2017 (1) TMI 1854 - AT - Income Tax

Invalid Notice u/s 148: Tribunal Upholds CIT (A) Decision

Deputy Commissioner of Income Tax, Circle -12 (1), Bengaluru Versus M/s. M.N. Dastur & Co. P. Ltd

Deputy Commissioner of Income Tax, Circle -12 (1), Bengaluru Versus M/s. M.N. Dastur & Co. P. Ltd - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether issuance of notice under section 148 after the four-year period from the end of the relevant assessment year is valid where an assessment under section 143(3) had already been completed. 2. Whether the proviso to section 147 (requiring failure to disclose fully and truly all material facts) is attracted where the taxpayer had claimed the expenditure in the return and the Assessing Officer had specifically noticed and queried the claim during original assessment proceedings. 3. Whether reassessment proceedings initiated after expiry of the four-year period amount to a permissible action or constitute an impermissible change of opinion by the Assessing Officer. 4. Whether reassessment is vitiated for want of a separate and speaking order disposing of the assessee's objection to reopening before proceeding with reassessment. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of notice under section 148 after four years where section 143(3) assessment exists Legal framework: Proviso to section 147 bars issuance of notice under section 148 after four years from the end of the relevant assessment year if a section 143(3) assessment has been completed, unless income has escaped assessment by reason of failure by the assessee to disclose fully and truly all material facts. Precedent treatment: The Court followed established authorities holding that where the facts and claims were before the Assessing Officer at the time of the original assessment, the proviso operates to bar reopening after the four-year period; reexamination of the same material cannot be used to extend limitation. Interpretation and reasoning: The Court examined the assessment record and found the relevant expenditure claim was disclosed in the return and specifically queried by the Assessing Officer (item seeking 'Details of expenses in respect of Y2K compliance'). The Assessing Officer had the claim on file and had considered it in the original assessment which was completed under section 143(3). There was thus no failure by the assessee to disclose material facts that would trigger the proviso. Consequently, issuance of notice under section 148 on 08.09.2006 (served 12.09.2006) was beyond the four-year period and therefore barred by limitation. Ratio vs. Obiter: Ratio - where a section 143(3) assessment has been completed and the claim and material facts were before the Assessing Officer (including specific queries), the proviso to section 147 prevents issuance of a section 148 notice after the four-year period absent failure to disclose fully and truly. Conclusion: The notice under section 148 issued after the four-year period was invalid and barred by limitation. Issue 2 - Whether there was a 'failure to disclose fully and truly all material facts' Legal framework: The proviso to section 147 permits reopening beyond four years only if income escaped assessment by reason of the assessee's failure to disclose fully and truly all material facts necessary for assessment. Precedent treatment: The Court applied the principle from authority that mere possibility of deeper investigation by the Assessing Officer does not convert the taxpayer's prior disclosure into a failure to disclose; facts available to the AO at original assessment cannot later be treated as newly discovered to justify reopening. Interpretation and reasoning: The assessee had declared the Y2K expenditure in the return; the AO had expressly sought details on that expenditure during the original assessment process. Although the audit report in Form No. 3BA (Rule 6ABB) was not filed, the claim itself was made and examined. The Court held that omission by the Assessing Officer to pursue further investigation or file a speaking order disposing of objections does not transform the taxpayer's earlier disclosure into a 'failure to disclose' within the meaning of the proviso. The reopening was therefore not based on any new information attributable to the assessee's concealment. Ratio vs. Obiter: Ratio - where the claim and material facts are before the AO and considered in the original assessment, absence of a subsequent audit form or deeper AO inquiry does not constitute the assessee's failure to disclose; proviso cannot be invoked. Conclusion: No failure to disclose fully and truly was shown; proviso to section 147 does not apply, and reopening was impermissible. Issue 3 - Reopening as impermissible change of opinion Legal framework: Reassessment cannot be based on a mere change of opinion by the Assessing Officer on the same set of facts; the law requires either new material facts or clear failure to disclose to justify reopening. Precedent treatment: The Court relied on established jurisprudence that a fresh application of mind to the same facts, amounting to a change of opinion, does not confer jurisdiction to initiate proceedings under section 147 after the limitation period. Interpretation and reasoning: Since the AO had the claim and had recorded queries on it in the original assessment, the subsequent reassessment attempt was effectively a reappraisal of the same material facts. The Court held that such reappraisal, without new information or failure of disclosure, is merely a change of opinion and cannot justify reopening after the statutory period. Ratio vs. Obiter: Ratio - reassessment based on reconsideration of claims already in the file and considered in original assessment constitutes impermissible change of opinion and cannot sustain action under section 147 beyond the period prescribed by the proviso. Conclusion: The reassessment was a change of opinion and therefore impermissible; reopening cannot be sustained on that basis. Issue 4 - Requirement of a separate speaking order disposing of assessee's objection before proceeding with reassessment Legal framework: Judicial decisions require that objections filed by the assessee to reopening must be disposed of by a separate and speaking order before reassessment proceedings proceed. Precedent treatment: The Court endorsed prior rulings that failure to render such a speaking order vitiates the reassessment proceedings. Interpretation and reasoning: The CIT(A) had found, and the Tribunal agreed, that the Assessing Officer failed to dispose of the assessee's objection to reopening by a separate speaking order before continuing with reassessment. This procedural omission was treated as a material irregularity vitiating the reassessment process in addition to the limitation defect. Ratio vs. Obiter: Ratio - absence of a separate, reasoned order disposing of the objection to the reopening renders the reassessment proceedings vitiated and unsustainable. Conclusion: Reassessment proceedings were vitiated for failure to issue a separate speaking order on the assessee's objection; this procedural flaw supports setting aside the reassessment. Overall Conclusion The Court held that (i) the section 148 notice issued after the four-year period was barred by limitation because the proviso to section 147 was not attracted, (ii) there was no failure by the assessee to disclose fully and truly material facts as the claim was disclosed and queried during the original section 143(3) assessment, (iii) the reassessment amounted to an impermissible change of opinion, and (iv) the reassessment was additionally vitiated by failure to dispose of objections by a separate speaking order. Accordingly, the reassessment and the notice under section 148 were held invalid and the original appellate order allowing the assessee's objection was confirmed.