FIRST SOURCE SOLUTIONS LIMITED vs. THE ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE 12(2)(1) AND 2 ORS

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WP/2762/2019HC Bombay31 August 2021Bench: HON'BLE SHRI JUSTICE K.R. SHRIRAM HON'BLE SHRI JUSTICE ABHAY AHUJA10 pages
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What did the High Court hold?

The High Court held that the impugned notice dated March 29, 2019, under Section 148 and the subsequent order dated September 16, 2019, rejecting objections, were invalid and set aside. The Court reasoned that the reopening notice was issued more than four years after the end of AY 2012-13. Under the proviso to Section 147, such reopening requires a failure on the part of the assessee to disclose fully and truly all material facts. The reasons recorded for reopening explicitly stated that the assessee had added short-term capital gains of Rs. 9,42,03,318/-. Furthermore, the assessment order dated January 31, 2017, itself allowed the set-off of this amount. Therefore, there was no failure on the part of the assessee to disclose this fact. The Court emphasized that reasons for reopening cannot be supplemented or substituted by affidavits or oral submissions. Since the reasons recorded did not indicate any non-disclosure of material facts, the notice was issued without jurisdiction. The ratio is that for reopening after four years, specific failure to disclose material facts must be evident in the reasons recorded, not just a general assertion or later supplementation.

What were the facts?

The assessee, First Source Solutions Limited, is challenging a notice dated March 29, 2019, issued under Section 148 of the Income Tax Act, 1961, to reopen its assessment for Assessment Year (AY) 2012-13. The revenue believed income had escaped assessment. The assessee also challenges the order dated September 16, 2019, rejecting its objections. The assessee, engaged in contact centre and transaction processing services, had operations in SEZs. For AY 2012-13, it filed a revised return claiming a loss after setting off short-term capital gains. The original assessment under Section 143(3) r.w.s. 144C(13) was completed on January 31, 2017, at a total income of Rs. 5,54,70,651/-. The reopening is based on the ground that a short-term capital gain of Rs. 9,42,03,318/- was wrongly set off against business income eligible for deduction under Section 10AA.

What were the issues?

1. Whether the notice dated March 29, 2019, issued under Section 148 of the Income Tax Act, 1961, for reopening the assessment for AY 2012-13, is valid, considering it was issued more than four years after the end of the relevant assessment year. Assessee's contention: The assessee argued that since the reopening notice was issued after four years from the end of the assessment year, the proviso to Section 147 mandates a failure on the part of the assessee to disclose fully and truly all material facts. The reasons recorded for reopening do not specify any such non-disclosure, and in fact, acknowledge the inclusion of short-term capital gains in the computation. Therefore, the notice was issued without jurisdiction. Revenue's contention: The revenue contended that the assessee did not disclose that deduction under Section 10A was allowed on capital gains during the assessment proceedings under Section 143(3), which subsequently came to the notice of the assessing officer. They relied on Supreme Court judgments emphasizing the assessee's duty to disclose all primary facts.

Which sections of the Income-tax Act were involved?

Section 148,Section 147,Section 10AA,Section 10A,Section 143(3),Section 144C(13)

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Cited by 6 judgments on BharatTax

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WP 2762-19.odt IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION WRIT PETITION NO. 2762 OF 2019 First Source Solutions Limited 5th Floor, Paradigm, B Wing, Link Road, Malad West, Mumbai-400 064. ... Petitioner Vs. 1. The Assistant Commissioner of Income Tax-12(2)(1), Room No. 223, 2nd Floor, Aayakar Bhavan, M. K. Road, Mumbai-400020. 2. Principal Commissioner of Income-tax-12, Room No.127, 1st Floor, Aayakar Bhavan, Maharshi Karve Road, Mumbai-400020. … Respondents Mr. Niraj Sheth i/b Mr. Atul K. Jasani, Advocate for Petitioner. Mr. Sham Walve, Advocate for Respondents. CORAM : K.R. SHRIRAM, & ABHAY AHUJA, JJ. DATE : 31st AUGUST 2021 ORAL JUDGMENT:-(PER K.R. SHRIRAM, J)

1.

Petitioner is impugning a notice dated 29th March 2019 received under Section 148 of the Income Tax Act, 1961 (“the said Act”) by which respondent sought to reopen the assessment for Assessment Year 2012-13 on the grounds that they have reasons to believe that petitioner’s income chargeable to tax has escaped assessment with the meaning of Section 147 of the said Act. Petitioner is also impugning the order dated 16th September 2019 rejecting the objections raised by petitioner in response to the notice dated 29th March 2019. Nikita Gadgil 1 of 10 CNR No : HCBM020251962019 Uploaded on - 03/09/2021 Downloaded on - 27/10/2026 19:19:27

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WP 2762-19.odt 2. Petitioner is engaged in the business of contact centre and transaction processing services. During the previous year relevant to the assessment year 2012-13, petitioner had operations from two units located in the Special Economic Zone (SEZ) viz. Pritech unit and Airoli unit. Pritech unit made profit, which was eligible for deduction under Section 10AA of the said Act, whereas Airoli unit though eligible for deduction, had a loss. Petitioner filed its return of income for the assessment year 2012-13. Petitioner revised this return of income in which petitioner claimed to carry forward unabsorbed loss of Rs.6,19,82,739/- and certain other income. The loss of Rs. 6,19,82,739/- was arrived at after setting off short term capital gain at Rs. 9,42,03,318/-. 3. The case of the petitioner was selected for scrutiny and during the course of assessment proceedings certain deductions were disallowed under Section 10AA and the assessing officer worked out resulting disallowance as under:- Business income before deduction u/s 10AA (as per computation) Rs. 32,52,00,938 Short term capital gain Rs. 9,42,03,318 Total income considered for section 10AA Rs. 41,94,04,256 Deduction under section 10AA out of total claim of Rs. 48,12,86,995 which is allowed to the extent of income available Rs. 41,94,04,256 Nikita Gadgil 2 of 10 Uploaded on - 03/09/2021 Downloaded on - 27/10/2026 19:19:27

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WP 2762-19.odt 4. In this computation of income, respondent no. 1 has specifically mentioned that short term capital gain of Rs. 9,42,03,318/- was being set off against business loss of Rs. 41,94,04,256/- computed by him. Petitioner filed objections thereafter, which was rejected by a Dispute Resolution Panel. Subsequently, petitioner received a final assessment order dated 31st January 2017. Petitioner thereafter received the impugned notice dated 29th March 2019 under Section 148 of the said Act, proposing to reopen the assessment of petitioner for the assessment year 2012-13. After receipt of this notice, petitioner challenged the final assessment order in appeal before the Income Tax Assessment Tribunal (ITAT). This appeal was decided in favour of petitioner and by this order the ITAT, in effect, accepted the return as revised and filed by petitioner. 5. Thereafter, petitioner received from respondent no. 1 a letter dated 26th August 2019 giving reasons recorded under Section 148 (2) of the Act for reopening the assessment for assessment year 2012-13. Petitioner vide its letter dated 9th September 2019 filed its objections challenging the validity of the reassessment proceedings. The objections were rejected and respondent no.1 passed its order dated 16th September 2019. Reassessment is on the ground that the set off of Rs. 94,22,03,318/- which is a short term capital gain against business Nikita Gadgil 3 of 10 Uploaded on - 03/09/2021 Downloaded on - 27/10/2026 19:19:27

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WP 2762-19.odt income was not permissible and the grant of deduction in the assessment order was not correct. The assessing officer has relied upon circular no. 7 of 2013 and states that Section 10A of the said Act states that where the gross total income of assessee includes any profits and gains derived by an undertaking or enterprise from any eligible business, a deduction shall be allowed in computing total income of the assessee, of an amount equal to 100% of the profit and gains derived from such business for ten consecutive assessment years. It will be useful to reproduce the reasons and it reads as under :- “ANNEXURE REASONS RECORDED U/s 148 (2) OF THE I. T. ACT, 1961 FOR REOPENING THE ASSESSMENT IN THE CASE OF M/S FIRSTSOURCE SOLUTION LTD. PAN: AAACI8904N; A.Y. 2012-13 1. The return of income in this case for A. Y. 2012-13 was e-filed by the assessee on 30.11.2012 declaring total income NIL (Loss of Rs. 6,19,82,739/-). Thereafter, the case of the assessee was selected for scrutiny and the assessment u/s 143 (3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) was completed on 31.01.2017 (u/s 143 (3) r.w.s. 144C (13) of the Act) assessing the total income at Rs. 5,54,70,651/-. The assessee company is engaged in the business of contact centre and Transaction Procession Services. 2. On perusal of case records it was seen that assessee had added Short Term Capital Gain of Rs. 9,42,03,318/- to Business Income of Rs. 32,52,00,938/- before claim of deduction u/s 10A/10B/10AA. Thereafter, deduction of (Rs. 48,13,86,995/-) was allowed, which is not correct as I.T. Act 1961. 3. The CBDT issued circular No. 7 of 2013 to clarify the method of computation of computation of deduction allowable under Section 10A, 10B and 10AA of the Act. Section 10A of the Act states that where the gross total Nikita Gadgil 4 of 10 Uploaded on - 03/09/2021 Downloaded on - 27/10/2026 19:19:27

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WP 2762-19.odt income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any eligible business, a deduction shall be allowed in computing total income of the assessee of an amount equal to hundred percent of the profits and gains derived from such business for ten consecutive assessment years. 4. Therefore, it is obvious from the above computation that that the Gross Total Income of Rs. 41,94,04,256/- included Capital Gain of Rs. 9,42,03,318/-. Still the deduction under section 10A was allowed for an amount of Rs. 41,94,04,256/-. The deduction has to be restricted to the income under the head ‘Profits and Gains of Business of Rs. 32,52,00,938/-. 5. Hence, it is obvious that deduction 10A of the Act wrongly allowed to the extent of Rs. 9,42,03,318/-(amount of income from capital gain). This finding is the basis of reasons to believe that income chargeable to tax has escaped assessment. The facts of the case are covered by explanation 1 to 147 of I.T. Act 1961. 6. In this case a return of income was filed for the year under consideration and regular assessment u/s 143

(3) r.w.s. 144C (13) of the Act was made on 31.01.2017. Since 4 years from the end of the relevant year has expired in this case, the only requirement to initiate proceeding u/s 147 is reason to believe which has been recorded in above Paras. It is pertinent to mention here that in this case the assessment was made as stipulated u/s 2(40) of the act. However as discussed in reason to believe in this case the income chargeable to tax has been under assessed by an amount of Rs. 9,42,03,318/-. 7. In view of the above, I am satisfied that and income chargeable to tax of Rs. 9,42,03,318/- has escaped assessment. 8. Therefore, I have reason to believe that income chargeable to tax amounting to Rs. 9,42,03,318/- has escaped assessment within the meaning of provision of section 147 of the Income Tax Act for the A. Y. 2012-13. Further this escapement of income is by reasons of the failure on the part of the assessee to disclose full and truly, all material facts necessary for its assessment for A. Y. 2012-13. In this case more than four years have lapsed from the end of assessment year under consideration. Hence necessary sanction to issue the notice u/s 148 has Nikita Gadgil 5 of 10 Uploaded on - 03/09/2021 Downloaded on - 27/10/2026 19:19:27

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WP 2762-19.odt been obtained separately from Pr CIT-12, Mumbai as per provisions of Section 151 of the Act. (ARABINDA BISWAS) Date: 25.03.2019

ACIT-12(2)(1), Mumbai” 6. Mr. Sheth submitted that the assessing officer can reopen an assessment after four years under Section 148 (2) of the said Act only if any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment. Mr. Sheth submitted that in paragraph 8 of the reasons to believe the officer is making an allegation of failure on the part of assessee to disclose fully and truly material facts, but in the entire reasons to believe there is no mention as to what are those material facts that have not been disclosed. Mr. Sheth submitted that in paragraph 2 of reasons to believe, the assessing officer on the contrary states that “on perusal of case records it was seen that assessee had added Short Term Capital Gain of Rs. 9,42,03,318/- to Business Income of Rs. 32,52,00,938 before claim of deduction under Section 10A/10B/10AA....” Therefore, when the reasons recorded for reopening the assessment do not disclose anywhere what has not been disclosed, he could not have exercised his jurisdiction to reopen after a period of four years. Nikita Gadgil 6 of 10 Uploaded on - 03/09/2021 Downloaded on - 27/10/2026 19:19:27

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WP 2762-19.odt 7. Mr. Walve submitted relying upon the affidavit-in-reply of one Mr. Ajay Uke, on behalf of respondents, affirmed on 31st August 2021, that the assessee did not disclose that deduction under Section 10A was allowed on capital gain during the course of assessment proceeding under Section 143 (3) of the said Act which has subsequently come to the notice of the assessing officer. 8. It is settled, as held in Aroni Commercial Ltd. Vs. Deputy Commissioner of Income Tax-2(1)1, that the reasons for reopening an assessment has to be tested/examined only on the basis of the reasons recorded at the time of issuing a notice under Section 148 of the said Act seeking to reopen an assessment. These reasons cannot be improved upon and/or supplemented much less substituted by affidavit and/or oral submissions.

In the reasons to believe, except for a general statement that the escapement of income is by a reason of the failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment, there is no mention anywhere that the assessee did not disclose that the deduction under Section 10A was allowed on capital gain during the course of assessment proceedings under Section 143(3) 1) 2014 (44) Taxmann. Com 304 Nikita Gadgil 7 of 10 Uploaded on - 03/09/2021 Downloaded on - 27/10/2026 19:19:27

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WP 2762-19.odt of the Act or that the subsequently it came to the notice of the assessing officer. Infact in the reasons for reopening, it is expressly mentioned that the assessee has added short term capital gain of Rs. 9,42,03,318/-. We would also add that in the assessment order dated 31st January 2017, the assessing officer has allowed the set of of Rs. 9,42,03,318/-. Therefore, by no stretch of imagination it can be concluded that there was failure on the part of petitioner to disclose fully and truly the fact that Rs. 9,42,03,318/- has been deducted against the losses claimed under Section 10AA. 9. Mr. Walve relied upon the judgments of the Apex court in Indi- Aden Salt Mfg. and Trading Co.(P.) Ltd. Vs. Commissioner of Income Tax2 and Zohar Siraj Lokhandwala Vs. M. G. Kamat, Asst. Commissioner of Income Tax3 to submit that the duty of disclosing all the primary facts relevant to the decision of the question before the assessing authority lies on the assessee and the contention that some books of accounts or other evidence have been produced, there was no duty on the part of assessee to disclose further facts which on due diligence the assessing authority might have ascertained has not been accepted. 2)(1986) 25 Taxman 356 (SC) 3)(1994) 77 Taxman 302 (Bombay) Nikita Gadgil 8 of 10 Uploaded on - 03/09/2021 Downloaded on - 27/10/2026 19:19:27

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WP 2762-19.odt 10. There can be no dispute on this preposition, but in the case at hand the assessing officer has not even indicated what was the material fact that was not disclosed truly or fully to him. Proviso to Section 147 prior to its amendment reads as under:- “147. Income escaping assessment.— …... Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year: …….” (emphasis supplied) 11. Therefore, when the assessment is sought to be reopened after the expiry of period of four years from the end of the relevant year, the proviso to Section 147 stipulates a requirement that there must be a failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for that year. This stipulation does not govern a notice for reopening within a period of four years. In the case at hand, as noted earlier, there is not even a whisper about what fact was not disclosed. In our view, therefore, the notice to reopen under Section 148 of the said Act itself was issued without jurisdiction. Consequently, the order passed also cannot be sustained. Nikita Gadgil 9 of 10 Uploaded on - 03/09/2021 Downloaded on - 27/10/2026 19:19:27

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WP 2762-19.odt 12. Therefor, the impugned notice dated 29th March 2019 as well as the order dated 16th September 2019 are hereby set aside. 13. Petition disposed. (ABHAY AHUJA, J) (K.R.SHRIRAM, J) Nikita Gadgil 10 of 10 Uploaded on - 03/09/2021 Downloaded on - 27/10/2026 19:19:27 Powered by TCPDF (www.tcpdf.org)

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