2025 (4) TMI 1495 - HC - Income Tax

Validity of reopening of assessment - Reason to believe - whether the AO was justified in proposing to reopen the search assessments earlier made beyond the period of four years? - HELD THAT - What is to be answered is whether the assessee by furnishing the Information had disclosed all the primary facts before the assessing officer and whether the assessee s duty stood discharged. At the first blush it looks as if the assessee had nothing more to do and that it was for the assessing officer to arrive at the requisite inferences. The statutory provision does not stipulate that at the stage of issuing notice u/s 148 of the Act the authority must point out the default on the part of the assessee. If such were to be the requirement the Hon ble Supreme Court would not have held that the assessee can demand furnishing of reasons. In the case on hand pursuant to the request made by the assessee reasons were furnished. The assessee offered its objections. The objections were rejected. All these steps had to be taken before proceeding with the reassessment. Challenging the rejection order writ petitions were filed. When the course of action adopted by the assessee as well as the assessing officer are in consonance with GKN Driveshafts 2002 (11) TMI 7 - SUPREME COURT decision the question of quashing the impugned proceedings on the basis of Fenner 1998 (11) TMI 66 - MADRAS HIGH COURT decision by the Madras High Court which was rendered in 2000 does not arise at all. Single Judge extracted the rival contentions and the decision of Asianet Star Communications Pvt. Limited 2019 (6) TMI 356 - MADRAS HIGH COURT dealing with the issue of change of opinion was cited. With due respect we have to observe that the order allowing the writ petitions is non-speaking. It is vulnerable on that sole ground. Probably that was why the erudite Senior Counsel appearing for the assessee trained his guns on the notices and the rejection orders passed by the assessing officer instead of supporting the order passed by the learned Single Judge. For the foregoing reasons the orders impugned in the writ petitions are sustained.

The core legal questions considered in this judgment revolve around the validity of reopening income tax assessments beyond the normal four-year period under Sections 147 and 148 of the Income Tax Act, 1961. Specifically, the issues include whether the assessing officer had "reason to believe" that income chargeable to tax had escaped assessment due to failure by the assessee to fully and truly disclose all material facts, thereby justifying reopening under the extended six-year limitation; the sufficiency and nature of disclosure by the assessee regarding a substantial equity investment and subsequent buyback transaction; the applicability of judicial precedents on reopening assessments and the requirement to furnish reasons for reopening; and whether the writ petitions challenging the reopening notices and rejection of objections were maintainable and properly decided.

Regarding the reopening of assessments under Sections 147 and 148, the Court examined the statutory framework which permits reassessment if the Assessing Officer has reason to believe that income has escaped assessment. The normal limitation period is four years from the end of the relevant assessment year, extended to six years if the income escaped assessment due to failure by the assessee to disclose fully and truly all material facts necessary for assessment. The Court emphasized that the duty of the assessee is to disclose all primary facts relevant to the assessment, including documents and agreements, but not to assist the Assessing Officer in drawing inferences. This principle was drawn from authoritative Supreme Court precedents such as Calcutta Discount Co. Ltd. v. ITO and Phool Chand Bajrang Lal v. ITO.

The Court analyzed the facts surrounding a Rs. 500 crore investment by KKR Mauritius Cement Investment Limited in the assessee company during the 2010-11 financial year, which was disclosed in the audited financial statements and income tax returns, including details of shareholding and PAN. However, the subsequent buyback of these shares by the holding company at a significantly higher valuation (Rs. 1218 crores) raised suspicion of round-tripping and potential tax evasion. The assessing officer received information from the investigation unit indicating that the initial investment was possibly made using the assessee's own undisclosed funds (black money), and that KKR Mauritius Cement Investment Limited was a shell company incorporated shortly before the investment, with an address linked to the "Paradise Papers Leak." The buyback arrangement involved a cash and share deal, yielding an unusually high compound return of approximately 18%, which was not consistent with prudent business practice.

The Court held that mere disclosure of the investment amount and shareholding percentage did not amount to full and true disclosure of all material facts, particularly since the underlying agreements and the true nature of the transaction were not placed before the Assessing Officer at the time of the original assessment. The agreements between KKR and the assessee company were deemed primary facts that should have been disclosed. The failure to disclose these primary facts justified the Assessing Officer's "reason to believe" that income had escaped assessment, thereby validating the reopening under the extended six-year period.

In addressing the contention that the reopening was based on change of opinion, the Court reiterated the settled legal position that reopening cannot be sustained on mere change of opinion but must be based on tangible failure to disclose material facts. The Court found that the reopening was not a mere change of opinion but was triggered by subsequent reliable information exposing the transaction as potentially bogus, consistent with the Supreme Court's ruling in Phool Chand Bajrang Lal. The Court also noted that the Assessing Officer's reasons, although partly based on market gossip and impressions, included sufficient material to constitute a reasonable belief, and that the sufficiency of reasons is not justiciable.

The Court further examined the procedural aspect of the reopening notice under Section 148, which was cryptic and did not explicitly record the default or failure of the assessee. The Court referred to the Supreme Court's decision in GKN Driveshafts (India) Ltd. v. ITO, clarifying that the Assessing Officer is required to furnish reasons upon demand and dispose of objections by passing a speaking order before proceeding with reassessment. Since the Assessing Officer complied with this procedure by furnishing reasons and rejecting objections through speaking orders, the reopening notice was held valid despite the initial cryptic nature.

The Court rejected the assessee's argument that the writ petitions were maintainable and that the reopening was barred by limitation, emphasizing that the reopening was within the extended period due to failure of full and true disclosure. It also dismissed the submission that the proceedings were vitiated by non-disclosure of reasons in the notice itself, relying on the procedural safeguards under GKN Driveshafts.

Regarding the learned Single Judge's order allowing the writ petitions, the Court found it to be non-speaking and lacking detailed reasoning, particularly in failing to appreciate the legal principles and the Assessing Officer's justification for reopening. The Court set aside the Single Judge's order and allowed the writ appeals.

Significant holdings include the following verbatim excerpts and principles:

"...so far as primary facts are concerned, it is the assessee's duty to disclose all of them - including particular entries in account books, particular portions of documents, and documents and other evidence." (Calcutta Discount Co. Ltd.)

"Acquiring fresh information, specific in nature and reliable in character, relating to the concluded assessment which goes to expose the falsity of the statement made by the assessee at the time of original assessment is different from drawing a fresh inference from the same facts and material which was available with the ITO at the time of original assessment proceedings." (Phool Chand Bajrang Lal)

"The expression 'reason to believe' does not mean a purely subjective satisfaction on the part of the officer but the reason must be held in good faith and cannot be merely a pretence." (ITO vs. Lakshmani Mewal Das)

"When a notice under Section 148 of the Income Tax Act is issued, the proper course of action for the noticee is to file return and if he so desires, to seek reasons for issuing notices. The assessing officer is bound to furnish reasons within a reasonable time. On receipt of reasons, the noticee is entitled to file objections to issuance of notice and the assessing officer is bound to dispose of the same by passing a speaking order." (GKN Driveshafts)

The Court concluded that the Assessing Officer was justified in reopening the assessments beyond the four-year period due to failure by the assessee to fully and truly disclose all material facts, particularly the nature of the investment and the underlying agreements. The reopening was not a mere change of opinion but based on subsequent, reliable information indicating escapement of income. The procedural requirements for reopening were complied with, and the writ petitions challenging the reopening were dismissed.

← Previous Next →