2016 (1) TMI 788 - HC - Income Tax

Reopening of assessment - Held that - Reasons 3 to 7 of the order dated 30th March, 2011, based as they are on audit objections, in terms of which the AO felt constrained as a result of the CBDT Instruction No. 9 of 2006, to reopen the assessment for the AY 2004-05, are unsustainable in law. The Court holds instruction No.9 of the CBDT dated 7th November, 2006 cannot possibly override the statutory powers to be exercised by an AO in terms of Section 147 of the Act. In other words the said instruction has to be read consistent with proviso (a) to Section 119 (1) of the Act and cannot, as was erroneously understood by the Respondent, compel the AO to issue the notice dated 30th March, 2011. If the CBDT Instruction No. 9/2006 is read to the contrary, it would fall foul of Section 119 of the Act. In the first instance when the original assessment was framed. This included the account books, tax audit reports etc. The return was picked up for scrutiny and after two questionnaires were answered to the AO s satisfaction by the Assessee, the assessment was framed under Section 143 (3) of the Act. In the circumstances, the reference by the AO to Explanation 1 to Section 147 of the Act is, misconceived for the simple reason that once the original return was picked up for scrutiny and the accounts and other documents were subjected to a detailed examination by the AO, the question of there being no full and true disclosure of the material facts did not arise. Significantly, the reasons for re-opening fail to mention which material was failed to be disclosed by the Assessee Despite the Assessee earning dividend which was treated as exempt under Section 10 (34) no disallowance of expenditure was made under Section 14-A - It is seen that during the original assessment proceedings under Section 143(3) of the Act, there was a specific query raised by the AO in the letter dated 24th December, 2004 addressed to the Assessee. Question 8 required the assessee to give details of dividend exempt under Section 10 (34) received from HDFC along with copies of accounts. It is further seen that Question 9 of the AO s letter dated 25th February, 2005 was regarding the dividend of ₹ 1.85 crores received from HDFC. The Assessee submitted detailed replies in this regard on 31st January, 2005 enclosing the complete details. Another reply was furnished on 16th March, 2005. Para 8 of the said reply deals with in detail with the query regarding the dividend of ₹ 1.85 crores received from HDFC. Assessee was unable to reconcile the receipts of USD, 10369250 from Ranbaxy USA despite various opportunities. In this regard the AO had sought an explanation from the Petitioner by issuing a notice dated 25th January, 2011 even prior to issuance of the notice under Section 147/148 of the Act. This information had been furnished to the AO by the Petitioner by its letter dated 11th February, 2011. It was explained that USD 1,03,69,250/- was a total of six of the seven receipts and was, therefore, included in the sum of USD 1,13,17,472/-. A certificate was also provided from Ranbaxy USA to the effect that no other amount was paid by them during the relevant period. In the counter affidavit filed by the Respondent, it is simply reiterated that the Petitioner had not reflected USD 948,222 as income in the relevant AY despite the fact that Ranbaxy USA has disclosed this in its return. As pointed out by Mr Syali, it was the above reason that prompted the AO to issue a letter in the first instance to the Petitioner on 25th January, 2011. The explanation offered by the Petitioner in its reply dated 11th February, 2011 that the said amount was included in the amount already disclosed was obviously overlooked while seeking to reopen the assessment. Consequently, there appears to be no basis in the conclusion of the AO that Petitioner was unable to reconcile the receipts from Ranbaxy USA. The Court is, therefore, satisfied that reason 8 is also unsustainable in law. - Decided in favour of assessee

Issues Involved:
1. Validity of the notice under Section 148 of the Income Tax Act.
2. Reopening of assessment based on audit objections.
3. Requirement of fresh material for reopening.
4. Alleged non-disclosure of material facts by the assessee.
5. Specific reasons for reopening the assessment.

Detailed Analysis:

1. Validity of the notice under Section 148 of the Income Tax Act:
The petitioner, Sun Pharmaceutical Industries Ltd., sought to quash the notice dated 30th March 2011 issued under Section 148 of the Income Tax Act for the Assessment Year (AY) 2004-05. The court examined whether the notice met the statutory requirements and whether the reasons provided for reopening the assessment were legally sustainable.

2. Reopening of assessment based on audit objections:
The court scrutinized the reasons for reopening the assessment, noting that five out of eight reasons (Serial Nos. 3 to 7) were based solely on audit objections. The court held that the Assessing Officer (AO) could not be compelled by the Central Board of Direct Taxes (CBDT) Instruction No. 9/2006 to reopen the assessment if he did not independently agree with the audit objections. It was emphasized that the AO must exercise his statutory powers independently and not act under external pressure or instructions.

3. Requirement of fresh material for reopening:
The court observed that the AO must have fresh material to justify the reopening of an assessment. The AO's reliance on audit objections without fresh material was deemed insufficient. The court referenced several precedents, including CIT v. Greenworld Corporation and CIT v. Kelvinator of India Ltd, which reinforced the necessity of fresh material for reopening assessments.

4. Alleged non-disclosure of material facts by the assessee:
The court examined whether the petitioner failed to disclose material facts fully and truly. It was noted that the petitioner had provided all relevant documents, including tax audit reports and responses to detailed questionnaires during the original assessment. The court found no evidence of non-disclosure of material facts by the petitioner, thus invalidating the reasons for reopening based on alleged non-disclosure.

5. Specific reasons for reopening the assessment:

Reason 1: Provision for Doubtful Debts and Advances:
The court noted that the clause requiring the addition of the provision for doubtful debts for calculating book profits under Section 115JB was inserted retrospectively from 1st April 2009. The petitioner had already disclosed all relevant materials, and the AO had accepted the claim in the original assessment. The court held that there was no failure on the petitioner's part to disclose material facts.

Reason 2: Disallowance of expenditure under Section 14A:
The court observed that the petitioner had provided detailed responses to the AO's queries regarding the dividend income exempt under Section 10(34) during the original assessment. The court found no failure to disclose material facts and held that the reopening was based on a mere change of opinion.

Reason 3 to 7: Audit objections:
The court reiterated that the AO could not reopen the assessment solely based on audit objections, especially when the AO had not accepted those objections. The court invalidated these reasons as they were unsustainable in law.

Reason 8: Reconciliation of receipts from Ranbaxy USA:
The court found that the petitioner had provided a satisfactory explanation and documentation to reconcile the receipts from Ranbaxy USA. The AO's conclusion that the petitioner failed to reconcile the receipts was deemed baseless.

Conclusion:
The court quashed the notice dated 30th March 2011 issued under Section 148, the order dated 29th July/1st August 2011, and all consequential proceedings. The writ petition was allowed, emphasizing that the AO must independently exercise his statutory powers and not act under compulsion from audit objections or CBDT instructions.

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