Reassessment notice beyond four years quashed as audit objections constitute mere change of opinion under Section 147

The Gujarat HC quashed a reassessment notice issued u/s 147 beyond four years. The revenue sought to reopen assessment based on audit objections regarding TP adjustment mark-up reduction from 12% to 9.17% (considering foreign exchange risk) and reduced exchange gain on share sale. The court held that audit objections constituted mere change of opinion without any failure by the assessee to make full and true disclosure of material facts. Since the assessee had made complete disclosure in original assessment and revised return, reassessment beyond four years was impermissible under proviso to Section 147. The petition was allowed in favor of the assessee.

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Issues Involved:
1. Legality of the notice issued under Section 148 of the Income Tax Act, 1961.
2. Alleged underassessment of income due to foreign exchange risk not considered in the Transfer Pricing Officer's (TPO) determination.
3. Alleged underassessment of income due to reduced exchange gain on sale of shares of MAP.

Issue-wise Detailed Analysis:

1. Legality of the Notice Issued under Section 148 of the Income Tax Act, 1961:

The petitioner challenged the notice dated 27th March 2021, issued under Section 148 of the Income Tax Act, 1961, for the Assessment Year 2013-14. The petitioner argued that the notice was issued beyond the four-year period from the end of the relevant assessment year, invoking the proviso to Section 147 of the Act. The petitioner contended that there was no failure on their part to disclose fully and truly all material facts relevant for the assessment. The court found that the petitioner had made full and true disclosure of all material facts during the original assessment. Therefore, the respondent could not assume jurisdiction for reopening the assessment based on mere audit objections.

2. Alleged Underassessment of Income Due to Foreign Exchange Risk Not Considered in the TPO's Determination:

The TPO had initially determined a mark-up of 12% for the Arm's Length Price (ALP) in relation to the marketing support services provided by Mastek (UK) Limited (MUK) to the petitioner. The audit objection suggested adding a 1% foreign exchange risk, reducing the mark-up to 9.17%, resulting in an alleged underassessment of Rs. 1,60,75,800/-. The petitioner argued that this was merely a change of opinion, as the TPO had already considered all aspects, including the foreign exchange risk, in the original assessment. The court agreed with the petitioner, stating that the audit objection amounted to a mere change of opinion, and there was no failure on the part of the petitioner to disclose all material facts. Hence, the notice for reopening the assessment on this ground was not tenable.

3. Alleged Underassessment of Income Due to Reduced Exchange Gain on Sale of Shares of MAP:

The petitioner had reduced the exchange gain on the sale of MAP shares of Rs. 1,88,72,839/- from the net profit under the head "Profit and Gains of Business or Profession." The audit objection claimed that this resulted in an underassessment of income of Rs. 92,37,424/-. The petitioner contended that the exchange gain was offered to tax in the Assessment Year 2016-17, consistent with similar transactions in the Assessment Year 2011-12. The court found that the petitioner had made full disclosure in the computation of income and the revised return of income during the original assessment. The respondent failed to consider the detailed explanation and documentary evidence provided by the petitioner. Therefore, the court held that there was no failure on the part of the petitioner to disclose all material facts, and the notice for reopening the assessment on this ground was also not tenable.

Conclusion:

In view of the foregoing reasons, the court quashed and set aside the impugned notice dated 27th March 2021, issued under Section 148 of the Income Tax Act, 1961. The rule was made absolute to the aforesaid extent with no order as to costs.

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