2023 (6) TMI 1294 - HC - Income Tax

Challenge to reassessment under s.147 allowed where AO lacked tangible material and valid reason to believe income escaped

HC allowed challenge to reassessment under s.147, holding AO lacked tangible material and valid 'reason to believe' that income escaped assessment. The ... Reopening of assessment u/s 147 - reason to believe - ‘tangible material’ for purposes of reopening an assessment - necessity of disposing of the objections to the re-assessment - claim of deduction on account of payment made to settle a class action suit - AO observed the same as in the nature of penalty and proposed to disallow u/s 37(1) - HELD THAT:- According to the law, which is applicable to the present case, as it existed before 1st April 2021, with a view to invoke the provisions of section 147 for reopening, AO had to satisfy the jurisdictional condition of ‘his reason to believe that income chargeable to tax had escaped assessment’. If the reopening of the assessment is beyond the period of four years from the end of the relevant assessment year, an additional jurisdictional condition has to be satisfied that in a case where an assessment u/s 143(3) of the Act had been completed, the assessee had failed to disclose fully and truly all material facts necessary for assessment during such assessment proceedings. In the instant case, AO has in fact alleged that the petitioner had failed to disclose fully and truly material facts necessary for the assessment for the assessment year 2013- 14. A bald statement made in the reasons recorded would not satisfy the jurisdictional condition as prescribed for purposes of invoking section 147 of the Act. Whether or not there was in fact a failure to disclose fully and truly can be seen from the material on record. In the present case, as stated in the preceding paragraphs, the claim of the petitioner with regard to deduction of on account of settlement of class action suit was not only specifically reflected in the relevant documents but the issue had also been specifically gone into by the AO. A specific query was raised by the Assessing Officer during the scrutiny assessment proceedings as is reflected from the order-sheet dated 16th November 2016 whereby the Assessing Officer had sought specific details of claims made under class action suit (Rs. 161.63 crore) and had sought justification for its allowability. The query so raised was responded to by the petitioner which was before the AO. Finally, an order of assessment came to be passed on 3rd January 2022 wherein the claim was not disallowed. It, therefore, is clear that the issue with regard to the claim of deduction on account of payment made to settle a class action suit was not so embedded in the documents as could not with due diligence have been noticed by the Assessing Officer rather in this case, the claim had been noticed, queries raised, response called, which came to be furnished, and therefore, must be deemed to have been considered. In such a case, it cannot by any stretch of imagination, be said that there was any failure to disclose fully and truly any of the material facts. In the present case, a bald assertion made in the reasons recorded that what was paid was in fact was a penalty would not make the deduction liable to be disallowed in terms of Explanation – 1 to section 37 of the Act. For purposes of reference, Explanation to Section 37 envisages that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. The argument that the petitioner had failed to provide to the Assessing Officer a copy of the plaint/suit filed against the petitioner before the Court in USA which it is alleged constitutes a failure on the part of the assessee to disclose fully and truly a material fact, in our opinion, does not at all impress or appeal to us in any manner. Nothing could have prevented the Assessing Officer from calling for a copy of the pleadings which were filed before the Court in USA if at all it was found to be necessary. Therefore, the argument advanced clearly deserves to be rejected. A reference to the agreement would show that what was agreed to be paid was on account of a pure settlement between the parties. It was also made clear in the agreement that the settlement was being arrived at for purposes of avoiding expense, risk and uncertainty and further that the agreement would not be construed as an admission by the defendants of any wrongdoing or that the plaintiff’s claim had any merit or that the defendants have any liability to the plaintiffs or class members on those claims. The agreement also reflects that the same would not be construed as an admission of wrongdoing or liability on the part of any party to the said agreement. Even the order passed by the Court recording approval to the said agreement did not even in the least refer the amount payable in any manner as a penalty amount. A.O. had no reason to believe that the payment made towards settlement of the class action suit was a payment towards a penalty imposed and on that account we hold that there was no reason for the A.O. to believe that income had escaped assessment. In the light of the above to hold that what was paid by the petitioner was a penalty, in fact, would be without any basis and aimed at reviewing an order passed earlier by the AO who had specifically gone into the allowability of the claim. We also have no hesitation in holding that a mere assertion in the absence of any material would not constitute a ‘tangible material’ for purposes of reopening an assessment. Decided in favour of assessee. Issues Involved:1. Validity of the notice issued under section 148 of the Income Tax Act, 1961.2. Whether the reopening of the assessment is valid under section 147 of the Act.3. Whether the payment made by the petitioner was a penalty or a deductible expense under section 37 of the Act.Summary:Issue 1: Validity of the notice issued under section 148 of the Income Tax Act, 1961The petitioner challenged the notice dated 31st March 2021 issued under section 148 of the Income Tax Act, 1961, for reopening the assessment for the assessment year 2013-14. The petitioner also contested the order dated 3rd January 2022, which disposed of the objections to the reassessment.Issue 2: Whether the reopening of the assessment is valid under section 147 of the ActThe court emphasized that for reopening an assessment beyond four years from the end of the relevant assessment year, the Assessing Officer must show that there was a failure on the part of the petitioner to disclose fully and truly all material facts necessary for assessment during the original assessment proceedings. The court found that the petitioner had disclosed fully and truly all material facts, including the claim of deduction of Rs. 161.63 crores on account of the settlement of a class action suit, which was specifically reflected in the relevant documents and scrutinized by the Assessing Officer during the original assessment proceedings. Therefore, the court held that the reopening of the assessment was not justified and was merely a change of opinion based on the report received from the Investigation Wing of the department.Issue 3: Whether the payment made by the petitioner was a penalty or a deductible expense under section 37 of the ActThe court examined the nature of the payment made by the petitioner to settle the class action suit in the USA. The court referred to the settlement agreement and the order passed by the US Court, which did not indicate any violation of law or wrongdoing by the petitioner. The court concluded that the payment made was not a penalty but a settlement amount to avoid expense, risk, and uncertainty of continuing the proceedings. Therefore, the payment was a deductible expense under section 37(1) of the Act and not disallowable under Explanation 1 to section 37, which prohibits deductions for expenditures incurred for any purpose that is an offense or prohibited by law.Conclusion:The court allowed the petition, setting aside the impugned notice dated 31st March 2021 under section 148 and the impugned order dated 3rd January 2022. The court held that there was no basis for the Assessing Officer to believe that income had escaped assessment and that the reopening of the assessment was unjustified and based on a mere change of opinion without any tangible material.