2023 (11) TMI 596 - HC - Income Tax

Court Quashes Reopening of 2016-17 Assessment, Citing Income Already Considered in Later Years, No Cost Order Issued.

The court allowed the petition, quashing the notice dated 31st March 2021 and the order dated 13th January 2022, which sought to reopen the assessment for ... Escapement of income of trust - assessment year selection - as alleged petitioner had sold an immovable property and income arising there from was not offered to tax under the head “Capital Gains” in the return of income - as per assessee transfer of lease hold rights was duly offered to tax by petitioner on its own in the year of transfer - HELD THAT:- In the affidavit in reply filed through one Mr. P. N. Nair, Joint Commissioner of Income Tax (OSD) affirmed on 30th May 2022 it is admitted that the assessment for Assessment Year 2018-19 was completed on 27th August 2021 while the notice under Section 148 of the Act was issued on 31st March 2021. Respondent as agreed to a query posed by the court that if the amount has already been considered in the subsequent assessment years and assessment order has been passed, the question of escapement of income for the same amount in the previous year will not arise. We are also informed that there is no change in the rate of tax. Reopening order set aside - Decided in favour of assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether a notice under Section 148 of the Income Tax Act (reopening of assessment for a previous year on ground of escaped income) is maintainable where the same quantum of income has been offered to tax and accepted by the revenue in a subsequent assessment year. 2. Whether issuance of a notice under Section 148 prior to completion of assessment for the subsequent year affects the validity of reopening when the subsequent-year assessment ultimately accepts the same amount as income/application of funds. 3. Whether absence of any change in tax rate between the years bears on the validity of reopening under Section 148 in the facts of the case. ISSUE-WISE DETAILED ANALYSIS Issue 1: Maintainability of Section 148 notice where same income has been offered and accepted in a subsequent year Legal framework: Section 148 permits reopening of assessment if income chargeable to tax has escaped assessment for any assessment year. The concept of 'escapement' is question of fact and law to be determined on whether taxable income of a particular year was not offered to tax when it ought to have been. Precedent Treatment: No specific precedents are cited or relied upon in the judgment. The Court proceeds on statutory principles and established approach that reopening must be justified by escapement in the year sought to be reopened. Interpretation and reasoning: The Court reasons that where funds/consideration attributable to a transaction are offered to tax in a subsequent year and that offer is examined and accepted by the revenue, the premise that income 'escaped assessment' in the earlier year is negated. The acceptance in a later assessment year demonstrates that the taxability of the relevant amount has been dealt with by the department; consequently, there is no subsisting escapement for the earlier year in respect of the same sum. The Court also notes the factual matrix where the petitioner had declared the sum as consideration for transfer of leasehold rights and contemporaneously treated the amount as application of income (construction) under Section 11 in the year when the new building was completed; that declaration was scrutinized and accepted in the subsequent assessment. Ratio vs. Obiter: Ratio - A Section 148 notice is not maintainable insofar as it alleges escapement of income for a prior assessment year when the identical amount has been offered to tax and accepted by the revenue in a subsequent assessment year; acceptance by the department negates the claim of escapement for the earlier year. Obiter - No extensive commentary on ancillary doctrines (e.g., change of opinion) or exceptions is provided. Conclusion: The reopening on the ground of alleged escapement in the earlier year is unsustainable where the same amount has been offered and accepted for a subsequent assessment year; the impugned notice must be quashed to that extent. Issue 2: Effect of timing - Section 148 notice issued before completion of subsequent-year assessment which later accepts the same amount Legal framework: Valid exercise under Section 148 depends on existence of escapement at the time of issuing the notice and on the state of facts thereafter insofar as those facts render the original basis for reopening unsustainable. Precedent Treatment: The judgment does not reference prior decisions addressing the temporal interplay between issuance of a reopening notice and subsequent acceptance of the same income in a later assessment; the Court decides on the facts and statutory logic. Interpretation and reasoning: The Court records admission by the revenue that the subsequent assessment (for the year in which the amount was offered) was completed after issuance of the Section 148 notice. The Court reasons that, given the subsequent completion of assessment and acceptance of the amount, the fundamental premise for issuance of the earlier notice (that income had escaped assessment in the prior year) no longer persists. The timing of the notice (being issued before the later assessment was finalized) does not preserve its validity once the relevant income has been examined and accepted by the revenue in the later assessment. Ratio vs. Obiter: Ratio - Subsequent events (completion of an assessment which accepts the same amount) can render a previously issued Section 148 notice invalid because the factual basis of escapement has been removed. Obiter - The Court does not lay down a general rule about notices issued pending related assessments but applies the principle to the facts at hand. Conclusion: The fact that the Section 148 notice predated completion of the subsequent-year assessment does not cure its invalidity once that subsequent assessment conclusively deals with and accepts the same amount; the earlier notice and consequential order cannot stand. Issue 3: Relevance of unchanged tax rate between years to the validity of reopening Legal framework: Reopening may be more likely to impact revenue if tax rates differ materially between years, but escape of assessment is primarily concerned with whether taxable income was omitted, not merely with revenue advantage. Precedent Treatment: No precedent is cited regarding the effect of unchanged tax rates; the Court notes the factual position without treating it as the decisive legal plank. Interpretation and reasoning: The Court records that there was no change in the rate of tax between the assessment years. This factual posture reinforces the conclusion that no real prejudice to the revenue arises from acceptance of the amount in the subsequent year and bolsters the view that alleged escapement in the earlier year is not established. Ratio vs. Obiter: Obiter - The observation that the tax rate was unchanged is used as supporting reasoning rather than as the primary legal basis for quashing the reopening. Conclusion: The unchanged tax rate between years supports the finding that the alleged escapement does not survive the subsequent-year acceptance, but it is supplemental to the controlling point that the same amount was offered and accepted by the revenue. Final Disposition The Court concludes that the Section 148 notice and the order rejecting objections to reopening are not sustainable on the facts because the identical amount alleged to have escaped assessment for the earlier year was offered to tax and accepted by the revenue in the subsequent assessment year; accordingly, the impugned notice and order are quashed. No order as to costs.