2021 (3) TMI 56 - HC - Income Tax

Reopening of assessment u/s 147 - disallowance u/s 14A - Reopening after four years - HELD THAT - All the material facts relating to Section 14(A) of the Act were before the Assessing Officer during the course of the original assessment and now, he could not reopen the assessment after 4 years where there is no failure on the part of the assessee to disclose fully and truly all the facts necessary for assessment. It is settled by the Apex Court in the case of CIT Delhi Vs. Kelvinator of India Limited. 2010 (1) TMI 11 - SUPREME COURT that the existence of tangible material is essential to safeguard against the arbitrarily exercised of power. Therefore, as discussed above, at the time of recording the reasons, there were no fresh materials on which the Assessing Officer could have formed a requisite belief with regard to the escapement of the assessment. The record further indicates that, the assessee had disclosed all materials fully and truly before the respondent at the time of original assessment. Even on merits, it is settled that, disallowance under Section 14A of the Act cannot exceed the exempt income of the assessee. Thus, the twin conditions as provided under Section 147 of the Act, which are condition precedent for reopening of the assessment made after 4 years are not satisfied. As proposed amount is exceed the exempt income of the assessee. In that view of the matter on merits, invoking the provisions for reopening of the assessment under Section 147 of the Act is bad in law. There was no basis or jurisdiction for assessing officer to form a belief that, any income of the assessee chargeable to tax for the year under consideration had escaped assessment within the meaning of Section 147 of the Act and the reasons recorded could not have led to formation of any belief that income had escaped assessment within the meaning of the aforesaid provision. - Decided in favour of assessee.

Summary

Issues Involved:
1. Legality and validity of the notice issued under Section 148 of the Income Tax Act, 1961 for reopening the assessment.
2. Whether the reopening of assessment constitutes a change of opinion.
3. Whether the disallowance under Section 14A of the Act can exceed the exempt income.

Issue-wise Detailed Analysis:

1. Legality and Validity of the Notice Issued Under Section 148:
The writ applicant challenged the notice dated 26.07.2018 issued under Section 148 of the Income Tax Act, 1961, proposing to reassess the income for the Assessment Year (A.Y.) 2012-13 on the grounds that the income chargeable to tax had escaped assessment within the meaning of Section 147 of the Act. The applicant argued that the initial assessment was completed under Section 143(3) on 05.03.2015, and the reopening notice was issued after four years, which requires a higher threshold of conditions to be met, specifically the failure to disclose fully and truly all material facts necessary for the assessment.

2. Change of Opinion:
The applicant contended that the issue of disallowance under Section 14A was thoroughly examined during the original assessment, and the disallowance was limited to ?34,06,859/-, which was the amount of exempt income earned. The reopening of the assessment on the same material was argued to be a change of opinion, which is not permissible in the absence of any tangible new material. The court noted that all material facts relating to Section 14A were before the Assessing Officer during the original assessment, and no new material surfaced during the reassessment proceedings. The court relied on the Supreme Court's decision in CIT Delhi Vs. Kelvinator of India Limited, which mandates the existence of tangible material to justify the reopening of an assessment.

3. Disallowance Under Section 14A:
The applicant argued that the disallowance under Section 14A cannot exceed the exempt income, citing the Supreme Court's decision in Principal Commissioner of Income Tax Vs. State Bank of Patiala, which held that the amount of disallowance under Section 14A of the Act should be restricted to the amount of exempt income only and not at a higher figure. The court agreed with this contention, noting that the proposed disallowance of ?5,13,06,096/- exceeded the exempt income of ?34,06,859/-, making the reopening of the assessment on this ground invalid.

Conclusion:
The court concluded that the reopening of the assessment was based on a change of opinion and not on any new tangible material. It held that the conditions for reopening the assessment after four years were not satisfied, as there was no failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. Consequently, the impugned notice dated 26.07.2018 issued under Section 148 of the Act was quashed and set aside, and the writ application was allowed.