Section 147 assessment reopening invalid after four years without fresh material facts despite full disclosure

Sandesh Procon LLP Versus The Assistant Commissioner of Income Tax, Circle 3 (3), Ahmedabad

Sandesh Procon LLP Versus The Assistant Commissioner of Income Tax, Circle 3 (3), Ahmedabad - [2021] 432 ITR 414 (Guj) The primary legal issues considered in this judgment revolve around the validity and legality of reopening an income tax assessment under Sections 147 and 148 of the Income Tax Act, 1961. Specifically, the Court examined whether the Assessing Officer had a valid 'reason to believe' that income chargeable to tax had escaped assessment for the assessment year 2012-13, based on alleged non-disclosure or incomplete disclosure of material facts by the assessee concerning disallowance under Section 14A of the Act. The core questions include:

1. Whether the reopening of assessment under Section 148 was justified on the ground that income had escaped assessment due to failure to make appropriate disallowance under Section 14A read with Rule 8D of the Income Tax Rules.

2. Whether the Assessing Officer's 'reason to believe' was based on tangible material or was merely a change of opinion on the same material considered during the original assessment under Section 143(3).

3. Whether the disallowance under Section 14A can exceed the amount of exempt income earned, particularly when the assessee had already made disallowance equal to the exempt income during the original assessment.

4. Whether the assessee had truly and fully disclosed all material facts necessary for assessment, or whether there was an omission justifying reassessment.

5. The applicability and interpretation of judicial precedents regarding the scope of reopening assessments and the extent of disallowance under Section 14A.

Issue-wise Detailed Analysis

1. Validity of reopening assessment under Section 148/147 of the Income Tax Act

The legal framework governing reopening of assessments is contained in Sections 147 and 148 of the Income Tax Act, which empower the Assessing Officer to reassess income if there is a 'reason to believe' that income chargeable to tax has escaped assessment. The Court referred to the statutory requirement that this 'reason to believe' must be based on tangible material and not merely a change of opinion. The principle is well established in judicial precedents that reassessment cannot be initiated on the basis of the same material which was available during the original assessment, unless new material has surfaced or there was failure to disclose material facts fully and truly.

The Court examined the reasons recorded by the Assessing Officer for reopening, which centered on the contention that the assessee had failed to make an appropriate disallowance under Section 14A read with Rule 8D, resulting in escapement of income of approximately Rs. 4.78 crores. The Assessing Officer noted that during the original assessment, disallowance was restricted to the exempt income of Rs. 34,06,859/-, but the correct disallowance computed was Rs. 5,13,06,096/-, and hence there was escapement of income.

However, the Court observed that the material relied upon by the Assessing Officer at the time of reopening was the same as that available during the original assessment. The assessee had furnished audited accounts, balance sheets, profit and loss accounts, and had been subject to scrutiny under Section 143(3). The issue of disallowance under Section 14A was considered and decided at that stage. The Court held that no new tangible material had surfaced to justify reopening, and the Assessing Officer's belief amounted to a mere change of opinion, which is not a valid ground for reassessment.

The Court relied on authoritative Supreme Court decisions which emphasize that reassessment proceedings cannot be initiated on the basis of the same material which was available during the original assessment, and that the 'reason to believe' must be based on objective, firm, and concrete facts. The Court also noted that the Assessing Officer's own records, including notices and order sheet entries, showed that the issue was examined during the original assessment.

2. Extent of disallowance under Section 14A of the Income Tax Act

Section 14A read with Rule 8D provides for disallowance of expenditure incurred in relation to income which does not form part of total income, such as exempt income. The Assessing Officer argued that the disallowance should be computed based on the formula prescribed under Rule 8D, resulting in a figure exceeding the exempt income earned.

The assessee contended, supported by judicial precedents including a Supreme Court ruling, that the disallowance under Section 14A cannot exceed the amount of exempt income. The assessee had disclosed the exempt income and claimed interest expenses, and the Assessing Officer had limited disallowance to the exempt income during the original assessment.

The Court agreed with the assessee's contention, holding that the disallowance under Section 14A cannot exceed the exempt income. The Court relied on the apex court's decision which held that disallowance exceeding exempt income is not permissible. Therefore, even on merits, the reopening was not justified because no additional income had escaped assessment beyond what was already considered.

3. Disclosure of material facts by the assessee

The Revenue argued that the assessee failed to disclose material facts fully and truly, thereby justifying reassessment. The Assessing Officer contended that although the assessee filed annual reports and audited accounts, the material facts relevant for disallowance under Section 14A were embedded in such a manner that it required due diligence by the Assessing Officer to extract them, and hence the failure to disclose was deliberate or negligent.

The Court rejected this argument, noting that the assessee had filed all relevant documents and had responded to show cause notices during the original assessment. The Court observed that mere furnishing of details is sufficient if it enables the Assessing Officer to make a proper assessment. The Court emphasized that the burden is on the Revenue to show that the assessee suppressed material facts, which was not demonstrated.

4. Treatment of competing arguments and application of law to facts

The Court carefully analyzed the submissions of both parties. The Revenue's reliance on the formula under Rule 8D and the alleged failure to make adequate disallowance was countered by the assessee's argument that disallowance cannot exceed exempt income and that all material facts were disclosed. The Court found that the Revenue's case was based on the same material already considered during original assessment and that the reopening was a mere change of opinion.

The Court also considered the judicial precedents cited by both sides. It relied on the principle that reopening after four years requires strict compliance with conditions precedent, including existence of tangible new material and failure of full disclosure, neither of which were satisfied here.

5. Conclusions

The Court concluded that the reopening of assessment was not justified as there was no tangible material to form a valid 'reason to believe' that income had escaped assessment. The reopening was based on the same material considered during original assessment and amounted to a prohibited change of opinion. The assessee had disclosed all material facts fully and truly, and the disallowance under Section 14A cannot exceed the exempt income, which was already disallowed in the original assessment.

Significant Holdings

'It is settled by the Apex Court in the case of CIT Delhi Vs. Kelvinator of India Limited that the existence of tangible material is essential to safeguard against the arbitrarily exercised of power.'

'In case of the same material being present before the assessing authority during both the assessment proceedings and the issuance of notice for reassessment proceedings, it cannot be said by the assessing authority that 'reason to believe' for initiating reassessment is an error discovered in the earlier view taken by it during original assessment proceedings.'

'The necessary sequitur is that a mere change of opinion while perusing the same material cannot be a 'reason to believe' that a case of escaped assessment exists requiring assessment proceedings to be reopened.'

'The amount of disallowance under Section 14A of the Act was restricted to the amount of exempt income only and not at a higher figure.'

'Mere furnishing of details about income does not mean that all material facts have been fully and truly disclosed.'

'The twin conditions as provided under Section 147 of the Act, which are condition precedent for reopening of the assessment made after 4 years are not satisfied.'

Accordingly, the Court quashed and set aside the notice issued under Section 148 of the Income Tax Act for reassessment, holding that the reopening was invalid and the reassessment proceedings could not be sustained.