Unnecessary litigation by revenue on settled legal position is causing brain drain: Reassessment not permissible on mere change of opinion recently reiterated by the Supreme Court.

[DEV KUMAR KOTHARI]

Recent judgments:

ASSISTANT COMMISSIONER OF INCOME TAX AND ORS. VERSUS KALPATARU LAND PRIVATE LIMITED - 2022 (10) TMI 365 - SUPREME COURT

KALPATARU LAND PRIVATE LIMITED VERSUS ASSISTANT COMMISSIONER OF INCOME TAX CENTRAL CIRCLE – 5 (3) & ORS. - 2021 (12) TMI 998 - BOMBAY HIGH COURT

Relevant facts are as follows:

Assessee/ petitioner in WP KALPATARU LAND PRIVATE LIMITED

Assessment Year 2013-2014

Oder under Section 143(3) of the Income Tax Act, 1961 (the said Act)  was passed on 20th February 2016 by determining the total income of Rs.Nil.

Enquiry by AO:

During scrutiny assessment proceeding The AO by a letter dated 5th October 2015  had called upon assessee  to produce the evidence in support of increase of authorised share capital, produce the evidence of share allotment and name and address of the parties from whom share premium was received, among other things.

Reply of Assessee/ petitioner:

Assessee by its letter dated 23rd December 2015 provided the details of share premium received including name of the party from whom it was received.

After considering the same,  the AO passed the assessment order u.s. 143.3  on 10th February 2016.

Notice u.s. 148

On 27th March 2019 AO issued  notice under Section 148 of the Income-tax Act. The reasons for reopening of assessment, considered by the High Court read as under:

1. The assessee is engaged in the business of real estate and development and filed its return of income for AY 2013-14 on 23/11/2013 declaring total income of Rs. Nil. The assessment in the instant case was completed u/s. 143(3) on 20/02/2016 by determining the total income of Rs. Nil.

2. Thereafter, it is noticed that the assessee company had issued its shares at premium of ₹ 990/- per share in FY 2012-13 relevant to AY 2013-14. During the said period, the assessee company had no significant transaction except having capitalized its interest expenses to the cost of the land purchased. The valuation of shares at a high premium of ₹ 990/- per share by the company was based on the Discounted Cash Flow (DCF) method in which projections of profitability was computed on unrealistic future growth projections which is not correct. The company had received consideration which exceeded the Fair Market Value (FMV) of the shares and therefore liable to be taxed as the difference between the aggregate value of the shares and FMV u/s 56(2) (viib) of the Act.

Per author:

Other reasons are not found in the judgment, may be they were not necessary by HC.

This appears that the AO did not mention about enquiry made by him, replies filed by assesse and considered before original assessment. Therefore, assessee  in WP  before HC, requested inter alia to call for assessment records also and sought relief to set aside the notice u.s. 148.

The prayer in WP before High Court was as follows (highlights added by author)

(a)  this Hon’ble Court may be pleased to issue a Writ of Certiorari or a writ in the nature of Certiorari or any other appropriate writ, order or direction under Article 226 of the Constitution of India calling for the records of the petitioner’s case and after examining the legality and validity thereof quash and set aside the notice dated 27th March 2019 issued by respondent no.1 under Section 148 of the Act seeking to reopen the assessment for the assessment year 2013-14 being Exhibit J hereto and the order dated 11th November 2019 being Exhibit N hereto.

About notice and reasons honorable High Court found as follows ,

vide para 3 (with highlights added by author):

                  3. First of all we find the entire view expressed is to be speculative and conjecture. The Assessing Officer has not even indicated what according to him should be the fair market value of the shares and how he has arrived at. The Assessing Officer has also not mentioned why according to him the valuation of shares were based on projections of profitability computed on unrealistic future growth projections. Moreover, it does not even indicate what was the material fact which was not truly and fully disclosed by petitioner during the assessment proceedings.

 

Argument of  counsel of revenue:

Counsel of revenue  relied upon a judgment  in CROMPTON GREAVES LTD. VERSUS ASSISTANT COMMISSIONER OF INCOME TAX & OTHERS - 2014 (12) TMI 936 - BOMBAY HIGH COURT and  submitted  that even if the reason for reopening does not specifically state that there was any failure on the part of petitioner to disclose fully and truly all material facts necessary for its assessment for the relevant assessment year, it will not be fatal to the assumption of jurisdiction under Sections 147 and 148 of the Act.

Court observed on the following lines:

As held in Crompton Greaves Ltd. (Supra), this is subject to the rider that there must be cogent and clear indication in the reasons supplied, that in fact there was failure on the part of the assessee to disclose fully and truly all the material facts necessary for its assessment. If the factum of failure to disclose can be culled down from the reasons in support of the notice seeking to reopen assessment, that will certainly not be fatal to the assumption of jurisdiction under Sections 147 and 148 of the said Act. The Court held “However, if from the reasons, no case of failure to disclose is made out, then certainly the assumption of jurisdiction under Sections 147 and 148 of the Act would be ultra vires, being in excess of the jurisdictional restraints imposed by the first proviso to Section 147 of the Act”.

Thereafter honorable Court considered the enquiry made by the AO and replies filed by the assessee before assessment was made u.s. 143.3. And in view of the same honorable Court held that :

        a.  it is not permissible for an Assessing Officer to reopen the assessment based on the very same material with a view to take another view without consideration of material on record one view is conclusively taken by the Assessing Officer.

b.  It is also not permissible to reopen purely on change of opinion.

c. A general statement that the escapement of income is by reason of failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment is not enough.

d. The Assessing Officer should indicate what was the material fact that was not truly and fully disclosed to him.

 In the circumstances,  Court  allowed the petition in terms of prayer clause - (a).

Appeal of Revenue before the Supreme Court:

On challenge by revenue by way of SLP against judgment of Bombay High Court, the Supreme Court dismissed the SLP of revenue  holding and reiterating settled legal position. The order  of the Supreme court is analyzed by author with some additions  placed in bracket and italicized) for understanding :

        Considering the fact that earlier (during original assessment proceeding)  the Assessing Officer had called upon the petitioner(s) to produce the evidence in support of increase of authorised share-capital, produce the evidence of share allotment and names and addresses of the parties from whom share-premium was received, among other things ( against which assessee had furnished details as asked by the AO)

and thereafter,( means after assessee had furnished all details as asked by the AO)

 the Assessing Officer finalised the assessment and passed Assessment Order,

the subsequent re-opening can be said to be change of opinion.

Under the circumstances, the re-opening is rightly set aside by the High Court. We see no reason to interfere with the same.

The Special Leave Petition stands dismissed (means the  judgment of High Court stand confirmed, particulary because judgement / order of SC is speaking order).

Earlier judgments and articles and experience:

On this website itself readers can found various judgments on similar and related issues and many articles, including some by the same author.

In similar situations, where AO has made enquiry and assesse had made submissions, based on which AO passed assessment order without making any addition, then it can be said that the AO has taken a possible view allowable in view of facts, circumstances and legal position.

 Therefore, in those circumstances there should not be revision by CIT u.s. 263 and any rectification of order by any authority u.s. 154.

And undoubtedly there cannot be rectification by AO if in original assessment enquiry has been made, complied with and no addition or disallowance has been made to some extent or has not been made at all.

However, we find that department is resorting to all such proceedings  u/s/ 147 /148  by AO u.s. 263 by CIT, Enhancements by CIT(A) and rectification can by any authority.

Although knowingly that these proceedings are not sustainable.

These actions of tax officers are causing litigation and harassment of taxpayers.

The revenue is make futile efforts in many similar situations.

The only gainers are  professionals engaged in dealing with litigation initiated  by revenue because unless protested and contested by assesse, the tax officers can demand anything and all things of assessee.