2024 (5) TMI 646 - HC - Income Tax

Reopening of Assessment u/s 147 - investment in NCDs unexplained - difference between accrual of income and receipt of income - reopening after the expiry of four years - Petitioner is a tax resident of Cyprus - Petitioner s objection to reopening that under the DTAA, interest income can be taxed only when the same was received by the payee under the provisions of Article 11, has not been controverted in the order rejecting the objections - HELD THAT - During the course of original assessment proceedings, Petitioner was issued a notice u/s 142 (1) - Petitioner was called upon to give details of income from sources other than that of capital gain and also details of interest income accrued on security held during the last four financial years. By its Chartered Accountant s letter, Petitioner replied to the notice and stated that it had not received any income during AY 2015-2016. During the course of discussion that Petitioner s Chartered Accountant had with the AO, Petitioner was called upon to furnish details of the statement showing closing stock of NCDs - Petitioner furnished a statement showing closing stock of NCDs as also a statement giving details of investment in NCDs during the year. The opening stock and the closing stock were unchanged. Thereafter, the assessment order dated 30th August 2017 came to be passed. In the assessment order, it is accepted that Petitioner is the resident of Cyprus and its nature of business is to act as investment holding company. In our view, since Petitioner was called upon and Petitioner supplied the details of investment in NCDs during the year, the issue of holdings in the NCDs and the interest on the NCDs was certainly a subject of consideration of the AO. Discussion in the assessment order or not? - As decided in Aroni Commercials Limited 2014 (2) TMI 659 - BOMBAY HIGH COURT once a query is raised during the assessment proceedings and Assessee has replied to it, it follows that the query raised was a subject of consideration of the AO while completing the assessment. It is also not necessary that an assessment order should contain reference and/or discussion to disclose its satisfaction in respect of the query raised. Therefore, the reopening of the assessment, in our view, is merely on the basis of change of opinion of the AO from that held earlier during the course of assessment proceedings and this change of opinion does not constitute justification and/or reason to believe that income chargeable to tax has escaped assessment. AO must have certainly considered the aspects during the assessment proceedings because specific queries were raised regarding the NCDs and the details were made available which disclosed that there was no change in the opening and closing stock of the NCDs. Decided in favour of assessee.

Summary

Issues Involved:

1. Legality of notice u/s 148 of the Income Tax Act, 1961.
2. Validity of the order rejecting objections to reopening of assessment.
3. Legitimacy of the draft order proposing adjustment of Rs. 16,71,24,000/-.

Summary:

1. Legality of notice u/s 148 of the Income Tax Act, 1961:
The Petitioner challenged the notice dated 30th March 2021 issued u/s 148 of the Act, proposing to reopen the assessment for AY 2015-2016. The Court noted that the assessment was completed on 30th October 2017 u/s 143(3) of the Act, accepting the return of income as 'Nil'. The reopening was based on the belief that the Petitioner had not disclosed interest income from NCDs despite following the Mercantile system of accounting. However, the Court found that the reopening was merely on the basis of a change of opinion, which does not constitute a valid reason to believe that income had escaped assessment. The Court referenced the ruling in Aroni Commercials Limited v. Deputy Commissioner of Income Tax, emphasizing that once a query is raised and answered during assessment proceedings, it is considered that the issue was examined by the AO.

2. Validity of the order rejecting objections to reopening of assessment:
The Petitioner's objections, including the argument that the reasons recorded showed a change of opinion and that full disclosure had been made, were rejected by the AO without addressing the merits of the objections. The Court observed that the AO did not consider the Petitioner's claim under the India-Cyprus DTAA, which allows interest income to be taxed only when received by the payee. The Petitioner had not received any interest income during AY 2015-2016 and had paid tax on the interest income in AY 2017-2018 when it was received. The Court found that the AO's rejection of the objections was not justified.

3. Legitimacy of the draft order proposing adjustment of Rs. 16,71,24,000/-:
The draft order dated 31st March 2022 proposing an adjustment of Rs. 16,71,24,000/- was also challenged. The Court noted that the AO had raised specific queries regarding the NCDs during the original assessment proceedings, and the Petitioner had provided the necessary details. The reopening of the assessment was found to be based on a change of opinion, and the AO had not considered the provisions of the DTAA. The Court concluded that the draft order was unsustainable.

Conclusion:
The Court quashed and set aside the notice dated 30th March 2021 u/s 148, the order dated 27th March 2022 rejecting the objections, and the draft order dated 31st March 2022. The Petition was disposed of with no order as to costs.