Court quashes assessment notice, favors petitioner in landmark tax case

The court set aside the notice for reopening assessment and the order rejecting objections in favor of the petitioner, a subsidiary of a Japanese company, for assessment year 2009-10. The court emphasized the necessity of tangible material to show income escaped assessment within four years and found the reasons provided by the Assessing Officer (AO) lacked substance, amounting to a mere change of opinion. The court highlighted deficiencies in the AO's reasoning for reopening, including unsustainable grounds such as disallowance under Section 14A, excess depreciation, TDS credit discrepancy, and gratuity fund deduction, ultimately ruling in favor of the petitioner.

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Issues:
Challenging notice for reopening assessment in AY 2009-10 and subsequent order rejecting objections.

Analysis:
The petitioner, a subsidiary of a Japanese company, challenged a notice dated 31st March, 2014, seeking to reopen the assessment for AY 2009-10, along with the order rejecting objections filed against the reopening. The petitioner declared NIL income due to brought-forward losses in the return for AY 2009-10. The AO passed a draft assessment order on 22nd March, 2013, assessing the total income at Rs. 1665,09,05,642/-. The reasons for reopening included disallowance under Section 14A, excess depreciation, TDS credit discrepancy, and gratuity fund deduction. The petitioner's objections were rejected by the AO in an order dated 11th January, 2016.

The court emphasized that reopening assessments within four years requires tangible material showing income escaped assessment, not a mere change of opinion. The first reason for reopening, disallowance under Section 14A, was found unsustainable as no exempt income was earned by the petitioner. The AO's order lacked discussion on objections, indicating a non-speaking order. The court highlighted the necessity for the AO to demonstrate tangible material forming the reason to believe income escaped assessment.

The second reason for reopening, excess depreciation claimed by the petitioner, was also found lacking a basis for forming a reason to believe income escaped assessment. The court noted that the AO's failure to indicate the basis for forming such belief indicated a mere change of opinion. Similarly, the third reason regarding excess TDS credit and the fourth reason concerning gratuity fund deduction were deemed invalid due to lack of substantial material supporting the belief of income escapement.

Overall, the court concluded that the reasons provided by the AO were based on suspicion rather than tangible material, amounting to a mere change of opinion. Consequently, the notice for reopening assessment and the order rejecting objections were set aside, with the writ petition allowed in favor of the petitioner.

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