2025 (4) TMI 1135 - HC - Income Tax

Reopening of assessment u/s 147 - Reason to believe - whether interest cost claimed by the petitioner u/s 37(1) is capital or revenue expenditure? - HELD THAT - It is not in dispute that the case of the petitioner was under scrutiny and after calling for information and considering the material available on record the AO passed the order under section 143(3). It is also apparent from the facts of the record that the impugned notice is issued after four years and therefore as per the proviso to section 147 when the petitioner has disclosed fully and truly all material facts for the purpose of assessment and assessment order is passed after scrutiny under section 143(3) of the Act no action could have been taken by AO by assuming jurisdiction to reopen the assessment for the year under consideration. Moreover in facts of the case the consideration of issue as to whether interest cost claimed by the petitioner u/s 37(1) is capital or revenue expenditure is nothing but mere change of opinion by the respondent Assessing Officer while assuming jurisdiction which is not permissible in view of decision of Kelvinator of India Ltd 2010 (1) TMI 11 - SUPREME COURT The impugned notice issued u/s 148 along with consequential proceedings are hereby quashed and set aside - Decided in favour of assessee.

Summary

The core legal questions considered by the Court were:

1. Whether the notice issued under section 148 of the Income Tax Act, 1961, reopening the assessment for Assessment Year 2015-2016, was legally valid and within jurisdiction, especially given it was issued after four years of the original assessment order.

2. Whether the petitioner had fully and truly disclosed all material facts relevant to the assessment, thereby precluding the reopening of the assessment under the proviso to section 147 of the Act.

3. Whether the reopening was based on a mere change of opinion by the Assessing Officer regarding the nature of interest expenditure claimed by the petitioner (capital versus revenue expenditure), which is impermissible as a ground for reopening.

4. The applicability and interpretation of the proviso to section 147 of the Act and the scope of the Assessing Officer's power to reopen assessments post the Direct Tax Laws (Amendment) Act, 1987.

5. The sufficiency and adequacy of the reasons recorded by the Assessing Officer for forming belief that income had escaped assessment.

Issue-wise Detailed Analysis:

Issue 1: Validity of the notice under section 148 issued after four years

Legal framework and precedents: Section 148 of the Income Tax Act empowers the Assessing Officer to reopen an assessment if there is reason to believe that income has escaped assessment. However, the proviso to section 147 restricts reopening beyond four years unless certain conditions are met. The Court referred extensively to the Supreme Court ruling in Commissioner of Income Tax v. Kelvinator of India Ltd., which clarified that reopening cannot be based on mere change of opinion and that the Assessing Officer must have a genuine reason to believe that income has escaped assessment.

Court's interpretation and reasoning: The Court noted that the impugned notice was issued after four years from the original assessment order passed under section 143(3), which had been after scrutiny. The petitioner had disclosed all material facts, including the auditor's Note No. 32, which detailed the capitalization of check posts and the interest expenses claimed. The Court held that since the petitioner had fully and truly disclosed all relevant facts and the assessment was completed after scrutiny, the reopening beyond four years was impermissible under the proviso to section 147.

Application of law to facts: The Assessing Officer's issuance of the notice under section 148 after four years was not supported by any new information or material beyond what was already available and considered during the scrutiny assessment. Hence, the reopening was invalid.

Treatment of competing arguments: The respondent argued that the reopening was justified due to escapement of income relating to interest expenses claimed as revenue expenditure instead of capital expenditure. The Court rejected this, holding that this was a mere change of opinion and not a valid ground for reopening.

Conclusion: The notice issued under section 148 after four years was invalid and liable to be quashed.

Issue 2: Whether the petitioner fully disclosed all material facts

Legal framework and precedents: The proviso to section 147 mandates that if the assessee has disclosed fully and truly all material facts relevant to the assessment, the reopening beyond four years is barred. The Court relied on the principles laid down in the Kelvinator case and other precedents emphasizing the importance of full disclosure to prevent reopening.

Court's interpretation and reasoning: The Court observed that the petitioner had disclosed the relevant facts, including the auditor's note explaining the accounting treatment of interest expenses on capital borrowed for construction of check posts. This disclosure was made at the time of filing the return and during scrutiny assessment proceedings.

Key evidence and findings: The audited balance sheet, profit and loss account, and the auditor's Note No. 32 were all on record before the Assessing Officer during the original assessment. The petitioner had not concealed any material fact.

Application of law to facts: Since the petitioner had made full disclosure, reopening the assessment on the basis of the same material was impermissible.

Treatment of competing arguments: The respondent contended that the petitioner's claim of interest expense as revenue expenditure was incorrect and led to escapement of income. However, the Court held that this was a difference in opinion on the nature of expenditure, not non-disclosure.

Conclusion: The petitioner had fully and truly disclosed all material facts, barring reopening beyond four years.

Issue 3: Whether the reopening was based on mere change of opinion

Legal framework and precedents: The Supreme Court in Kelvinator of India Ltd. clarified that reopening on the basis of mere change of opinion is not permissible. The Assessing Officer's power to reopen must be based on reason to believe that income has escaped, not on a mere difference in interpretation of facts or law.

Court's interpretation and reasoning: The Court found that the Assessing Officer's reason for reopening was that the interest expenditure claimed as revenue expense should have been capitalized, which was a question of accounting treatment and classification. This amounted to a mere change of opinion.

Application of law to facts: The reopening was essentially an attempt to revisit and alter the accounting treatment accepted during the original assessment, which is impermissible.

Treatment of competing arguments: The respondent argued that the reopening was justified due to escapement of income. The Court emphasized that the Assessing Officer is not required to finally ascertain escapement of income at the stage of recording reasons but the reasons must not be based on mere change of opinion.

Conclusion: The reopening was based on a mere change of opinion and hence invalid.

Issue 4: Sufficiency and adequacy of reasons recorded for reopening

Legal framework and precedents: The Supreme Court in CIT v. Rajesh Jhaveri Stock Brokers (P) Ltd. held that the Assessing Officer must have a subjective satisfaction based on reasons recorded or material on record that income has escaped. However, the Court cannot examine the sufficiency or adequacy of reasons at the stage of challenge to reopening.

Court's interpretation and reasoning: The Court acknowledged that the Assessing Officer had recorded reasons based on the auditor's note and accounting treatment. However, since the reopening was barred by the proviso to section 147 and was a mere change of opinion, the sufficiency of reasons was immaterial.

Application of law to facts: The reasons recorded did not justify reopening because the case was fully disclosed and assessed after scrutiny.

Treatment of competing arguments: The respondent relied on the case law to assert that the Court should not interfere with the reasons at this stage. The Court agreed with this principle but held that the reopening was barred on other grounds.

Conclusion: The reasons recorded were insufficient to justify reopening in the face of full disclosure and scrutiny assessment.

Significant Holdings:

"It is not in dispute that the case of the petitioner was under scrutiny and after calling for information and considering the material available on record, the Assessing Officer passed the order under section 143(3) of the Act. It is also apparent from the facts of the record that the impugned notice is issued after four years and therefore, as per the proviso to section 147 of the Act, when the petitioner has disclosed fully and truly all material facts for the purpose of assessment and assessment order is passed after scrutiny under section 143(3) of the Act, no action could have been taken by the respondent Assessing Officer by assuming jurisdiction to reopen the assessment for the year under consideration."

"In facts of the case the consideration of issue as to whether interest cost claimed by the petitioner under section 37(1) is capital or revenue expenditure is nothing but mere change of opinion by the respondent Assessing Officer while assuming jurisdiction which is not permissible in view of decision of Hon'ble Supreme Court in case of Commissioner of Income tax v. Kelvinator of India Ltd."

"...post-1st April, 1989, power to re-open is much wider, However, one needs to give a schematic interpretation to the words 'reason to believe' failing which, we are afraid, Section 147 would give arbitrary powers to the Assessing Officer to re-open assessments on the basis of 'mere change of opinion', which cannot be per se reason to re-open."

"The impugned notice dated 27.03.2021 issued under section 148 of the Act along with consequential proceedings are hereby quashed and set aside."