2018 (4) TMI 1376 - SC - Income Tax

Reopening under s.147 by notice u/s.148 invalid where Assessing Officer already considered s.10A deduction, reassessment was change of opinion

SC held that reopening under s.147 by issuing notice u/s.148 was invalid because the Assessing Officer had already considered how and to what extent ... Re-opening of assessment - reason to believe - change of opinion - reassessment under Section 147 - notice under Section 148 - deduction under Section 10A - non-speaking assessment orderRe-opening of assessment - reason to believe - change of opinion - reassessment under Section 147 - notice under Section 148 - deduction under Section 10A - non-speaking assessment order - Validity of reopening the completed assessment for AY 2001-02 by issuing notice under Section 148 read with Section 147 on the ground that deduction under Section 10A was allowed in excess - HELD THAT: - Section 147 empowers reassessment where the Assessing Officer has a 'reason to believe' that income has escaped assessment, but that phrase must be given a schematic meaning to prevent arbitrary re-openings based on mere change of opinion. Reassessment cannot be used as a device to review an original assessment founded on the same material facts. Where the issue forming the basis of proposed reassessment was expressly or by necessary implication considered in the original assessment, and the material now relied upon was already within the knowledge of the assessing officer, a subsequent initiation of proceedings amounts to a change of opinion and does not constitute a valid 'reason to believe'. The Court noted that the original assessment proceedings included a show cause notice dated 09.03.2004 addressing the absence of separate books and the allocation of common expenses between software development and human resource services, and the original order dealt with the manner of allocation and allowed deduction under Section 10A. Consequently, the notice dated 10.02.2005 and the reassessment order dated 17.08.2005 - which proceeded on the view that Section 10A deduction had been allowed in excess - were based on no new material but on a reappraisal of facts already considered, and therefore amounted to impermissible change of opinion rather than a legitimate reassessment. The court also observed that where an original order is non-speaking, it may be difficult to attribute a previously formed opinion; however, in this case the original proceedings had engaged with the relevant question. [Paras 10, 11, 12, 13, 14]Reopening the assessment for AY 2001-02 was not justified; the notice under Section 148 and the reassessment order were quashed as they were based on mere change of opinion regarding the Section 10A deduction.Final Conclusion: The appeal is dismissed; the High Court's order setting aside the Section 148 notice dated 10.02.2005 and the reassessment order dated 17.08.2005 is upheld, as the reassessment was founded on a mere change of opinion concerning a matter already considered in the original assessment for AY 2001-02. Issues:Re-opening of completed assessment under Section 147 of the Income Tax Act, 1961.Analysis:The case involved an appeal against a High Court judgment quashing a notice issued under Section 148 of the IT Act and a subsequent re-assessment order. The Respondent, a private limited company engaged in software development and human resource services, had filed its return for AY 2001-02, claiming deduction under Section 10A of the IT Act. The Assessing Officer issued a show cause notice questioning the allocation of common expenses between software and human resource development. After rectification, the income was assessed as 'Nil'. Subsequently, a notice was issued for re-opening the assessment, alleging excess deduction under Section 10A. The High Court set aside the notice and re-assessment order.The main contention was whether the re-opening of assessment was justified. The Appellant argued that excess deduction justified re-assessment under Section 147, while the Respondent contended it was a mere change of opinion. The Court referred to Sections 147 and 148 of the IT Act, emphasizing the requirement of the assessing officer having a 'reason to believe' income escaped assessment. It noted that re-assessment cannot be based on a mere change of opinion, as it would grant review powers to the assessing officer, not intended by the legislature.Citing precedents, the Court highlighted that re-opening requires tangible material showing escapement of income, not a change of opinion. It emphasized that the assessing officer cannot review but re-assess based on specific conditions. The Court held that if the original assessment did not address the issue forming the basis of re-assessment, it could proceed. However, in this case, the issue of excess deduction under Section 10A was already considered during the original assessment, rendering the re-assessment a mere change of opinion.Consequently, the Court upheld the High Court's decision, dismissing the appeal. The judgment emphasized that re-assessment should be based on new material, not a change of opinion on existing facts.