2025 (5) TMI 713 - HC - Income Tax

Taxpayer's Undisclosed Income Triggers Valid Reassessment Beyond Standard Four-Year Limitation Under Section 148 Income Tax Act

Bhaval Synthetics (India) Ltd. Versus The Assistant Commissioner Of Income Tax (ACIT) and The Central Board Of Direct Taxes (CBDT), Delhi

The SC upheld the validity of a reassessment notice under Section 148 of the Income Tax Act beyond the standard four-year limitation period. The court ... Validity of reopening of assessment - reasons to believe - contention of counsel for the petitioner that it is a case of change of opinion and the entire material was before the assessment authority - HELD THAT:- From perusal of the assessment order passed under Section 143 (3) it is evident that the order is cryptic, discusses no issue and even the deductions claimed have not been dealt with. The operational part of the order is that after going through the details and verifying the affairs, the return income is accepted and the credit of prepaid taxes is given. There is no quarrel with the proposition that as per the proviso the reassessment proceedings in case of assessment having been finalized under Section 143(3) of the Act cannot be initiated after expiry of four years from the end of the relevant assessment year. But this limitation prescribed is subject to exception in cases where the income chargeable to tax has escaped assessment for failure on part of the assessee to disclose fully and truly all the material facts necessary for the assessment. While dealing with the objections the finding recorded is that the assessing officer had come to the conclusion that on failure to fully and truly disclose the necessary material, there is an escapement of assessment. AO on an independent application of mind and after conducting the enquiry had reasons to believe that there was escapement of Minimum Alternative Tax (MAT) on books profit. The escapement was a result of non disclosure by the petitioner that concessions relating to income tax as mentioned the scheme sanctioned by the Board for Industrial and Financial Reconstruction (BIFR) on 02.06.2009 was not allowed by competent authority i.e. CBDT. Inspite of the non-sanctioning of grant of exemption to the petitioner from the provisions of Section 115JB(2)(ii) of the Act relating to MAT the petitioner availed deduction of “Profit of Sick Industrial Company till net worth is equal to or exceeds accumulated losses” in the assessment year 2011-12. The contention raised that the notice was time barred is based upon the factual aspect and involves a mixed question of fact and law and cannot be determined at this stage in writ jurisdiction. WP dismissed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Court are:Whether the notice issued under Section 148 of the Income Tax Act, 1961 (the Act) for reassessment after the assessment under Section 143(3) had been finalized is valid, particularly in light of the limitation period prescribed under the proviso to Section 147 of the Act.Whether the reassessment proceedings constitute a mere change of opinion by the assessing authority, which is impermissible, or are justified by the discovery of escapement of income chargeable to tax due to failure on the part of the assessee to disclose fully and truly all material facts.Whether the objections filed by the petitioner against the reassessment notice and consequent proceedings were rightly rejected.Whether the reassessment notice was barred by limitation, and if so, whether this question can be adjudicated in writ jurisdiction at this stage.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Validity of the reassessment notice under Section 148 of the Act in light of the limitation period under proviso to Section 147Relevant legal framework and precedents: The proviso to Section 147 of the Act restricts the initiation of reassessment proceedings beyond four years from the end of the relevant assessment year where the assessment has been finalized under Section 143(3), unless income chargeable to tax has escaped assessment due to failure by the assessee to make a proper return or to disclose fully and truly all material facts necessary for assessment. The proviso also exempts reassessment in cases involving undisclosed income related to assets outside India.Court's interpretation and reasoning: The Court noted that the limitation period of four years is subject to the exception where income has escaped assessment due to non-disclosure of material facts by the assessee. The Court rejected the petitioner's contention that the reassessment was barred by limitation, holding that the proviso allows reassessment beyond four years if escapement of income is established.Key evidence and findings: The assessment order under Section 143(3) was cryptic, did not deal with deductions claimed, and simply accepted the return income. The reassessment notice was issued after four years from the end of the relevant assessment year, but the assessing officer had reasons to believe that income chargeable to tax had escaped assessment due to failure of disclosure by the petitioner.Application of law to facts: Since the assessing officer found that the petitioner failed to fully and truly disclose material facts-specifically, non-disclosure of the denial of exemption under Section 115JB(2)(ii) relating to Minimum Alternative Tax (MAT)-the reassessment notice issued beyond four years was valid under the proviso to Section 147.Treatment of competing arguments: The petitioner argued that the reassessment was a mere change of opinion and that all material was before the assessing officer at the time of original assessment, thus barring reassessment. The Court rejected this, observing that the original assessment order was cryptic and did not deal with the relevant deductions or material facts, and that the reassessment was based on independent application of mind by the assessing officer.Conclusions: The reassessment notice under Section 148 was validly issued beyond the four-year limitation period because the assessing officer had reason to believe that income had escaped assessment due to failure to disclose material facts.Issue 2: Whether the reassessment proceedings constitute impermissible change of opinionRelevant legal framework and precedents: It is well settled that reassessment proceedings cannot be initiated merely because of a change of opinion by the assessing authority. There must be tangible material or evidence indicating escapement of income.Court's interpretation and reasoning: The Court examined the original assessment order and found it to be cryptic and non-comprehensive, indicating that the assessing officer did not consider or deal with the deductions claimed by the petitioner. The reassessment was initiated after the assessing officer formed a reasoned belief, based on enquiry, that the petitioner had failed to disclose the denial of exemption under the BIFR scheme, resulting in escapement of MAT liability.Key evidence and findings: The petitioner had availed deduction of Rs.1,64,51,540/- under the head 'Profit of Sick Industrial Company till net worth is equal to or exceeds accumulated losses' despite the CBDT not sanctioning exemption from MAT under Section 115JB(2)(ii). This non-disclosure was the basis for reassessment.Application of law to facts: Since the reassessment was based on the assessing officer's independent application of mind and discovery of non-disclosure of material facts, it was not a mere change of opinion but a justified exercise of reassessment powers.Treatment of competing arguments: The petitioner contended that the reassessment was initiated on suspicion and was a change of opinion. The Court held that suspicion alone is insufficient, but here the assessing officer had conducted enquiry and formed a reasoned belief, which is permissible.Conclusions: The reassessment proceedings do not amount to a mere change of opinion and are validly initiated on the basis of escapement of income due to non-disclosure.Issue 3: Rejection of objections filed by the petitioner against reassessment proceedingsRelevant legal framework and precedents: The assessee is entitled to file objections against reassessment notices, which the assessing officer must consider in accordance with law before proceeding.Court's interpretation and reasoning: The Court noted that the assessing officer had dealt with the objections and rejected them after applying mind and conducting enquiry. The Court did not find any illegality or infirmity in the rejection of objections.Key evidence and findings: The objections raised were considered and rejected on the ground that the petitioner failed to disclose material facts necessary for assessment, leading to escapement of income.Application of law to facts: The rejection of objections was in accordance with law and based on the factual findings of non-disclosure.Treatment of competing arguments: The petitioner argued that the objections should have been accepted as the reassessment was barred. The Court held that the limitation issue involves mixed questions of fact and law and cannot be decided at writ stage.Conclusions: The rejection of objections was valid and sustainable.Issue 4: Whether limitation and validity of reassessment notice can be adjudicated in writ jurisdiction at this stageRelevant legal framework and precedents: Questions involving mixed facts and law, especially regarding limitation and escapement of income, are generally not adjudicated in writ jurisdiction but are left to be decided by the assessing authority and appellate forums.Court's interpretation and reasoning: The Court held that the contention of limitation being time-barred involves mixed questions of fact and law and cannot be determined at the writ petition stage.Key evidence and findings: The assessing officer had reasons to believe escapement of income and had conducted enquiry, which is a factual determination.Application of law to facts: The Court declined to interfere with the reassessment notice in writ jurisdiction and left the petitioner free to raise all issues before the assessing authority and appellate fora.Conclusions: The limitation and validity issues are not amenable to adjudication in writ jurisdiction at this stage.3. SIGNIFICANT HOLDINGSThe Court held that:'The proviso to Section 147 of the Act as is existed at the relevant time ... provides that reassessment proceedings cannot be initiated after four years from the end of the relevant assessment year unless income chargeable to tax has escaped assessment by reason of failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment.'The Court further observed:'From perusal of the assessment order passed under Section 143 (3) it is evident that the order is cryptic, discusses no issue and even the deductions claimed have not been dealt with... The Assessing Officer had come to the conclusion that on failure to fully and truly disclose the necessary material, there is an escapement of assessment.'Core principles established include:Reassessment beyond the four-year limitation period is permissible if there is escapement of income due to failure to disclose material facts.A cryptic or non-comprehensive assessment order does not preclude reassessment if material facts were not fully disclosed.