2020 (2) TMI 121 - HC - Income Tax

Reopening of assessment u/s 147 - failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment - profit arising from the agreement as capital gain or business income - HELD THAT - The amount which has been made liable to tax in the impugned order dated 29.12.2016 was subject matter of discussion with the respondent prior to passing of the impugned notice dated 31.03.2016 vide communications exchanged pursuant to letter dated 05.02.2014 seeking clarification from the petitioner. After the scrutiny assessment order dated 21.12.2011 came to be passed, the said letter dated 05.02.2014 was issued to the petitioner calling upon the petitioner to furnish explanation regarding computation of income. In the said notice dated 05.02.2014, it was stated that noncompete covenant on its own cannot amount to transfer of any right and therefore the amount received by the petitioner was to be taxed under Section 28(va) of the Income Tax Act, 1961. Having entertained a view that the amount received under the said Clause in the agreement was to be taxed under Section 28 (va) of the Income Tax Act, 1961, the respondent ought to have issued a notice within 4 years from the relevant date under Section 148 r/w. Section 147 of the Income Tax Act, 1961. After notice dated 31.03.2016 was issued after invoking the jurisdiction under Section 148 read with proviso to Section 147 of the Income Tax Act, 1961, on 08.12.2016, the petitioner was asked to explain the profit arising from the agreement and why it should be treated as business profit and not as Long Term Capital Gain as shown by the petitioner. The petitioner replied to the same on 14.12.2016. From a over all reading of the facts, it is clear that the respondent has sought to re-surrect a stale issue which had already been examined during the course of regular assessment pursuant to which assessment order was passed on 21.12.2011 but was also a subject matter of discussion pursuant to letter dated 05.02.2014 of the respondent. The last date of the assessment year 2009-10 was 31.03.2010. Therefore, the respondent was entitled to issue such a notice under Section 148 on or before 31.03.2014 i.e within 4 years for the purpose of Section 147 of the Act. Instead, the respondent failed to issue a notice in time and obtained permission from the Pr. Commissioner of Income Tax 5, Chennai on 30.03.2016 at the eleventh hour by giving an altogether different reason for issuing notice under Section 148 . The reasons given that the respondent had a belief that the income had escaped assessment for invoking Section 148 on 31.03.2016 is in complete variance with the reasons given in the impugned order dated 29.12.2016. It shows that the impugned order has been passed due to change of opinion of the respondent which was entertained on 05.02.2014. After missing an opportunity which came to the respondent within the period of 4 years seeking clarification from the petitioner, Section 148 was invoked. Since the invocation of jurisdiction under Section 148 for the purpose of proviso to Section 147 of the Income Tax Act, 1961 on 31.03.2016 was in variance with the so called recommendation/ concurrent permission of the Assistant Commissioner of Income Tax Pr. Commissioner on 29.03.2016 30.03.2016, the impugned order cannot be sustained. It also does not state that there was failure on the part of the petitioner to disclose fully and truly all material facts necessary for the purpose of the assessment for the assessment year. Entire proceedings were based on the change of view. Further, having entertained a view as early as 05.02.2014 that amount was a business income, the respondent ought to have issued the notice on or before 31.03.2014. Instead, the respondent waited till 31.03.2016 to issue notice to the petitioner. Therefore, the impugned order cannot be sustained.- Decided in favour of assessee.

Issues Involved:
1. Validity of the impugned order dated 29.12.2016 under Section 143(3) r/w Section 147 of the Income Tax Act, 1961.
2. Whether the re-assessment notice issued on 31.03.2016 under Section 148 of the Income Tax Act, 1961 was valid.
3. Classification of the income from the sale of shares as "Long Term Capital Gains (LTCG)" or "business profit" under Section 28(va) of the Income Tax Act, 1961.
4. Whether the respondent had the authority to seek clarification after the assessment order was passed.
5. Whether the proceedings were based on a change of opinion.

Detailed Analysis:

1. Validity of the Impugned Order Dated 29.12.2016:
The petitioner challenged the impugned order dated 29.12.2016, which was passed under Section 143(3) r/w Section 147 of the Income Tax Act, 1961. The court observed that the reasons given for invoking Section 148 read with proviso to Section 147 were not the basis of the impugned order. The order reclassified the income from the sale of shares as business income, which was previously accepted as LTCG. The court found this reclassification to be based on a change of opinion, which is not permissible.

2. Validity of the Re-assessment Notice Issued on 31.03.2016:
The notice under Section 148 was issued on 31.03.2016, which the petitioner argued was beyond the permissible period of four years from the end of the relevant assessment year. The court noted that the reasons for issuing the notice were not communicated to the petitioner and were in variance with the reasons given in the impugned order. The court concluded that the notice was issued due to a change of opinion and was therefore invalid.

3. Classification of Income as LTCG or Business Profit:
The respondent contended that the income from the sale of shares should be treated as business profit under Section 28(va) due to the non-compete clause in the agreement. The petitioner argued that the income was correctly classified as LTCG. The court found that the issue had already been examined during the regular assessment and that the respondent's attempt to reclassify the income was based on a change of opinion.

4. Authority to Seek Clarification After Assessment Order:
The court observed that the respondent had become functus officio after the assessment order was passed and had no authority to seek clarification on the sale of shares. The respondent's letter dated 05.02.2014 asking for clarification was therefore not valid.

5. Proceedings Based on Change of Opinion:
The court concluded that the entire proceedings were based on a change of opinion. The respondent had entertained a view as early as 05.02.2014 that the amount was business income but failed to issue a notice within the permissible period. The court held that the impugned order and the notice under Section 148 were not sustainable.

Conclusion:
The court allowed the writ petition, quashing the impugned order dated 29.12.2016 and the notice issued on 31.03.2016 under Section 148 of the Income Tax Act, 1961. The court emphasized that the proceedings were based on a change of opinion and were initiated beyond the permissible period, making them invalid.

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