Income Tax Act, 1961 – Sections 10(A), 143(3), 147 and 148 – Reassessment notice – Validity – Petitioner is a company engaged in business of providing healthcare technology services, filed its return of income for AY 2015-16 declaring total income after claiming deduction under Section 10(A) of the Act of profits earned from Special Economic Zone (SEZ) – After considering details furnished by Petitioner, AO allowed deduction claimed by assessee and completed assessment under Section 143(3) of the Act – Petitioner received notice under Section 148 of the Act proposing re-opening of assessment for AY under consideration – Respondent No.3 rejected objections filed by Petitioner contesting re-opening of assessment on various grounds – Whether Petitioner has failed to disclose fully and truly all material facts during course of original assessment to justify re-opening of assessment – HELD – AO can only re-open an assessment, if he has ‘reason to believe’ that undisclosed income has escaped assessment – Admittedly, notice under Section 148 of the Act has been issued more than four years after expiry of relevant assessment year and assessment under Section 143(3) of the Act has been completed – In such circumstances, proviso to Section 147 of the Act will apply, therefore, there is a bar in reopening unless there is a failure to truly and fully disclose material facts – Fact that Petitioner is conducting its operations from SEZ unit is evident in notes to accounts forming part of financial statements furnished by Petitioner during assessment proceedings – Petitioner was also specifically asked to produce Form No.56F with respect to SEZ unit and deduction under Section 10A of the Act was allowed after scrutiny of said forms – Petitioner has furnished all details and relevant documents during assessment proceedings – AO has perused documents and thereafter passed original order – There is no failure on part of Petitioner to make full and true disclosure during assessment proceedings to justify re-opening of proceedings – Reopening of assessment is merely based on a change of opinion on same set of facts and material before AO which was available to him at time of original assessment – Impugned notice issued under Section 148 of the Act and order rejecting objections filed by Petitioner are quashed – Petition allowed


 

2023-VIL-135-BOM-DT

Neutral Citation: 2023:BHC-OS:11327-DB

 

IN THE HIGH COURT OF JUDICATURE AT BOMBAY

ORDINARY ORIGINAL CIVIL JURISDICTION

 

WRIT PETITION NO.1796 OF 2022

 

DATED: 25.09.2023

 

CITIUSTECH HEALTHCARE TECHNOLOGY PVT. LTD

 

Vs

 

1. DEPUTY COMMISSIONER OF INCOME TAX, MUMBAI

2. PRINCIPAL COMMISSIONER OF INCOME-TAX-1, MUMBAI

3. NATIONAL FACELESS ASSESSMENT CENTRE

THROUGH THE PRINCIPAL CHIEF COMMISSIONER OF INCOME-TAX, NEW DELHI

4. THE UNION OF INDIA THROUGH THE SECRETARY, NEW DELHI

 

For Petitioner: Mr. J.D.Mistri, Senior Advocate with Mr. Hiten Chande i/by Mint & Confreres

For Respondents: Mr. Suresh Kumar

 

CORAM

K.R. SHRIRAM & NEELA GOKHALE, JJ

 

JUDGMENT: (Per Neela Gokhale, J.)

 

1. Rule. Rule made returnable forthwith. With consent of the parties, the Petition is taken up for final hearing.

 

2. Petitioner assails notice dated 27th March 2021 issued by Respondent No.1 under Section 148 of the Income-tax Act, 1961 (“the Act”) re-opening the assessment for the Assessment Year (“AY”) 2015-16 and order dated 22nd March 2022 rejecting the objections of Petitioner for re-opening of the assessment under Section 147 of the Act for the year under consideration. Notice dated 19th July 2021 issued under Section 143(2) of the Act and the further notices dated 10th January 2022 and 7th February 2022 issued under Section 142(1) of the Act are also assailed.

 

3. Petitioner is in the business of providing healthcare technology services. It commenced its business activities by establishing a unit in Software Technology Park (“STP”) Andheri, Mumbai. Production was commenced in the previous year relevant to AY 2006-07. Petitioner claimed 100% deduction under Section 10(A) of the Act on the profits earned from STP Unit from AY 2006-07 to AY 2011-12, which was allowed by the Assessing Officer (“AO”). Even in subsequent assessment years the AO accepted the profits and losses declared by Petitioner under Sections 10A and 10AA of the Act after calling for additional details from Petitioner for examination. The AO also allowed the deduction under Section 10AA of the Act from AY 2012- 13 to AY 2014-15.

 

4. Petitioner filed return of income for AY 2015-16 declaring a total income of Rs.42,53,18,780/- and claimed deduction of Rs.104,14,77,844/- for its unit established in the Special Economic Zone (“SEZ”), clearly disclosing that the unit in SEZ commenced production in AY 2011-12. During the assessment proceedings, Respondent No.1 called upon Petitioner to submit financial statements, computation of total income and tax audit report for the concerned year, which were furnished by Petitioner. A statutory report from the Auditor in Form No.56F relating to the 100% deduction claim was also furnished by Petitioner. Other details as required by the AO were also provided from time to time. The assessment order dated 27th September 2017 was thus passed under Section 143(3) of the Act for AY 2015-16.

 

5. A notice dated 27th March 2021 was received by Petitioner under Section 148 of the Act calling upon Petitioner to deliver a return for the said assessment year within 30 days from the date of service of the notice, since the AO had reasons to believe that the income of Petitioner chargeable to tax for AY 2015-16 escaped assessment within the meaning of Section 147 of the Act. Accordingly, Petitioner filed return of income declaring its total income to be same as the total income declared in its original return.

 

6. Petitioner, vide letter dated 27th April 2021, requested Respondent No.1 to furnish a copy of “reasons recorded” under Section 148 of the Act for re-opening the assessment for AY under consideration. The reasons recorded were received by Petitioner on 31st August 2021 and on 14th September 2021 and Petitioner filed its objections contesting the re-opening of the assessment on various grounds. By notice dated 10th January 2022 followed by another notice dated 7th February 2022, Respondent No. 3 called upon Petitioner to submit details in connection with the re-assessment proceedings. Petitioner reminded Respondents that its objections were yet to be decided and requested them to dispose of the objections since the time limit to complete the re-assessment was expiring on 31st March 2022 and conveyed that in case its objections were eventually rejected, Petitioner would require time to challenge the decision of initiation of re-assessment by rejection of the objections raised by Petitioner.

 

7. Despite reminders from Petitioner, Respondent No.3 passed the impugned order dated 22nd March 2022 disposing the objections merely eight days before the time limit to complete the assessment. Petitioner thus filed the present Petition seeking quashing of the notice under Section 148 of the Act and the order disposing of the objections, amongst other relief.

 

8. Mr. Mistri, learned Senior Advocate appearing for Petitioner contested the notices and the order impugned on the grounds that firstly, Petitioner had made full disclosure regarding the deduction claimed under Section 10AA of the Act in the return of income, financial statements and statutory audit report in Form No. 56F during the original assessment in respect of the profits earned from SEZ unit and hence, there was no failure to disclose fully and truly material facts as required under the Act; secondly, there was nothing to indicate that the deduction claimed on the profits earned from the SEZ unit was a result of splitting up or reconstruction of STP unit; thirdly, no tangible material had come in the possession of Respondent No.3 after completion of the original assessment and all information was already available with the AO in the earlier assessment years and; finally that the entire re-opening was on the basis of ‘a change of opinion’ which was evident from the very language of the notice as well as the order impugned herein. Mr. Mistri emphasized that there was ample evidence to indicate that Respondent No.1 had perused all the relevant material furnished by Petitioner on his own as well as pursuant to the requirement made by the AO and hence, there was a full and complete disclosure regarding all material facts necessary for assessment. He also argued that the consequent notice dated 10th January 2022 also impugned does not even bear the signature of the prescribed approval granting authority. He thus prays that the Petition be allowed, and the impugned order and notices be set aside.

 

9. Mr Suresh Kumar learned Counsel appearing for the Revenue attempted to justify actions of the Department by saying that petitioner had claimed deduction under Section 10AA of the Act in respect of its SEZ unit operating from Airoli and had submitted Form No.56F, without the signature, seal, membership number of the Chartered Accountant. Thus, the said form was not treated as valid. He further said that Petitioner was not eligible to claim deduction under Section 10AA of the Act, since its unit was formed by splitting up of or reconstruction of its business, which was already in existence. Mr. Suresh Kumar also argued that the expenditure shown by Petitioner in its profit and loss account towards Employees Benefit Expense including Employee Stock Appreciation Rights pertained to a prior period and the AO should have disallowed that expenditure not being for the current year and should have added it to the total income. Omission on the part of the AO, so to do, resulted in underassessment of the income and thus, justified the re-opening of the assessment proceedings.

 

10. Mr. Suresh Kumar further argued that the profit and loss account submitted by petitioner depicted the finance cost claimed by it as Premium on Put options and from Note-15, it was also seen that Premium on Put options was not routed through the profit and loss account. According to the Revenue thus, the Mark to Market (MTM) losses claimed by petitioner as was allowed, should have also been routed through the profit and loss account and brought to taxation. This resulted in under-assessment of income and hence he justified re-opening on the ground of income escaping assessment.

 

11. Mr. Suresh Kumar also pointed to ‘new and tangible’ information made available to the AO pursuant to an audit objection raised by the Revenue, although this does not find place in the reasons recorded for re-opening conveyed through the notice dated 19th July 2021 under Section 143(2) read with Section 147 of the Act.

 

12. We have heard the learned Counsels appearing for the parties and with their assistance have gone through the record of the proceedings. In our opinion, the following issues arise for consideration in this case: -

 

(i) Whether in the facts and circumstances of the case, it can be adduced that the petitioner failed to disclose fully and truly all material facts during the course of original assessment which led to the finalization of the assessment order and income escaping assessment?

 

(ii) Whether ‘reasons to believe’ conveyed vide the notice dated 19th July 2021 to petitioner can be attributed to a ‘change of opinion’ as a basis of re-opening of the assessment proceedings?

 

13. It is trite law that the AO can only re-open an assessment if he has ‘reason to believe’ that undisclosed income has escaped assessment. Mere change of opinion of the assessing officer is not sufficient to meet the standard of ‘reason to believe’. As far as the first issue regarding full and true disclosure by Petitioner is concerned, since admittedly the notice under Section 148 of the Act has been issued more than four years after the expiry of the relevant assessment year and assessment under Section 143(3) of the Act has been completed, the proviso to Section 147 of the Act will apply. Therefore, there is a bar in reopening unless there is a failure to truly and fully disclosed material facts. The reasons to believe itself shows that there was no non disclosure of material facts. Paragraphs 2, 3 and 4 of the reasons read as under:

 

2. On perusal of the case records it is seen that the assessee has claimed deduction u/s. 10AA of Rs.104,14,77,844/- In respect of its SEZ unit operating from Mindspace, Serene Properties SEZ, Airoli. The assessee has submitted a Form No.56F vide covering letter dated 19.09.2017. However, the same lack name of the Accountant, signature, seal and the membership number of the CA and hence cannot be treated a valid form 56F. The financial details of the undertaking, for determination of the eligible amount of claim, is also not provided by the assessee. It is stated in the said form 56F that the undertaking commenced operations on 06.09.2010. Further, it is noticed from the BS (Note1- Corporate Information) that, the assessee company conducts its operations from two offshore software development centers, one of which is registered as an STPI Unit and the other being an SEZ unit registered under the applicable regulations of the Gol. In this connection, the following comments are offered. To be eligible to claim deduction u/s. 10AA, as per sub section 4 of section 10AA, the undertaking is not formed by the spitting up, or the construction of a business already in existence, with certain exclusions as provided. From the records and the website of the assessee it is seen that the assessee, was being operating as an STPI unit as early as 2005, prior to 06.09.2010 i.e. the commencement date of the Serene Properties SEZ, Airoli and could have claimed deduction u/s. 10A/10B as applicable. Therefore, the assessee is not eligible for any deduction as provided in Sub-section 4 of section 10AA. This has resulted into underassessment of income to the tune of Rs.104,14,77,844/-.

 

3. Further from P & L account, it was seen that the assessee has claimed finance cost of Rs.1,61,93,313/- as Premium on Put options. Further, as per note 27, it was stated that the company enters into forward foreign exchange contracts and vanilla put options. The company purchases forward contracts and option to mitigate the risks of change in foreign exchange rate on receivables denominated in foreign currency. The Mark to Market (MTM) is considered on portfolio approach wherein the hedging instrument and the hedging items are evaluated together. Further, from note-15 other assets, it was also seen that Premium on Put Options of Rs.2,27,38,682/- was not routed through P&L account. As the assessee claimed MTM losses and was allowed, this amount should have also been routed through P&L Account and brought to taxation. This has resulted into underassessment of income to the tune of Rs.2.27,38,682/-.

 

4. Further, it is seen from P&L, the assessee has claimed an amount of Rs.127,29,02,550/- as Employees Benefit Expense. Further, it was noticed from the Note-30 (Prior Period Items) of financial statements, Employee benefit Expense includes Employee Stock Appreciation Rights of Rs.19,18,75,324/- pertaining to Prior Period. The expenditure being not for current year, should have been disallowed and added the total income. This has resulted into underassessment of income to the tune of Rs.19,18,75,324/-

 

The first point regarding claiming of deduction under Section 10AA of the Act, it says “On perusal of the case records it is seen that the assessee has claimed deduction u/s. 10AA of Rs.104,14,77,844/- in respect of its SEZ unit ………………”. This itself indicates that records were available and there was no non disclosure.

 

On the finance cost of Rs.1,61,93,313/- that was claimed as premium on put options, paragraph 3 of the reasons indicate “Further, from P&L account, it was seen that ………… Further, as per note 27, it was stated that the company enters into forward foreign exchange contracts ………. As the assessee claimed MTM losses and was allowed this amount should have also been routed through P&L account and brought to taxation …………”. This also indicates that there was no failure to disclose material facts.

 

On the finance cost of Rs.1,61,93,313/- that was claimed as premium on put options, paragraph 3 of the reasons indicate “Further, from P&L account, it was seen that ………… Further, as per note 27, it was stated that the company enters into forward foreign exchange contracts ………. As the assessee claimed MTM losses and was allowed this amount should have also been routed through P&L account and brought to taxation …………”. This also indicates that there was no failure to disclose material facts.

 

It is rather obvious that all the details have been obtained from the profit and loss account/annual accounts filed by petitioner.

 

14. The notice conveying its ‘reasons to believe’ itself cites profit and loss statement and notes to the financial statements in relation to SEZ point which was already before the AO during the initial assessment proceedings. The notice also records that Petitioner had furnished Form No. 56F, copy of return of income along with the computation of income in which deduction under Section 10 AA of the Act was claimed in AY 2015-16 to the AO. The fact that Petitioner is conducting its operations from STP unit and SEZ unit is also evident in the notes to accounts forming part of the financial statements furnished by Petitioner during assessment proceedings 2015-16. Petitioner was specifically asked to produce Form No. 56F with respect to STP and SEZ units during proceedings for AY 2011-12 and the deduction under 10A of the Act was allowed after the scrutiny of the said forms. Petitioner furnished the same and other relevant documents as required by the AO from time to time, including financial statements for AY 2012-13 and AY 2013-14, wherein again details of SEZ were mentioned. Further financial statements of AY 2014-15 also mention details of the SEZ unit and Form No. 56F and relevant extract of ITR form for AY 2012-13 to AY 2014-15 as furnished also disclose details of the claim of deduction under section 10AA of the Act. Hence there is no neglect or failure on the part of petitioner to render full and true disclosure at the time of assessment.

 

15. There can be no doubt that the duty of disclosing all the primary facts relevant to the decision of the question before the assessing authority lies on an assessee. Does the duty however extend beyond the full and truthful disclosure of all primary facts? In our opinion, the answer to this question must be in the negative. Once all the primary facts are before the assessing authority, he requires no further assistance by way of disclosure. It is for him to decide what inferences of facts can be reasonably drawn. It is not for somebody else – least of all an assessee – to tell the AO what inferences should be drawn. Indeed, when it is remembered that people often differ as regards what inferences should be drawn from given facts, it will be meaningless to demand that an assessee must disclose what inferences – whether of facts or law – he would draw from the primary facts. On this aspect we draw strength from the decision of the Apex Court in the matter of New Delhi Television Ltd v. Deputy Commissioner of Income Tax [2020 SCC OnLine SC 446] where the Apex Court, relying upon a decision of its Constitutional Bench in the matter of Calcutta Discount Company Ltd v. Income Tax Officer, Companies District I, Calcutta [AIR 1961 SC 372] has held that it is the duty of the assessee to disclose full and truly all material facts termed as primary facts and non-disclosure of other facts which may be termed as secondary facts is not necessary.

 

16. The above discussion clearly indicates that Petitioner has furnished all the details and relevant documents itself as also those required to be furnished by the AO from time to time during the assessment proceedings. The AO has perused the documents and thereafter passed the original order. There is, thus, no failure on the part of Petitioner to make a full and true disclosure during the assessment proceedings to justify re-opening of the proceedings on this account. We thus answer the first issue accordingly.

 

17. Coming to the second issue arising in the Petition with respect to re-opening the proceedings based on “change of opinion”, it is evident that the original order was passed based on all the necessary information that was already available at the time of regular assessment. In the assessment year subsequent to AY 2011-12 up to AY 2014-15, deduction under section 10AA of the Act was always allowed to petitioner after thorough examination of the documents by the AO. Paragraph 3 of the notice of ‘reasons to believe’ clearly conveys that the MTM losses claimed by Petitioner and allowed by AO should have been routed through profit and loss account and brought to taxation. Further the language of Paragraph 4 of the same notice states that the expenditure as claimed by Petitioner in its profit and loss account towards Employees Benefit Expense including Employee Stock Appreciation Rights was allowed by the AO and now it is held that the expenditure being not for current year should have been disallowed and added to the total income resulting in underassessment of income. This clearly shows that the AO during the original assessment was of the view that the expenditure as claimed should be allowed and the reopening of assessment is based on a ‘change of opinion’.

 

18. The impugned order dated 22nd March 2022 rejecting the objections of Petitioner to the ‘reason to believe’ notice merely justifies the reopening on the ground that Explanation I to Section 147 of the Act provides that ‘production before the assessing officer of books of accounts or other evidence from which material evidence could, with due diligence, have been discovered by the assessing officer will not necessarily amount to disclosure within the meaning of the foregoing proviso’. This is the only basis on which the objection of Petitioner is rejected. The impugned order does not even deal with any of the objections taken by Petitioner. The order is also silent on the objections of Petitioner in respect to the language of the notice indicating clearly that the reopening is based on a change of opinion. This Court in its decision rendered in Ananta Landmark Pvt. Ltd. v. Deputy Commissioner of Income Tax and Ors [(2021) 131 taxmann.com 52 Bombay] has held as under: -

 

“….that when the primary facts necessary for assessment are fully and truly disclosed, the assessing officer is not entitled on change of opinion to commence proceedings for reassessment and where on consideration of material on record, one view is conclusively taken by the assessing officer, it would not be open to reopen the assessment based on the very same material with a view to take another view.”

 

19. This Court in the matter of Ashraf Chitalwala v. Deputy Commissioner of Income Tax and Ors [2023:BHC-OS: 9873-DB. (Internal citation)] has also relied upon the decision in Ananta Landmarks (supra) to hold that the reopening of assessment cannot be justified based on a change of opinion. Strength has also been drawn from the decision in the matter of Aroni Commercials Ltd. v Deputy Commissioner of Income Tax 2 (1), Mumbai and Anr [2014 (44) taxmann.com 304 Bombay] which has also held that when the AO has clearly applied his mind while computing the capital gains and deductions after forming a view, the view cannot be changed and it will amount to a clear case of change of opinion which is impermissible in law.

 

20. Thus, we are firmly of the view that there is no failure on the part of Petitioner in making true and full disclosure to the AO during the original assessment leading to the deductions being allowed by the assessing order. The Notice conveying reasons to believe as well as the Order rejecting Petitioner’s objections clearly indicate that the original order was passed by the AO upon his satisfaction in respect of the material furnished by Petitioner. The notice simply says that the AO should not have allowed the deductions and should have arrived at an alternate finding. Thus, even de hors any additional explanation by Petitioner, the wording and language of the notice and the order impugned herein itself reveals the distinct views taken by the AO. We find that the reopening of assessment is merely based on a change of opinion on the same set of facts and material before the AO which was available to him at the time of original assessment. We thus, answer issue No.2 accordingly.

 

21. In view of the foregoing, we allow the Petition and hold that the Revenue has failed to show non-disclosure of facts by Petitioner and the reason to believe there was escapement of income is purely based on a change of opinion.

 

The Petition is allowed.

 

Rule is thus made absolute in terms of prayer clause (a) which reads as thus: -

 

(a) That this Hon’ble Court 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 and/or Article 227 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 impugned notice dated 27th March 2021 (Exhibit ‘I’) the impugned order dated 22nd March 2022 (Exhibit ‘W’) and consequential notice dated 19th July 2021 under section 143(2) of the Act (Exhibit ‘L’) and notices dated 10th January 2022 (Exhibit ‘Q’) and 7th February 2022 (Exhibit ‘T’) issued under Section 142(1) of the Act;

 

22. There will be no order as to costs.

 

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