Reassessment notice under Section 147 invalid due to full disclosure of facts and impermissible change of opinion

Karnataka HC held that reassessment notice u/s 147 was invalid on multiple grounds. The assessee had fully disclosed primary facts regarding technical services and claimed Section 10A deduction. The AO's failure to draw proper legal inferences during original assessment cannot constitute non-disclosure. The reassessment was based on borrowed satisfaction from AY 2008-09 proceedings and constituted impermissible change of opinion. Additionally, the notice was barred by third proviso to Section 147 due to pending appeals. The court emphasized that once primary facts are disclosed, determining nexus between technical services and STP unit remains AO's responsibility through further investigation.

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Issues Involved:

1. Whether the petitioner assessee failed to "disclose fully and truly all material facts necessary for assessment"Rs.
2. Whether the re-assessment notice under Section 147 r/w Section 148 of the I.T. Act is merely a product of change in opinion and accordingly is impermissible in lawRs.
3. Whether the re-assessment notice under Section 147 r/w Section 148 amounts to borrowed satisfaction as it places reliance on findings recorded in the assessment proceedings recorded in the Assessment Year 2008-2009Rs.
4. Whether the bar under third Proviso to Section 147 of the I.T. Act is a legal impediment insofar as the present re-assessment notice is concernedRs.

Summary:

Issue 1: Failure to Disclose Fully and Truly All Material Facts Necessary for Assessment
The court examined whether the petitioner had failed to disclose all material facts necessary for assessment. The petitioner's regular assessment for the relevant years was concluded under Section 143(3) of the I.T. Act, and the petitioner's claim for deduction under Section 10A was allowed. However, the Commissioner of Income Tax initiated proceedings under Section 263, directing the Assessing Officer to re-examine the claim for deduction under Section 10A/80HHE. The Assessing Officer made further disallowances after examining the matter afresh. The petitioner contended that all primary facts were disclosed, and it was the duty of the Assessing Officer to draw inferences from those facts. The court agreed with the petitioner, citing the Supreme Court's ruling in Calcutta Discount Company Ltd. v. Income Tax Officer, which stated that the duty of the assessee is to disclose fully and truly all primary relevant facts, but not to disclose inferences.

Issue 2: Change in Opinion
The court examined whether the re-assessment notice was based on a mere change of opinion. The petitioner argued that the very aspect of profits from rendering technical services in the context of the export of computer software had been examined and decided upon in the original assessment. The court referred to the Supreme Court's ruling in Commissioner of Income Tax, Delhi v. Kelvinator of India Ltd., which reiterated that mere change of opinion cannot be a ground for reopening concluded assessments. The court found that the reassessment was indeed based on a change of opinion, as the Assessing Officer had already considered the expenditure incurred in providing technical services outside India in the original assessment.

Issue 3: Borrowed Satisfaction
The court examined whether the re-assessment notice amounted to borrowed satisfaction, relying on findings from the assessment proceedings for the Assessment Year 2008-2009. The court found that the reasons for reopening were based on the satisfaction of the Assessing Officer who passed the Assessment Order for the Assessment Year 2008-09, which amounted to borrowed satisfaction. The court held that this was impermissible in law, as the jurisdictional requirement under Section 147 requires the Assessing Officer to entertain reasons to believe that income chargeable to tax has escaped assessment.

Issue 4: Bar under Third Proviso to Section 147
The court examined whether the bar under the third proviso to Section 147 was a legal impediment to the re-assessment notice. The third proviso prohibits proceedings under Section 148 when an appeal, revision, or reference is pending. The court found that as on the date of the Section 148 notice, appeals were pending for the relevant assessment years. Therefore, the re-assessment notices were hit by the bar under the third proviso to Section 147.

Implication of Circular No. 1/2013
The court also considered Circular No. 1/2013, which clarified issues relating to the export of computer software. The circular stated that tax benefits under Sections 10A, 10AA, and 10B would not be denied merely on the ground that a separate and specific Master Service Agreement (MSA) does not exist for each Statement of Work (SOW). The court found that the circular further clarified the scope of allowable deductions under Section 10A and supported the petitioner's case.

Conclusion:
The court set aside the re-assessment notices and the orders rejecting the petitioner's objections for the Assessment Years 2005-2006, 2006-2007, and 2007-2008.

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