assessing officer to make a back assessment, but in

Section 147 (of Income Tax Act, 1961) (with effect from 1-4- 1989), they

are given a go-by and only one condition has remained

viz. that where the assessing officer has reason to

believe that income has escaped assessment, confers

jurisdiction to reopen the assessment. Therefore, post-1-

4- 1989, power to reopen is much wider. However, one

needs to give a schematic interpretation to the words

“reason to believe” failing which, we are afraid, Section

147 would give arbitrary powers to the assessing officer

to reopen assessments on the basis of “mere change of

opinion”, which cannot be per se reason to reopen.

6. We must also keep in mind the conceptual

difference between power to review and power to

reassess. The assessing officer has no power to review;

he has the power to reassess. But reassessment has to

be based on fulfillment of certain precondition and if the

concept of “change of opinion” is removed, as contended

on behalf of the Department, then, in the garb of

reopening the assessment, review would take place.

7. One must treat the concept of “change of opinion”

as an in-built test to check abuse of power by the

assessing officer. Hence, after 1-4-1989, the assessing

officer has power to reopen, provided there is “tangible

material” to come to the conclusion that there is

escapement of income from assessment. Reasons must

have a live link with the formation of the belief. Our view

gets support from the changes made to Section 147 (of Income Tax Act, 1961) of

the Act, as quoted hereinabove. Under the Direct Tax

Laws (Amendment) Act, 1987, Parliament not only

deleted the words “reason to believe” but also inserted

the word “opinion” in Section 147 (of Income Tax Act, 1961). However,

on receipt of representations from the companies against

omission of the words “reason to believe”, Parliament

reintroduced the said expression and deleted the word

“opinion” on the ground that it would vest arbitrary

powers in the assessing officer.

8. We quote here in below the relevant portion of

Circular No.549 dated 31-10-1989, which reads as

follows:

“7.2. Amendment made by the Amending Act, 1989, to

reintroduce the expression ‘reason to believe’ in Section

147.—A number of representations were received against

the omission of the words ‘reason to believe’ from

Section 147 (of Income Tax Act, 1961) and their substitution by the ‘opinion’ of the

Assessing Officer. It was pointed out that the meaning of

the expression, ‘reason to believe’ had been explained in

a number of court rulings in the past and was well settled

and its omission from Section 147 (of Income Tax Act, 1961) would give arbitrary

powers to the Assessing Officer to reopen past

assessments on mere change of opinion. To allay these

fears, the Amending Act, 1989, has again amended

Section 147 (of Income Tax Act, 1961) to reintroduce the expression ‘has reason to

believe’ in the place of the words ‘for reasons to be

recorded by him in writing, is of the opinion’. Other

provisions of the new Section 147 (of Income Tax Act, 1961), however, remain the

same.” (emphasis supplied)

9. For the aforestated reasons, we see no merit in

these civil appeals filed by the Department, hence,

dismissed with no order as to costs.”(Emphasis given by

us)”

20. In the overall view of the matter, we are convinced that

the impugned notice under Section 148 (of Income Tax Act, 1961) issued to the

assessee for the purpose of reopening of the assessment

beyond the period of four years and that too in a case of

scrutiny assessment under Section 143(3) (of Income Tax Act, 1961) is not

sustainable in law having regard to the facts of this case.

21. In the result, this writ application succeeds and is hereby

allowed. The impugned notice is hereby quashed.

(J. B. PARDIWALA, J)

(ILESH J. VORA,J)