2014 (6) TMI 444 - HC - Income Tax

Invalidity of Income Tax Act Section 148 notice due to lack of new material; reassessment unsustainable.

The court found the notice issued under Section 148 of the Income Tax Act invalid, as it was based on a change of opinion without new tangible material. ... Re-opening of assessment under section 147 - reason to believe that income has escaped assessment - failure to disclose fully and truly all material facts - change of opinion doctrine - audit report under section 44AB cannot be treated as non-disclosure - inapplicability of section 40(a)(ia) to institutions exempt under section 11 - Explanation 1 to section 147 - production of books is not necessarily disclosureReason to believe that income has escaped assessment - failure to disclose fully and truly all material facts - Validity of the notice dated 28th February 2011 under section 148 in view of the requirement that re-opening after four years must be founded on a recorded reason to believe that income escaped assessment due to failure to disclose fully and truly all material facts - HELD THAT: - The Court held that where an assessment under section 143(3) has been completed and a notice under section 148 is issued after the four-year period, the proviso to section 147 permits re-opening only if the Assessing Officer has recorded reasons showing failure by the assessee to disclose fully and truly all material facts. The reasons recorded must disclose the Assessing Officer's mind, be clear, unambiguous and must identify which fact or material was not disclosed so as to establish the vital link between evidence and conclusion. In the present case the reasons merely recited a bald assertion of non-disclosure and repeatedly relied upon perusal of existing records without identifying any fact or material not disclosed earlier or any new tangible material. Consequently the impugned notice failed to satisfy the statutory threshold required for re-opening beyond four years and was bad in law. [Paras 5, 9, 10, 11]Impugned notice under section 148 quashed for failing to disclose specific facts or material whose non-disclosure gave rise to the reason to believe; mere bald assertion of non-disclosure is insufficient.Provision for doubtful accounts - change of opinion doctrine - Whether the Assessing Officer could re-open assessment on the ground that a provision for doubtful accounts treated as application of income should not have been so treated - HELD THAT: - The Court applied a prior Division Bench decision concerning identical factual matrix and figures to conclude that the provision for doubtful accounts was disclosed in the return and reflected in the income and expenditure account and Statement-2. Ex facie there was no suppression of material facts. The Assessing Officer relied on the same material already on record and did not point to any new tangible material. Re-opening on this ground amounted to a mere change of opinion which is impermissible; the Assessing Officer's reasons did not controvert the explanations already on record nor disclose any undisclosed material. [Paras 12, 13]Re-opening on the ground of the provision for doubtful accounts is unsustainable; it amounts to change of opinion and is covered by binding Division Bench precedent.Double deduction - change of opinion doctrine - Whether re-opening could be sustained on the allegation of a double deduction in respect of amounts transferred to defaulters' account - HELD THAT: - The Court noted that the computation of income (Statement-2) and Schedule K to the income and expenditure account, showing the reduction and the claimed application, were part of the original return filed and were specifically queried and explained during scrutiny. The Assessing Officer having considered the explanation and passed the assessment under section 143(3) cannot afterwards re-open the assessment beyond four years merely because he forms a different view; no new material was identified that would justify re-opening. The reasons themselves demonstrate reliance on the material already filed, evidencing a change of opinion. [Paras 13]Re-opening on the alleged double deduction is unsustainable as it rests on a change of opinion; the details were disclosed and considered during original assessment.Audit report under section 44AB cannot be treated as non-disclosure - Explanation 1 to section 147 - production of books is not necessarily disclosure - inapplicability of section 40(a)(ia) to institutions exempt under section 11 - Whether re-opening could be justified on the basis that an audit objection under Form 3CD (clause 17(f)) showing an inadmissible expense under section 40(a) was not specifically brought to the Assessing Officer's attention or that section 40(a)(ia) applied to the Petitioner - HELD THAT: - The Court rejected the contention that filing the tax audit report with the return could be treated as mere production of books within Explanation 1 to section 147; disclosures in Form 3CD filed with the return do not fall within that Explanation. However, the Court further held that section 40(a)(ia) applies only to computations under the head 'profits and gains of business or profession' and not to an entity whose income is exempt under section 11. The Petitioner had consistently maintained that it sought audit certification as a matter of abundant caution and its income was exempt as charitable activity; the Assessing Officer did not point to any new material showing non-disclosure. Therefore re-opening on this ground was misconceived. [Paras 14]Re-opening on the basis of the audit objection under Form 3CD and alleged applicability of section 40(a)(ia) is unsustainable; the audit report filed with the return cannot be treated as non-disclosure and section 40(a)(ia) does not apply to an institution exempt under section 11.Depreciation and capital expenditure - double deduction - binding precedent - Whether re-opening could be sustained on the ground that the Petitioner claimed both capital expenditure as application of income and depreciation on those capital assets - HELD THAT: - The Court held that this ground was covered by an earlier Division Bench decision in materially similar proceedings involving the Petitioner, which held that re-opening on this ground beyond four years was not permissible where there was no failure to disclose and the issue had been considered in earlier litigation. That precedent is binding on the Court. The Assessing Officer did not rely on any new material that would distinguish the present case from the binding authority. [Paras 15, 16]Re-opening on the ground of allowance of both capital expenditure and depreciation is unsustainable and barred by binding Division Bench precedent.Final Conclusion: The writ petition is allowed: the notice dated 28th February 2011 issued under section 148 for Assessment Year 2005-06 is quashed on the grounds that the Assessing Officer's reasons failed to identify any specific undisclosed fact or new material and the assorted grounds invoked either amounted to impermissible change of opinion or were legally untenable; petition granted in terms of the prayers with no order as to costs. Issues Involved:1. Validity of notice issued under Section 148 of the Income Tax Act, 1961.2. Alleged failure to disclose fully and truly all material facts necessary for assessment.3. Legality of reassessment based on 'change of opinion'.4. Specific grounds for reopening the assessment, including provisions for doubtful accounts, double deduction, inadmissible expenses under Section 40(a), and depreciation on fixed assets.Detailed Analysis:Issue 1: Validity of Notice Issued Under Section 148The petitioner challenged the notice dated 28th February 2011 issued under Section 148 of the Income Tax Act, 1961, for Assessment Year 2005-06. The court examined whether the notice was issued in compliance with the statutory requirements, particularly considering that more than four years had elapsed since the end of the relevant assessment year.Issue 2: Alleged Failure to Disclose Fully and Truly All Material FactsThe petitioner argued that they had disclosed all material facts necessary for the assessment, and the reasons for reopening the assessment did not specify which facts were not disclosed. The court noted that the reasons provided by the Assessing Officer did not detail any specific material facts that were allegedly not disclosed by the petitioner. The court emphasized that merely making a bald assertion without providing details is insufficient to justify reopening the assessment.Issue 3: Legality of Reassessment Based on 'Change of Opinion'The petitioner contended that the reassessment was based on a 'change of opinion,' which is impermissible in law. The court found that the Assessing Officer had relied on the same material that was already available during the original assessment, indicating that the reassessment was indeed based on a change of opinion rather than new tangible material.Issue 4: Specific Grounds for Reopening the Assessment1. Provision for Doubtful Accounts:- The court referred to a previous judgment involving the same petitioner, where it was held that the provision for doubtful accounts was disclosed in the income and expenditure account, and there was no suppression of material facts. The court found that the initiation of reassessment proceedings on this ground was unsustainable as it was based on a change of opinion.2. Double Deduction:- The court noted that the alleged double deduction for Rs.25,44,889/- was already disclosed in the original return and scrutinized by the Assessing Officer during the original assessment. The court concluded that the reassessment on this ground was also based on a change of opinion and was unsustainable.3. Inadmissible Expenses Under Section 40(a):- The court held that Section 40(a) applies to deductions claimed under 'profits and gains of business or profession,' which was not applicable to the petitioner as their income was exempt under Section 11 of the Act. The court found that the reliance on Section 40(a) for reopening the assessment was wholly misconceived.4. Depreciation on Fixed Assets:- The court referred to a previous judgment where it was held that claiming both capital expenditure as application of income and depreciation on capital assets was permissible. The court found that the reassessment on this ground was also unsustainable.Conclusion:The court concluded that the notice issued under Section 148 was invalid as it was based on a change of opinion without any new tangible material. The petitioner had disclosed all material facts necessary for the assessment, and the reassessment proceedings were unsustainable on all specific grounds cited. The petition was granted, and the rule was made absolute, quashing the impugned notice.