Cyprus tax resident wins challenge against assessment reopening under section 147 for NCD investments

The Bombay HC ruled in favor of a Cyprus tax resident regarding reopening of assessment under section 147 for unexplained NCD investments. During original assessment proceedings, the AO had specifically queried the petitioner about NCD holdings and interest income through section 142(1) notice. The petitioner provided complete details showing unchanged opening and closing NCD stock. The HC held that since the NCD issue was already considered during original assessment when specific queries were raised and answered, the reopening was merely based on AO's change of opinion, which doesn't constitute valid reason to believe income escaped assessment. The assessment reopening was therefore invalid.

---

---

Issues Involved:

1. Legality of notice u/s 148 of the Income Tax Act, 1961.
2. Validity of the order rejecting objections to reopening of assessment.
3. Legitimacy of the draft order proposing adjustment of Rs. 16,71,24,000/-.

Summary:

1. Legality of notice u/s 148 of the Income Tax Act, 1961:
The Petitioner challenged the notice dated 30th March 2021 issued u/s 148 of the Act, proposing to reopen the assessment for AY 2015-2016. The Court noted that the assessment was completed on 30th October 2017 u/s 143(3) of the Act, accepting the return of income as 'Nil'. The reopening was based on the belief that the Petitioner had not disclosed interest income from NCDs despite following the Mercantile system of accounting. However, the Court found that the reopening was merely on the basis of a change of opinion, which does not constitute a valid reason to believe that income had escaped assessment. The Court referenced the ruling in Aroni Commercials Limited v. Deputy Commissioner of Income Tax, emphasizing that once a query is raised and answered during assessment proceedings, it is considered that the issue was examined by the AO.

2. Validity of the order rejecting objections to reopening of assessment:
The Petitioner's objections, including the argument that the reasons recorded showed a change of opinion and that full disclosure had been made, were rejected by the AO without addressing the merits of the objections. The Court observed that the AO did not consider the Petitioner's claim under the India-Cyprus DTAA, which allows interest income to be taxed only when received by the payee. The Petitioner had not received any interest income during AY 2015-2016 and had paid tax on the interest income in AY 2017-2018 when it was received. The Court found that the AO's rejection of the objections was not justified.

3. Legitimacy of the draft order proposing adjustment of Rs. 16,71,24,000/-:
The draft order dated 31st March 2022 proposing an adjustment of Rs. 16,71,24,000/- was also challenged. The Court noted that the AO had raised specific queries regarding the NCDs during the original assessment proceedings, and the Petitioner had provided the necessary details. The reopening of the assessment was found to be based on a change of opinion, and the AO had not considered the provisions of the DTAA. The Court concluded that the draft order was unsustainable.

Conclusion:
The Court quashed and set aside the notice dated 30th March 2021 u/s 148, the order dated 27th March 2022 rejecting the objections, and the draft order dated 31st March 2022. The Petition was disposed of with no order as to costs.

---