2020 (4) TMI 133 - SC - Income Tax

Reopening of assessment u/s 147 - Valid reason to believe that undisclosed income had escaped assessment or not? - sufficient material before the assessing officer to take a prima facie view that income of the assessee had escaped assessment - failure to show non-disclosure of facts the notice having been issued after a period of 4 years - HELD THAT - Obviously, during the assessment proceedings the assessee will have the right to place material on record to show that the transaction in question was a genuine transaction. It is trite law that an assessing officer can only reopen an assessment if he has reason to believe that undisclosed income has escaped assessment. Mere change of opinion of the assessing officer is not a sufficient to meet the standard of reason to believe . Subsequent facts which come to the knowledge of the assessing officer can be taken into account to decide whether the assessment proceedings should be reopened or not. Information which comes to the notice of the assessing officer during proceedings for subsequent assessment years can definitely form tangible material to invoke powers vested with the assessing officer under Section 147 of the Act. The material disclosed in the assessment proceedings for the subsequent years as well as the material placed on record by the minority shareholders form the basis for taking action under Section 147 of the Act. At the stage of issuance of notice, the assessing officer is to only form a prima facie view. In our opinion the material disclosed in assessment proceedings for subsequent years was sufficient to form such a view. We accordingly hold that there were reasons to believe that income had escaped assessment in this case. Question No.1 is answered accordingly. Whether there was failure on the part of the assessee to make a full and true disclosure of all the relevant facts? - Extension of limitation period - HELD THAT - Assessee disclosed all the primary facts necessary for assessment of its case to the assessing officer. What the revenue urges is that the assessee did not make a full and true disclosure of certain other facts. We are of the view that the assessee had disclosed all primary facts before the assessing officer and it was not required to give any further assistance to the assessing officer by disclosure of other facts. It was for the assessing officer at this stage to decide what inference should be drawn from the facts of the case. In the present case the assessing officer on the basis of the facts disclosed to him did not doubt the genuiness of the transaction set up by the assessee. This the assessing officer could have done even at that stage on the basis of the facts which he already knew. The other facts relied upon by the revenue are the proceedings before the DRP and facts subsequent to the assessment order, and we have already dealt with the same while deciding Issue No.1. However, that cannot lead to the conclusion that there is nondisclosure of true and material facts by the assessee. It is interesting to note that whereas before this Court the revenue is strenuously urging that the assessee is guilty of nondisclosure of material facts, before the High Court the case of the revenue was just opposite. In our opinion the revenue cannot now turn around and urge that the assessee is guilty of nondisclosure of facts. We are also of the view that the revenue could not be permitted to blow hot and cold at the same time. We are clearly of the view that the revenue in view of its counter affidavit before the High Court that it was not relying upon the nondisclosure of facts by the assessee could not have been permitted to orally urge the same. Even otherwise we find that the assessee had fully and truly disclosed all material facts necessary for its assessment and, therefore, the revenue cannot take benefit of the extended period of limitation of 6 years. Whether in terms of second proviso to Section 147 of the Act read with Section 149(1) (c) of the Act, the limitation period would be 16 years since the assessee has derived income from a foreign entity? - HELD THAT - There is nothing in the reasons to indicate that the revenue was intending to apply the extended period of 16 years. It is only after the assessee filed its reply to the reasons given, that in the order of rejection for the first time reference was made to the second proviso by the revenue. In our view this is not a fair or proper procedure. If not in the first notice, at least at the time of furnishing the reasons the assessee should have been informed that the revenue relied upon the second proviso. The assessee must be put to notice of all the provisions on which the revenue relies upon. If the revenue is to rely upon the second proviso and wanted to urge that the limitation of 16 years would apply, then in our opinion in the notice or at least in the reasons in support of the notice, the assessee should have been put to notice that the revenue relies upon the second proviso. The assessee could not be taken by surprise at the stage of rejection of its objections or at the stage of proceedings before the High Court that the notice is to be treated as a notice invoking provisions of the second proviso of Section 147 of the Act. Accordingly, we answer the third question by holding that the notice issued to the assessee and the supporting reasons did not invoke provisions of the second proviso of Section 147 of the Act and therefore at this stage the revenue cannot be permitted to take benefit of the second proviso. Thus notice issued to the assessee shows sufficient reasons to believe on the part of the assessing officer to reopen the assessment but since the revenue has failed to show non-disclosure of facts the notice having been issued after a period of 4 years is required to be quashed

Summary

Issues Involved:
1. Validity of the reason to believe that undisclosed income had escaped assessment.
2. Whether the assessee failed to disclose fully and truly all material facts during the original assessment.
3. Applicability of the second proviso to Section 147 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Validity of the Reason to Believe:
The court examined whether the revenue had sufficient reasons to believe that undisclosed income had escaped assessment. The assessment officer can reopen an assessment if there is 'reason to believe' that income chargeable to tax has escaped assessment. The revenue argued that subsequent information and complaints from minority shareholders provided fresh tangible material indicating round-tripping of funds, which justified reopening the assessment. The court held that the material disclosed in assessment proceedings for subsequent years and the complaints from minority shareholders formed a sufficient basis for the revenue to have a prima facie view that income had escaped assessment. Thus, the court concluded that there were valid reasons to believe that income had escaped assessment.

2. Failure to Disclose Fully and Truly All Material Facts:
The court considered whether the assessee failed to disclose all material facts necessary for the assessment. The revenue claimed that the assessee did not disclose the amount subscribed by each entity and the management structure of these companies. However, the court found that the assessee had disclosed all primary facts, including the issuance and redemption of step-up coupon bonds, and the names of the entities that subscribed to the bonds. The court emphasized that it is the duty of the assessee to disclose all primary facts, but not secondary facts. The court held that the assessee had made a full and true disclosure of all material facts necessary for its assessment, and the revenue could not take benefit of the extended period of limitation of 6 years for initiating proceedings under the first proviso to Section 147.

3. Applicability of the Second Proviso to Section 147:
The court examined whether the notice dated 31.03.2015 invoked the provisions of the second proviso to Section 147, which allows for an extended limitation period of 16 years for income related to any asset located outside India. The court noted that the notice and the reasons communicated to the assessee did not mention the second proviso or any foreign entity. It was only in the order rejecting the assessee's objections that the revenue referred to the second proviso. The court held that the notice and reasons did not conform to the principles of natural justice, as the assessee was not given a proper opportunity to respond to the allegations related to the second proviso. Therefore, the court concluded that the revenue could not rely on the second proviso at this stage.

Conclusion:
The appeal was allowed, and the notice issued to the assessee was quashed due to the revenue's failure to show nondisclosure of facts. The court clarified that it had not expressed any opinion on the applicability of the second proviso and allowed the revenue to issue a fresh notice if permissible under law. Both parties were given the liberty to raise all contentions regarding the validity of such notice.