2006 (2) TMI 88 - HC - Income Tax

Court quashes tax notice & reassessment for lack of new material

The court allowed the writ petition, quashing the notice under section 148 of the Income-tax Act, 1961, and the subsequent speaking order. The court held ... Maintainability of writ of certiorari under Article 226 to challenge notice under section 148 - requirement of reason to believe for reopening assessments - mere change of opinion as not constituting escapement of income - Assessing Officer's duty to record and furnish reasons and pass a speaking order on objections - deduction under section 10A computed on profits of the undertaking (not of the whole business)Maintainability of writ of certiorari under Article 226 to challenge notice under section 148 - Assessing Officer's duty to record and furnish reasons and pass a speaking order on objections - Whether a writ petition under Article 226 is maintainable to challenge issuance of a notice under section 148 and the speaking order disposing objections thereto. - HELD THAT: - The Court held that a writ petition seeking to quash a notice under section 148 and a speaking order disposing of objections is maintainable. The Constitution Bench decision in Calcutta Discount Co. Ltd. establishes that High Courts may prohibit executive authorities from acting without jurisdiction to prevent lengthy proceedings and harassment, and this rule remains good law. GKN Driveshafts requires that a noticee may first seek reasons and have objections decided by a speaking order, after which a writ challenge to that speaking order is open; but GKN does not oust Article 226. The writ jurisdiction is discretionary and equitable; availability of alternative statutory remedies does not bar relief where there is lack of jurisdiction or palpable legal foundation for the authority's action. The Court accordingly rejected the submission that the petition was non-maintainable merely because alternative remedies in assessment and appeals exist.Writ is maintainable to challenge the section 148 notice and the speaking order; the court will exercise discretion depending on facts, but such petitions cannot be summarily dismissed for existence of alternate remedies.Requirement of reason to believe for reopening assessments - mere change of opinion as not constituting escapement of income - deduction under section 10A computed on profits of the undertaking (not of the whole business) - Whether the reassessment proceedings initiated by the notice dated February 10, 2005 (AY 2001-02) and the speaking order dated August 17, 2005 were justified or amounted to reopening based on a mere change of opinion and thus without jurisdiction. - HELD THAT: - On the facts the Court found that during the original assessment the Assessing Officer had examined in detail the allocation of common expenses between the STP undertaking and other business and had issued a show-cause notice; the deduction under section 10A was allowed on the basis of profits of the undertaking as required by the law applicable for AY 2001-02 (following the amendment to sub-section (4)). The reasons recorded for reopening merely stated that section 10A had been allowed in excess and produced a computation effectively applying the pre-amendment formula (profits of the business), but no new material was shown to have emerged after the original assessment. The speaking order's sole ground - lack of separate books of account - had already been considered in the original assessment. Applying the settled principle that mere change of opinion does not justify reopening, and that reopening is permissible only where the Assessing Officer forms a genuine reason to believe based on new material, the Court concluded that the reassessment was founded on a mere change of opinion. The Assessing Officer also failed to address the statutory amendment and the correct method of computing the section 10A deduction for AY 2001-02.Reopening and the speaking order were without jurisdiction and are quashed; all proceedings pursuant to the notice are set aside.Final Conclusion: The writ petition was allowed: the notice under section 148 dated February 10, 2005, the speaking order dated August 17, 2005, and all proceedings pursuant thereto in respect of Assessment Year 2001-02 were quashed on the ground that reopening was based on a mere change of opinion and that the section 10A deduction had been correctly computed on profits of the undertaking. Issues Involved:1. Maintainability of the writ petition for quashing a notice under section 148 of the Income-tax Act, 1961.2. Merits of the reassessment proceedings initiated under section 147/148 of the Income-tax Act, 1961.Issue-Wise Detailed Analysis:1. Maintainability of the Writ Petition:The primary contention was whether a writ petition could be maintained to challenge the initiation of reassessment proceedings under section 147/148 of the Income-tax Act, 1961. The petitioners argued that if the initiation of proceedings was without jurisdiction, they could challenge it via a writ petition both at the stage of issuance of the notice and after the speaking order disposing of objections. The Revenue contended that a writ petition was not maintainable due to the availability of an alternative remedy of appeal post-reassessment.The court relied on the Supreme Court's decision in Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191, which affirmed that the High Courts could issue orders to prevent executive authorities from acting without jurisdiction, even if alternative remedies were available. This position was further supported by the Supreme Court in Whirlpool Corporation v. Registrar of Trade Marks [1998] 8 SCC 1, which stated that the High Court's jurisdiction under Article 226 of the Constitution remains unaffected by the existence of alternative statutory remedies, especially where the authority acted without jurisdiction.The court also referenced the Supreme Court's decision in GKN Driveshafts (India) Ltd. v. ITO [2003] 259 ITR 19, which outlined the procedure for challenging a notice under section 148, indicating that objections to the notice must be disposed of by a speaking order, which could then be challenged via a writ petition.The court agreed with the views of the Gujarat High Court in Garden Finance Ltd. v. Asst. CIT [2004] 268 ITR 48 and the Allahabad High Court in Indra Prastha Chemicals P. Ltd. v. CIT [2004] 271 ITR 113, which upheld the maintainability of writ petitions in similar circumstances.2. Merits of the Reassessment Proceedings:The petitioners contended that the reassessment proceedings were initiated based on a mere change of opinion, which is not permissible. They argued that the original assessment had already considered all relevant factors, and the subsequent notice under section 148 was issued without any new material, merely representing a change in the Assessing Officer's opinion.The court examined whether the reassessment was based on new material or a mere change of opinion. It noted that during the original assessment, a detailed inquiry was conducted, and the allocation of expenses between the software and human resources divisions was specifically addressed. The original assessment had allowed the deduction under section 10A based on the profits of the eligible undertaking.In the reasons for reopening, the Assessing Officer merely stated that the deduction under section 10A had been allowed in excess without presenting any new material. The court referenced its decision in Jindal Photo Films Ltd. v. Deputy CIT [1998] 234 ITR 170, which held that reopening an assessment based on a change of opinion is not permissible. This position was reaffirmed in Transworld International Inc. v. Joint CIT [2005] 273 ITR 242.The court found that the reassessment was indeed based on a mere change of opinion, as no new material had come to light. The original assessment had already addressed the issue of allocation of expenses and the computation of deduction under section 10A. The court also noted that the amendment to sub-section (4) of section 10A, effective from April 1, 2001, clarified that the deduction should be computed based on the profits of the eligible undertaking, not the entire business. This aspect was not considered in the speaking order dated August 17, 2005.Conclusion:The court allowed the writ petition, quashing the notice under section 148 dated February 10, 2005, and the speaking order dated August 17, 2005. It also quashed all proceedings initiated pursuant to the said notice, holding that the reassessment proceedings were without jurisdiction and based on a mere change of opinion.