2023 (8) TMI 826 - HC - Income Tax

Reopening of income tax assessment on foreign exchange gain invalid where AO acted on audit change of opinion; notice quashed

Validity of reopening an income tax assessment was examined on whether the assessing officer had independent reasons to believe and whether there was ... Validity of reopening of assessment u/s 147 - reasons to believe - reliance on dictates on audit department - non independent application of mind by AO - proposed re-opening is after expiry of four years from the end of relevant Assessment Year - gain on foreign exchange fluctuation - HELD THAT:- If one considers the reasons recorded, there is not even a whisper that there was failure on the part of Petitioner to disclose fully and truly all material facts. In our view, on this ground alone, the notice issued u/s 148 has to be quashed. Moreover, in the computation of income that Petitioner filed along with Profit & Loss Account, Petitioner has disclosed the business income and has deducted from the business income gain on Foreign Exchange Fluctuation. As during the course of assessment proceedings, Petitioner was called upon by a notice issued u/s 142(1) to furnish various details, one of which was copy of computation of income and annual accounts with annexures, if any, and copy of the E-return (Acknowledgment) filed for the year under consideration. Petitioner replied vide its letter and provided the computation of income with annual accounts with annexures. Subsequently, Petitioner received another notice issued u/s 142(1) when the scrutiny proceedings commenced, calling upon Petitioner to furnish in writing the 21 separate heads of information called for in the notice - Petitioner replied vide its letter again in which Petitioner has recorded about the hearing held on 16th November 2015 and various details that were submitted. Annexure 2 is a copy of an opinion from an Advocate in which Petitioner has been advised to treat gain on foreign exchange fluctuation as capital gain and, therefore the gain would not be taxable under the Income Tax Act. Thereafter, the Assessment Order came to be passed in which there is no discussion about gain on foreign exchange fluctuation. It is settled law that once a query is raised during assessment proceedings and the assessee has replied to it, it follows that the query raised was subject matter of consideration while computing the Assessment and it is not necessary that an Assessment Order should contain reference and/or discussion to disclose satisfaction in respect of query raised. Therefore, on this ground also, the notice impugned in the Petition is required to be quashed and set aside. Also notice to re-open came to be issued in view of the audit objection raised. A copy of the audit objection reveals that because for the subsequent year, i.e., AY 2014- 15, the Department had not accepted assessee’s contention and added back the foreign exchange gain after treating it as revenue receipt, to take a consistent stand on the same issue, the Assessment has to be reopened. From this communication also, it is quiet clear that there has not been non-disclosure of any material fact but only change of opinion. Thus reasons for re-opening Assessment was not that of the AO alone issuing notice but he has acted merely on the dictates of another person for issuing the notice, i.e., audit department. Decided in favour of assessee. Issues involved:The issues involved in this case are the re-opening of assessment for the Assessment Year 2013-14 under Section 148 of the Income Tax Act, 1961, based on the belief that income has escaped assessment, and the application of the proviso to Section 147(1) regarding the requirement of failure to fully and truly disclose all material facts necessary for assessment.Re-opening of Assessment:The Petitioner, engaged in the business of manufacturing flavors and fragrances, filed its return of income for Assessment Year 2013-14, which was selected for scrutiny under CASS due to international transactions. The Transfer Pricing Officer (TPO) made an upward adjustment of Rs. 77,22,054, resulting in the assessment of the Petitioner's income at Rs. 7,87,14,030. Subsequently, a notice was issued under Section 148 of the Act, alleging that income chargeable to tax for the year had escaped assessment. The reasons for re-opening included the treatment of foreign exchange gain as a capital receipt instead of a revenue receipt, leading to an alleged escape of income exceeding Rs. 1,00,000.Proviso to Section 147(1) - Failure to Disclose:The re-opening of assessment after the expiry of four years triggers the proviso to Section 147(1), which mandates that assessment cannot be reopened unless there has been a failure on the part of the assessee to fully and truly disclose all material facts necessary for assessment. However, the reasons recorded for re-opening did not indicate any failure on the part of the Petitioner to disclose material facts, thereby rendering the notice issued under Section 148 liable to be quashed.Discussion on Foreign Exchange Fluctuation:During the assessment proceedings, the Petitioner had disclosed the gain on Foreign Exchange Fluctuation in its computation of income. The Petitioner had responded to queries regarding this gain, providing explanations and opinions treating it as a capital receipt. The absence of specific discussion on this gain in the Assessment Order did not imply non-consideration, as once a query is raised and replied to, it is deemed to have been considered during assessment. Therefore, the notice for re-opening based on this ground was also deemed invalid.Basis of Re-opening:The affidavit-in-reply acknowledged that the re-opening was prompted by audit objections and a desire for consistency with the treatment of foreign exchange gain in a subsequent year. This indicated a change of opinion rather than non-disclosure of material facts. The court emphasized the requirement for the Assessing Officer to independently determine the reasons for re-opening, without solely relying on external influences like audit objections.Conclusion:The High Court concluded that the notice for re-opening the assessment, along with subsequent orders and notices, lacked a valid basis as there was no failure on the part of the Petitioner to disclose material facts. The court quashed the notice dated 27th March 2021, rejecting the Petitioner's objections and all related orders, thereby disposing of the petition with no order as to costs.