2025 (12) TMI 201 - HC - Income Tax

Reassessment under Sections 147/148 upheld; valid sanctions under Section 151 and non-disclosure defeat four-year limitation challenge

HC upheld the reassessment proceedings initiated u/s 147/148, holding that the AO had validly invoked the wide powers under s.147, having obtained ... Reopening of assessment u/s 147 - Notice issued beyond period of four years - Disallowance u/s 14A - disallowance was made in accordance with the method adopted in the previous year HELD THAT:-seen the scope and power of proceeding under Section 147 of the Act subject to the provisions of Sections 148-153 is a wide power which includes the power to assess or reassess the income. In the instant case, the appellants had also obtained sanction as required under Section 151 of the Act and the Additional Commissioner of Income Tax, Kumbakonam Range and Principal Commissioner of Income Tax, Trichy had both granted sanction after examining the relevant records and recommended notice to be issued under Section 148 of the Act. One of the contentions raised by the learned Senior Counsel for the respondent is that the notice had been issued beyond the period of four years from the assessment year. However, Section 147 of the Act is quite comprehensive and the proviso which stipulates that no action shall be taken after the expiry of four years also has an exception clause viz., if there is income chargeable to tax and had escaped assessment for such assessment year, then action can be taken even after the expiry of those four years. In Honda Siel Power Products Limited [2011 (7) TMI 275 - SC ORDER] the Hon'ble Supreme Court of India dismissed a Special Leave Petition challenging the dismissal of a Writ Petition filed by the assessee, before the Delhi High Court, questioning the reassessment notice issued under Sections 147/148 of the Act. The Hon'ble Supreme Court had very clearly held that a duty was cast on every assessee to disclose truly and fully all materials facts for its assessment. In the instance case, having filed its return in response to the notice and having raised objections and the objections having been overruled and at that stage challenging the notice issued would render, in our considered opinion, the Writ Petition as not maintainable. The respondent had progressed sufficiently far enough in answering and responding to the notice issued. The proceedings have to go forward to reach a logical conclusion. The proceedings cannot be curtailed by re-appreciation of facts or sitting in review over the subjective satisfaction of the Assessment Officer. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether a writ petition under Article 226 is maintainable to challenge a notice under Section 148 and the initial order rejecting objections, after the assessee has followed the procedural steps prescribed in the decision laying down the proper course of action in reassessment proceedings. 1.2 Whether reassessment proceedings under Sections 147/148, initiated beyond four years from the end of the relevant assessment year, were without jurisdiction on the grounds that (a) reasons were not properly recorded under Section 148(2), (b) there was no 'failure to disclose fully and truly all material facts' as required by the proviso to Section 147, and (c) the reopening amounted to curing an earlier error or omission of the Assessing Officer in applying Section 14A read with Rule 8D. 1.3 Whether, in the context of disallowance under Section 14A read with Rule 8D, the duty to 'disclose fully and truly all material facts' rests solely on the assessee, or whether the failure of the Assessing Officer in the original assessment precludes reopening under Section 147 beyond four years. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Maintainability of the writ petition after following the reassessment procedure Legal framework 2.1 The Court referred to the binding directions governing the 'proper course of action' when a notice under Section 148 is issued: the assessee must (i) file a return, (ii) seek reasons for issuance of notice, (iii) on receipt of reasons, file objections; and the Assessing Officer is bound to dispose of such objections by a speaking order before proceeding with the reassessment. Interpretation and reasoning 2.2 The Court noted that the assessee had in fact: (a) filed a return in response to the notice dated 09.03.2018, (b) sought and obtained reasons, and (c) filed objections, which were rejected by a detailed speaking order dated 08.11.2018, followed by further correspondence and rejection of objections by communication dated 29.11.2018. 2.3 The challenge in the writ petition was, however, confined to (i) the notice issued under Section 148 dated 09.03.2018 and (ii) the initial order rejecting objections dated 08.11.2018, without directly challenging the final order overruling the objections after the entire exchange of correspondence. 2.4 The Court held that, after having substantially availed and exhausted the statutory procedural steps and after objections had been considered and rejected by speaking orders, it was not appropriate to invoke writ jurisdiction merely to assail the initial notice and the first rejection order, while allowing the later rejection to stand. 2.5 The Court emphasised that, at this stage, reassessment proceedings must be allowed to proceed to their logical conclusion and that writ jurisdiction cannot be used to re-appreciate facts or to sit in review over the subjective satisfaction of the Assessing Officer as to 'reason to believe'. Conclusions 2.6 The writ petition, having been filed after the assessee had fully participated in the reassessment process and after a speaking order had been passed rejecting objections, was held to be not maintainable. Issue 2: Validity of reopening beyond four years - recording of reasons and 'failure to disclose fully and truly' under Section 147 proviso Legal framework 2.7 Section 147 empowers the Assessing Officer, if he 'has reason to believe that any income chargeable to tax has escaped assessment', to assess or reassess such income, subject to Sections 148-153. The proviso stipulates that, where an assessment under Section 143(3) or Section 147 has already been made, no action shall be taken after four years from the end of the relevant assessment year unless income has escaped assessment 'by reason of' the assessee's failure (a) to make a return under Section 139 or in response to notice under Section 142(1) or Section 148, or (b) to disclose fully and truly all material facts necessary for the assessment. 2.8 Section 148(2), as then in force, required the Assessing Officer, before issuing any notice under that Section, to 'record his reasons' for doing so. 2.9 The Court discussed precedent establishing: (a) the wide scope of powers under Section 147, subject to existence of 'reason to believe' and compliance with Sections 148-153, (b) that reassessment jurisdiction is attracted when there are reasonable grounds to think there has been non-disclosure of primary facts having a material bearing on under-assessment, and (c) that mere production of books or documents does not, by itself, discharge the assessee's duty of full and true disclosure. Interpretation and reasoning 2.10 The assessee argued that (i) the notice dated 09.03.2018 was issued beyond four years from the end of assessment year 2011-2012, and (ii) no valid reasons were recorded as required by Section 148(2), thereby rendering the notice without jurisdiction. 2.11 The Court noted that sanction under Section 151 had been obtained from the competent authorities, who examined the relevant records and recommended issuance of notice under Section 148, indicating that reasons were in fact recorded and considered at the sanction stage. 2.12 Relying on decisions explaining the scope of Section 147 and its proviso, the Court held that the power to reassess is 'wide' and can be exercised beyond four years where escapement of income is attributable to the assessee's failure to disclose fully and truly all material facts, and that the High Court's role in writ proceedings is limited to seeing whether the conditions conferring jurisdiction to reopen exist, not to finally decide if there was in fact a failure. 2.13 The Court adopted the reasoning that 'failure' to fully and truly disclose is not confined to what is stated in the return or audit report, but extends to the entire assessment proceedings; it arises where the assessee does not furnish complete and correct information which it is under an obligation to disclose. The burden is on the assessee to make such full and true disclosure. 2.14 The Court further noted that precedent expressly rejects the contention that mere production of books or evidence suffices; the assessee must bring to the Assessing Officer's notice the specific items or portions relevant to assessment. Even if the Assessing Officer, by greater diligence, could have discovered the truth from the material on record, that does not negate a failure on the assessee's part or bar reassessment jurisdiction. 2.15 Applying these principles, the Court rejected the assessee's contention that the notice was inherently without jurisdiction merely because it was issued after four years and allegedly for correcting the Assessing Officer's earlier omission. The statutory exception in the proviso to Section 147 permitted such reopening where there was escapement of income attributable to the assessee's failure in disclosure. Conclusions 2.16 The Court held that (a) the reassessment notice issued beyond four years was not per se barred, given the scope of Section 147 and the proviso, (b) the requirement of recording reasons and obtaining sanction had been complied with, and (c) in writ jurisdiction, it was not open to quash the notice on the basis of a detailed re-evaluation of whether there was, in fact, a failure to disclose fully and truly all material facts. Issue 3: Section 14A disallowance, Rule 8D and the effect of the Assessing Officer's earlier omission on reopening power Legal framework 2.17 The original and subsequent reassessment proceedings concerned disallowance of expenditure relating to exempt income under Section 14A of the Act, read with Rule 8D of the Income-tax Rules, 1962. 2.18 The learned Single Judge had held that, under Section 14A(2), the duty to appropriately determine the amount of expenditure lay on the Assessing Officer, that the assessee could make any claim (even if wrong), and that failure of the Assessing Officer to apply Rule 8D correctly could not justify reopening of a concluded assessment after four years. Interpretation and reasoning 2.19 The Division Bench reviewed the legal position on reopening and the duty of disclosure, particularly in relation to Section 14A, referring to the reasoning that: (a) the assessee has a positive duty to disclose fully and truly all material facts, including expenses relatable to tax-free/exempt income that have been claimed as deduction; and (b) omission or failure to point out such details can amount to failure to disclose. 2.20 The Court emphasised that the explanation to Section 147 makes it clear that mere production of books or evidence is not enough; material embedded in records, which the Assessing Officer could have uncovered with more diligence, does not prevent reopening if the assessee has not, in the first place, specifically and truly disclosed the material facts. 2.21 In this light, the Court disagreed with the approach of the learned Single Judge that the reopening was barred merely because any alleged escapement arose from the Assessing Officer's prior failure to apply Rule 8D properly. The correct test was whether there was escapement of income and whether there was a failure on the part of the assessee in making full and true disclosure, not whether the Assessing Officer had earlier erred or omitted to apply a method. 2.22 The Court therefore rejected the premise that the revenue was 'taking advantage of its own wrong' by initiating reassessment, holding instead that the statutory scheme under Section 147, its proviso, and the Explanation, read with decisions on Section 14A, recognise jurisdiction to reopen where the assessee has not discharged its disclosure obligations, even if the Assessing Officer could earlier have discovered the issue by greater diligence. Conclusions 2.23 The Court held that the existence of an earlier assessment under Section 143(3), and any failure or omission by the Assessing Officer in computing disallowance under Section 14A read with Rule 8D, did not by itself bar resort to Section 147 beyond four years, provided the conditions under the proviso (including failure to fully and truly disclose material facts) were satisfied. 2.24 The contrary view of the learned Single Judge-that reopening was impermissible as it merely sought to correct the Assessing Officer's own earlier omission under Section 14A/Rule 8D-was set aside. Overall Disposition 2.25 The Court set aside the order of the learned Single Judge, held that the writ petition was not maintainable in the circumstances, upheld the continuation of the reassessment proceedings initiated under Sections 147/148, and allowed the writ appeal, without any order as to costs.