Income Tax Act, 1961 – Sections 143(3), 148 and 156 – Reopening of assessment – Issuance of notice – Validity – Petitioner is a company engaged in business of recycling and trading of aluminium scrap filed its Income Tax Return for AY 2014-15 – After considering all relevant documents submitted by Petitioner, AO completed assessment under Section 143(3) of the Act and issued notice of Nil demand in accordance with Section 156 of the Act – After a period of five years, Petitioner was served with notice under Section 148 of the Act for reopening of assessment – Whether impugned notice issued by Respondent under Section 148 of the Act is sustainable – HELD – It is a well settled principle of law that AO has power to re-open assessment, if there is "tangible material" to come to conclusion that there is escapement of income from assessment – There was no fresh tangible material available with assessing authorities so as to assume jurisdiction under Section 148 of the Act – Case of revenue is that there was large increase in cenvat creditors against reduction in business income as compared to preceding year and there was mismatch in amount paid to related persons – Petitioner had furnished copies of audited financial accounts, copy of assessment order of year 2013-14, details of payments made to persons specified, copy of ledger, accounts of loans taken by company etc. – After consideration of all these materials, AO passed assessment order under Section 143(3) of the Act and raised no demand – After a period of five years, revenue has thought it fit to reopen assessment proceedings purportedly under guise of same records on ground that material embedded in records could not be discovered – Stand taken by revenue is based on change of opinion, as return filed by Petitioner for AY 2014-15 was scrutinised under Section 143(3) of the Act – It is a clear case of change of opinion – Impugned notice issued under Section 148 of the Act is quashed and set aside – Petition allowed

 

2023-VIL-141-GUJ-DT

 

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

 

R/SPECIAL CIVIL APPLICATION NO. 3698 of 2022

 

Date: 03.10.2023

 

PALCO RECYCLE INDUSTRIES LIMITED

 

Vs

 

DEPUTY COMMISSIONER OF INCOME TAX

 

For the Petitioner: TIRTH NAYAK (8563)

For the Respondent: MR. NIKUNT RAVAL, ADVOCATE FOR MRS KALPANA K RAVAL

 

CORAM

HONOURABLE MR. JUSTICE BIREN VAISHNAV

HONOURABLE MR. JUSTICE BHARGAV D. KARIA

 

ORAL ORDER

 

(PER: HONOURABLE MR. JUSTICE BIREN VAISHNAV)

 

1 This petition under Articles 19(1),(g), 21, 226 and 300A of the Constitution of India is filed challenging the notice dated 31.03.2021 issued by the respondent under Section 148 of the Income Tax Act, 1961, inter alia proposing to re-assess the income / loss for the Assessment Year 2014-15 and the order dated 27.01.2022 disposing the objections raised by the petitioner and the consequential action of the respondent.

 

2 Facts in brief are as under:

 

2.1 The petitioner is a company incorporated on 28.09.2007 as per the provisions of the Companies Act, 1956 and is inter alia engaged in the business of recycling and trading of aluminium scrap.

 

2.2 The petitioner, on 01/09/2014, filed its audit report in accordance with Section 44B of the Income Tax Act, 1961, disclosing its audited profit and loss account and audited balance sheet for the Assessment Year 2014-15. The petitioner had also filed its Income Tax Return for the Assessment Year 2014-15 on 29.11.2014. As per the said return, the petitioner’s gross total income for the Assessment Year 2014-15 was Rs.47,51,418/- and the total tax paid by the petitioner for the said assessment year was Rs.14,70,727/-.

 

2.3 The petitioner was served with a notice dated 06.04.2016 issued by the respondent under Sec.142(1) of the Income Tax Act, 1961 for scrutiny assessment in the Income Tax Return filed by the petitioner for the Assessment Year 2014-15. The petitioner submitted detailed reply along with all the relevant documents. The then Assessing Officer considered the representation and all the relevant documents submitted by the petitioner and passed an Assessment Order dated 26.08.2016, whereby the assessment was done duly under Section 143(3).

 

2.4 A notice dated 26.08.2016 of Nil demand was issued in accordance with Section 156 of the Income Tax Act, 1961. After almost a period of five years, the petitioner was served with notice dated 31.03.2021 under Section 148 of the Income Tax Act, 1961. The petitioner was also served a communication dated 09.11.2021, whereby reasons for reopening of assesment were communicated.

 

2.5 The petitioner vide a letter, submitted its objections against re-opening of assessment proceedings. The respondent passed an order vide communication dated 27.01.2022 disposing the objections raised by the petitioner against the reopening of the assessment proceedings. The petitioner has challenged the notice dated 31.03.2021 and order dated 27.01.2022.

 

3 Mr. Tirth Nayak, learned counsel appearing for the petitioner, made the following submissions:

 

3.1 The action of the respondent of reopening of reassessment of the Income Tax Return filed by the petitioner for the Assessment Year 2014-15 is admittedly based on ‘Change of Opinion’ as the return filed by the petitioner for the Assessment Year 2014-15 was scrutinized under Sec.143(3) and the said deductions were duly considered and duly allowed by the Assessing Officer and therefore, the same could not be relooked into.

 

3.2 The impugned order and action of the respondent of reopening assessment of the petitioner is without jurisdiction as no income can be said to have escaped assessment as admittedly, all documents were supplied to the Assessing Officer in 2016, the same were duly considered and assessment under Sec.143(3) has been done, and therefore, it cannot be said that income has escaped assessment.

 

3.3 In view of the reasons provided by the Assessing Officer, wherein, it is admitted that “expenditure was allowed by the Assessing Officer” and the assessee had produced all documents, the notice and the impugned order dated 27.01.2022 and consequential action are without jurisdiction. Further, it has been submitted by the learned counsel for the petitioner that no new material has been relied for issuing the impugned notice by the respondent.

 

4 Mr.Nikunt Raval, learned counsel appearing for Mrs. Kalpana Raval, learned counsel for the respondent, would submit as under:

 

4.1 As per Section 35D(1) of the Act, where a petitioner, being an Indian Company or a person, who is resident of India, after 31st day of March, 1970 any expenditure specified in sub-section (2) before the commencement of his business, or (ii) after the commencement of his business, in connection with the extension of his undertaking or in connection with his setting up a new unit, the petitioner shall, in accordance with and subject to the provisions of this section, be allowed a deduction of an amount equal to one-tenth of such expenditure for each of the ten successive previous years beginning with the previous year in which the business commences or, as the case may be, the previous year in which the extension of the undertaking is completed or the new unit commences production or operation.

 

4.2 Although, during the course of assessment proceedings, the petitioner had submitted P&L account, Balance sheet and other details, the scheme of tax evasion was embedded in annual report, audited P&L A/c, balance sheet and books of account in such a manner that it could be detected by the efforts of the AO. It can be reasonably concluded that there is failure on the part of the petitioner to disclose fully and truly all necessary facts during the assessment proceedings.

 

4.3 Mr. Raval, learned counsel, would submit that the petition being devoid of merits, the same may kindly be dismissed.

 

5 Having considered the submissions made by the learned advocates for the respective parties, it will be in the fitness of things to reproduce the reasons to believe that the revenue has considered for coming to the conclusion or reason to believe that the assessment has to be reopened. The reasons to believe read as under;

 

“4. In view of the facts as discussed above, it is concluded that the income of Rs.4,92,673/- has escaped taxation. It was further noticed from the breakup of the other expenses claimed by the assessee that Rs.1,12,953/- was claimed as expenditure on account of 1/5 of Rs.5,64,775/- as expenditure for raising fund and Rs.3,79,720/- as IPO expenditure and was allowed by assessing officer which was in contravention of the provisions of section35D and was needed to be disallowed but by not doing so it resulted in underassessment.

 

6. In this case a return of income was filed for the year under consideration and scrutiny assessment u/ s.143(3) of the Income-tax Act was made. During the assessment proceedings, even though, the assessee had produced books of accounts, annual report, P&L and Balance Sheet etc., the requisite material facts noted above in the reasons for reopening were embedded in such a manner that the same could not be discovered by the AO at the time of assessment proceedings, and it was discoverable only after detailed and thorough verification of case record is made. Therefore, the assessee has failed to disclose fully and truly all material facts necessary for assessment.”

 

6 Apparently reading the reasons sought to be canvassed by the revenue for reopening the assessment proceedings would indicate that in the words of the revenue “during the assessment proceedings, even though the assessee had produced books of accounts, annual report and balance sheet etc., the requisite material facts noted above in the reasons for reopening were embedded in such a manner that the same could not be discovered by AO at the time of the assessment proceedings, and it was discoverable only after detailed and thorough verification of case records is made.”

 

6.1 This obviously shows that there was no fresh tangible material available with the assessing authorities so as to assume jurisdiction under section 148 of the Income-tax Act. What is evident from the material placed on record is that while requisitioning information under section 142(1) of the Income-Tax Act, it was the case of the revenue that there was large increase in cenvat creditors against reduction in business income as compared to the preceding year. That there was mismatch in the amount paid to related persons under section 40A(2)(b) of the act. The petitioner in detail had furnished copies of audited financial accounts, copy of the assessment order of the year 2013-14, details of payments made to persons specified, copy of the ledger, accounts of the loans taken by the company etc. All this material was considered and an assessment order was passed on 26th of August 2016. All these further indicate that after a notice of demand was issued under section 156 of the Income Tax Act, the revenue had raised no demand. After a period of five years, the revenue has thought it fit to reopen the assessment proceedings purportedly under the guise of the same records on the ground that the material embedded in the records could not be discovered. This obviously is the stand taken by the revenue based on change of opinion as the return filed by the petitioner for the Assessment Year 2014-15 was scrutinised under section 143 (3) of the Act.

 

6.2 Mr Tirth, Naik, rightly in support of his submissions has relied on the decision in the case of Parasuram Pottery Works Co. Ltd vs. CIT, reported in (1977) 1 SCC 408, wherein, the Hon’ble Supreme Court held that two conditions have to be satisfied before an Income Tax Officer acquires jurisdiction to issue notice under Section 148 of the Act. Once the assessee makes a true and full disclosure of the primary facts at the time of the original assessment and which could have been discovered with due diligence by the Income Tax Officer, drawing an inference which appears subsequently to be alone, is a mere change of opinion with regard to that inference which would not justify the action under the Act. Para 10 of the judgement reads as under:

 

“10. … The language of clause (a) of section 147 read with sections 148 and 149 of the Act of 1961 as also the corresponding provisions of the Act of 1922 makes it plain that two conditions have to be satisfied before an Income-tax Officer acquires jurisdiction to issue notice under section 148...”

 

“…. The duty of the assessee in any case does not extend beyond making a true and full disclosure of primary facts. Once he has done that his duty ends. It is for the Income-tax Officer to draw the correct inference from the primary facts. It is no responsibility of the assessee to advise the Incometax Officer with regard to the inference which he should draw from the primary facts. If an Income-tax Officer draws an inference which appears subsequently to be erroneous, mere change of opinion with regard to that inference would not justify initiation of action for re-opening assessment.”

 

6.3 In the case of CIT vs. Kelvinator of India Limited., reported in (2010) 2 SCC 723, paragraphs 7 to 9 read as under:

 

“7. One must treat the concept of "change of opinion" as an in-built test to check abuse of power by the Assessing Officer. Hence, after 1st April, 1989, Assessing Officer has power to re-open, provided there is "tangible material" to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief. Our view gets support from the changes made to Section 147 of the Act, as quoted hereinabove. Under the Direct Tax Laws (Amendment) Act, 1987, Parliament not only deleted the words "reason to believe" but also inserted the word "opinion" in Section 147 of the Act. However, on receipt of representations from the Companies against omission of he words "reason to believe", Parliament re-introduced the said expression and deleted the word "opinion" on the ground that it would vest arbitrary powers in the Assessing Officer.

 

8. We quote hereinbelow the relevant portion of Circular No.549 dated 31st October, 1989, which reads as follows:

 

"7.2 Amendment made by the Amending Act, 1989, to reintroduce the expression `reason to believe' in Section 147.--A number of representations were received against the omission of the words `reason to believe' from Section 147 and their substitution by the `opinion' of the Assessing Officer. It was pointed out that the meaning of the expression, `reason to believe' had been explained in a number of court rulings in the past and was well settled and its omission from section 147 would give arbitrary powers to the Assessing Officer to reopen past assessments on mere change of opinion. To allay these fears, the Amending Act, 1989, has again amended section 147 to reintroduce the expression `has reason to believe' in place of the words `for reasons to be recorded by him in writing, is of the opinion'. Other provisions of the new section 147, however, remain the same."

 

9. For the afore-stated reasons, we see no merit in these civil appeals filed by the Department, hence, dismissed with no order as to costs.”

 

6.4 A Division Bench of this court, in the case of Ganesh Housing Corporation Limited vs. Dy. Commissioner of Income-Tax, Circle 4 & Anr., reported in 2012 SCC Online Guj 1633, held as under:

 

“6. We must also keep in mind the conceptual difference between power to review and power to reassess. The assessing officer has no power to review; he has the power to reassess. But reassessment has to be based on fulfilment of certain precondition and if the concept of “change of opinion” is removed, as contended on behalf of the Department, then, in the garb of reopening the assessment, review would take place.

 

7. One must treat the concept of “change of opinion” as an in-built test to check abuse of power by the assessing officer. Hence, after 1-4- 1989, the assessing officer has power to reopen, provided there is “tangible material” to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief. Our view gets support from the changes made to Section 147 of the Act, as quoted hereinabove. Under the Direct Tax Laws (Amendment) Act, 1987, Parliament not only deleted the words “reason to believe” but also inserted the word “opinion” in Section 147 of the Act. However, on receipt of representations from the companies against omission of the words “reason to believe”, Parliament reintroduced the said expression and deleted the word “opinion” on the ground that it would vest arbitrary powers in the assessing officer.

 

8. We quote hereinbelow the relevant portion of Circular No. 549 dated 31-10-1989, which reads as follows:

 

“7.2. Amendment made by the Amending Act, 1989, to reintroduce the expression ‘reason to believe’ in Section 147.—A number of representations were received against the omission of the words ‘reason to believe’ from Section 147 and their substitution by the ‘opinion’ of the Assessing Officer. It was pointed out that the meaning of the expression, ‘reason to believe’ had been explained in a number of court rulings in the past and was well settled and its omission from Section 147 would give arbitrary powers to the Assessing Officer to reopen past assessments on mere change of opinion. To allay these fears, the Amending Act, 1989, has again amended Section 147 to reintroduce the expression ‘has reason to believe’ in the place of the words ‘for reasons to be recorded by him in writing, is of the opinion’. Other provisions of the new Section 147, however, remain the same.”

 

9. For the a forestated reasons, we see no merit in these civil appeals filed by the Department, hence, dismissed with no order as to costs.”

 

6.5 What is therefore evident from the case laws cited by the learned advocate for the petitioner is that one must read the concept of change of opinion as an inbuilt test to check abuse of power by the Assessing Officer. Assessing Officer has power to reopen provided there is tangible material to come to the conclusion that there is an escapement of income from assessment. It is a well settled principle of law that reasons must have a live link with the formation of the belief. What is evident from the facts of the cases in absence of a live link between the reasons to believe and the material on record. This court is of the opinion that when all facts were correctly disclosed and were on record during the assessment proceedings for the relevant assessment year and the assessing officer has not consciously taxed the income which is now sought to be looked into, it is a clear case of change of opinion.

 

7 For the aforesaid reasons, therefore, the notice dated 31 March 2021 and the order dated 27th of January 2022 is quashed and set aside. The petition is allowed.

 

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