2022 (2) TMI 596 - HC - Income Tax

Reopening of assessment u/s 147 - change of opinion - 10% of the eligible profits u/s 10A were not fully taxed and yet set off of the losses of local units to the extent was allowed and this resulted in short levy of tax - HELD THAT - A bare perusal of the reasons indicates that the exercise was influenced by a mere change of opinion. To start with it is imperative to note that the AO has commenced the recording of reasons with the expression On perusal of records it is seen that 10% of the eligible profits u/s 10A were not fully taxed and yet set off of the losses of local units to the extent was allowed and this resulted in short levy of tax. Evidently this assessment of the Assessing Officer betrays an intent to question the original assessment on the strength of very same material by substituting his view for the conclusion recorded by the AO at the time of initial assessment. The alleged escapement of the income articulated under second head Correct computation of Business Income also suffers from the same vice of mere change of opinion. The third head under which the income allegedly escaped assessment under the caption Excess DIT Relief stands on a much weaker foundation. AO explicitly refers to the availability of two options for computation of deduction under section 10A and 80 HHE namely (i) exclusive method; and (ii) alternatively profit of 10A units shall form part of calculation of 80 HHE and export turnover of 10A is to be excluded therefrom. According to the AO the choice of the second method by the department resulted in escapement of income as excess DIT relief to the extent of Rs. 3, 67, 31, 204/- had been allowed. This inference is a classic example of change of opinion as it is rooted in expediency of exercise of one option over another. The impugned notice and the consequent action is legally unsustainable as the Revenue fails to satisfy the twin tests. Firstly there is no assertion much less material to indicate that the income escaped assessment on account of failure on the part of the petitioner to disclose fully and truly all material facts necessary for the assessment and secondly the reasons recorded by the Assessing Officer should not fall within the ambit of mere change of opinion on the very same material. Consequently we are persuaded to hold that there was no material to justify the formation of a reason to believe that income escaped assessment and invoke the power under section 147 - The petition therefore deserves to be allowed.

Summary

Issues Involved:
1. Validity of notice issued under Section 148 of the Income Tax Act, 1961.
2. Justification for reopening the assessment under Section 147 of the Income Tax Act, 1961.
3. Allegation of income escaping assessment due to suppression of material facts.
4. Legality of the reasons recorded for reopening the assessment.
5. Impact of previous scrutiny assessment and appellate proceedings on the reopening of assessment.

Detailed Analysis:

1. Validity of Notice Issued Under Section 148:
The petitioner challenged the notice dated 31st March 2010 under Section 148 of the Income Tax Act, 1961, claiming it was dispatched on 3rd April 2010, beyond the permissible period of six years from the end of the assessment year 2003-04. The respondents countered this by presenting an extract from the dispatch register showing that the notice was dispatched on 31st March 2010. The court noted that the petitioner had a strong case on merits and did not solely rely on the technical objection regarding the dispatch date.

2. Justification for Reopening the Assessment:
The petitioner argued that there was no tangible material justifying the reopening of the assessment under Section 147 of the Act. The court emphasized that the existence of a "reason to believe" that income had escaped assessment is a jurisdictional condition for invoking the power under Section 147. This belief must be based on tangible material and not merely a change of opinion. The court found that the reasons recorded by the Assessing Officer did not refer to any tangible material and were influenced by a mere change of opinion.

3. Allegation of Income Escaping Assessment Due to Suppression of Material Facts:
The petitioner contended that there was no allegation or material to demonstrate that the income escaped assessment due to suppression of material facts. The court observed that the reasons recorded for the proposed reopening were silent on the aspect of failure to make a full and true disclosure of all material facts by the petitioner. Since the assessment was sought to be reopened beyond four years and post-assessment under Section 143(3) of the Act, the absence of any assertion or proof of suppression of material facts eroded the legality of the exercise of power under Section 147.

4. Legality of the Reasons Recorded for Reopening the Assessment:
The court noted that the reasons recorded by the Assessing Officer indicated a mere change of opinion. The reasons commenced with the expression, "On perusal of records, it is seen that 10% of the eligible profits under section 10A were not fully taxed," suggesting that the Assessing Officer was questioning the original assessment based on the same material. The court found that this assessment was an instance of mere change of opinion, which is impermissible as the power is of reassessment and not review.

5. Impact of Previous Scrutiny Assessment and Appellate Proceedings:
The court highlighted that the assessment had undergone scrutiny under Section 143(3) and further consideration at the level of CIT (A). The assessment was finalized pursuant to the order of CIT (A). The court found that the petitioner had furnished explanations and submitted documents in response to multiple notices during the initial assessment. The absence of any mention of non-disclosure by the petitioner in the reasons for reopening further weakened the case for reopening the assessment.

Conclusion:
The court concluded that the impugned notice and the consequent action were legally unsustainable as the Revenue failed to satisfy the twin tests: (1) there was no material to indicate that the income escaped assessment due to failure on the part of the petitioner to disclose fully and truly all material facts, and (2) the reasons recorded by the Assessing Officer fell within the ambit of "mere change of opinion." Consequently, the court allowed the petition and quashed the notice dated 31st March 2010 and the order rejecting the petitioner's objections.

Order:
The petition was allowed, and the impugned notice dated 31st March 2010 issued under Section 148 and the order dated 30th November 2010 rejecting the petitioner's objections were quashed and set aside. No costs were awarded. Rule made absolute in the aforesaid terms.