SANDESH PROCON LLP vs. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 3(3), AHMEDABAD

By   filing   this   writ   application   under   Article 226   of   the   Constitution   of   India,   the   writ applicant has assailed the legality and validity of the impugned notice dated 26.07.2018 issued under Section 148 of the Income Tax Act, 1961 (hereinafter referred to as “the Act” for short) proposing  to   re­assess   the  income  of   the  writ applicant   for   the   A.Y.   2012­13   on   the   ground that the income chargeable to tax for the said year had escaped assessment within the meaning of Section 147 of the Act.

The brief facts leading to filing of the present writ application are as under:

From the records, it is noticed that the assessee has debited interest expenses of   Rs.9,77,80,572/­   and   had   shown   exempt income of Rs.34,06,856/­.

The assessee was required to make a disallowance under Section 14 A of the Act r.w.r 8 D of the IT Rules in such case as per the following calculation: Average   of   investment:   Rs.103,34,98,799/­ [1/2

5

The documents filed by the assessee during   the   course   of   assessment   was perused. 5, The assessee was required to disallow an amount of Rs 5,13,06,096/u/s 14A of IT Act r.w.r   8D   of   IT   Rules   which   the   assessee failed to do.

The assessee was required to disallow an amount of Rs 5,13,06,096/u/s 14A of IT Act r.w.r   8D   of   IT   Rules   which   the   assessee failed to do. During the course of original assessment, disallowance was made only for Rs 34,06,859/­ restricting to the extent of exempted  income.  Therefore,  the income of Rs   4,78,99,237/­   has   escaped   assessment. Considering the above facts, I have reason to believe that by omission on the part of the   assessee   to   disclose   fully   and   truly all   material   facts   necessary   for   the assessment,  the ­income  chargeable to tax for   AY   2012­13   has   escaped   assessment within the meaning of Section 147 of the IT Act. “7. Not applicable.

The   assessee   was   required   to disallow   an   amount   of   Rs   5,13,06,096/u/s 14A of IT Act r.w.r 8D of IT Rules which the   assessee   failed   to   do.   During   the course of original assessment, disallowance was   made   only   for   Rs   34,06,859/­ restricting   to   the   extent   of   exempted income.   Therefore,   the   income   of   Rs 4,78,99,237/has   escaped   assessment.   . Considering the above facts, I have reason to believe that by omission on the part of the   assessee   to   disclose   fully   and   truly all   material   facts   necessary   for   the assessment,   the   Income   chargeable   to   tax for   A.Y   2012­13   has   escaped   assessment within the meaning of Section 147 of the IT Act.

In   this  case,  return   of  income   was filed  for  the  AY 2012­13 by the assessee and regular assessment u/s 143(3) was made on 05/03/2015. Since, 04 years from the end . of the relevant year has expired in this case   and   the   assessee   has   not   truly   and correctly

Pursuant   to   the   issuance   of   notice   dated 26.07.2018

On 04.10.2019, the order came to be passed overruling   the   objections   raised   by   the assessee   against   the   issuance   of   notice under Section 148 of the Act. The relevant portion of the order reads thus:

The objection filed by the assessee has duly. been considered. However, the same   is   not   found   acceptable   for   the following

In   view   of   the   above   facts,   it becomes evident that this case has been re­ opened   only   after   following   the   due procedures prescribed in the IT Act and was based  on  the  tangible  material  leading  to the conclusion that there was escapement of income   from   assessment.   It   may   also   be pointed out that mere furnishing of details about   income   does   not   mean   that   all material   facts   have   been   fully   and   truly disclosed.   In   the   case   of   Indo­Aden   Salt Manufacturing and Trading Co. (P) Ltd. Vs. Commissioner of Income­tax 159 ITR 624 (SC) the   Hon'ble   Supreme   Court   has   held   that even   if the  assessee   had  supplied  details but   if   it   had   not   disclosed   true   facts which the ITO could have found by further probing,   the   re­opening   of   the   assessment 18388 & 18389 of 2014, Hon'ble Gujarat High Court vide its order dated 5th January 2016 has held that once the reasons are recorded properly, the proceedings initiated u/s.147 of the Act are valid. In the case of Shree Krishna (P) Ltd. Vs. Income­tax Officer 221 ITR   538   (SC),   the   Hon'ble   Supreme   Court reiterated   that   it   was   the   duty   of   the assessee   to   disclose   material   facts   fully and truly. The disclosure of a loan, which was   subsequently   discovered   to   be   false, would make the re­assessment valid. In the disclose   material   facts,   re­assessment­ Hon'ble   Supreme   Court   had   laid   down   the preposition   that   discovery   of   new   and important   facts   constitute   information   on the basis

In   view   of   the   above   discussion,   I reject   the   objections   of   assessee, furnished   vide   letter   dated   27.06.2019, against   re­opening   of   assessment.   The contentions   raised   by   the   assessee   on merits   are   required   verification   with evidences produce by the assessee and hence the   same   will   be   dealt   with   during   the course of reassessment proceedings.”

Being   dissatisfied   with   re­opening   of   the assessment,   the   writ   applicant   has   come   up before   this   Court   by   filing   present   writ application with the prayer as indicated above.

We   have   heard   Mr.   Bandish   S.   Soparkar,   the learned counsel appearing for the writ applicant and   Mr.   M.M.Bhatt,   the   learned   Sr.   Counsel assisted   by   Mrs.   Mauna   Bhatt,   the   learned Sr.Standing Counsel appearing for the Revenue.

Mr. Soparkar, the learned counsel for the writ applicant raised the following contentions :

It was further pointed out that, there is no   income   chargeable   to   tax   has   escaped assessment   so   far   the   disallowance   under Section 148 A of the Act is concerned. On this   ground,   it   was   submitted   that,   the interest   to   the   extent   of   entire   exempt income   already   having   disallowed   at   the time   of   original   assessment,   no   further disallowance is permissible.

It was further pointed out that, the writ applicant   had   made   all   disclosures regarding   the   exempt   income   and   the interest   expenses   claimed   during   the assessment  proceedings,  held under Section 143(3)   of   the   Act   and   the   issue   of disallowance  under Section  14A of the Act was   discussed   and  after   considering   the records   available   with   him   as   well   as produced   by   the   writ   applicant,   the assessment

Referring   to   the   decision   of   the   Supreme Court rendered in the case of  Patiyala Vs. State   Bank   of   Patiyala   [(2018)   99 Taxmann.com   286   (SC)],   it   was   submitted that,   the   amount   of   disallowance   under Section 14A of the Act could be restricted the amount of exempt income only and not at a higher figure. Therefore, even on merits, the interest to the extent of entire exempt income   already   having   disallowed   at   the time   of   original   assessment,   no   further disallowance   is   permissible.   As   a   result, no   income   has   escaped   assessment   and   the action   for   re­opening   of   assessment initiated may kindly be quashed.

Making the above submissions, Mr. Soparkar, the learned counsel appearing for the writ applicant prayed   that,   the   impugned   notice   and   the proceedings may be quashed and set aside.

Mrs.   Mauna   Bhatt,   the   learned   Sr.   Standing Counsel appearing for the Revenue has vehemently opposed this writ application. Relying upon the contentions raised in the affidavit­in­reply by the Revenue, she would submit that, there was an omission on the part of the assesse to disclose fully and truly material facts necessary for the assessment.   She   urged   that  on   the   basis   of tangible   material   leading   to   conclusion   that, there   was   escapement   of   income   for   the   year under   consideration   and   therefore,   considering the   material   available   with   the   Assessing Officer,   he   has   reason   to   believe   that,   the income has escaped assessment.  Mrs. Bhatt,  the learned standing counsel for the revenue further submits that, as per the statutory provisions, while   working   out   the   disallowance   under   the provisions,   the  amount   of  Rs.5,13,06,096/­   was required to be stated by the assessee, however, the   assessee   had  incorrectly   made  disallowance of   Rs.34,06,859/­.   In   this   context,   she   would submit that, mere disclosure is not sufficient, but it has to be true and full disclosure and therefore, the Assessing Officer rightly come to the   conclusion   that   the   income   has   escaped assessment   and   such   escapement   occurred   on account of failure on the part of the assessee to disclose fully and truly, all material facts necessary for the assessment for the year under consideration.

In the aforesaid circumstances, Mrs. Bhatt prays that   there   being   no   merits,   present   writ application may not be entertained.

We   have   carefully   considered   the   contentions raised   by   both   the   parties   and   perused   the materials placed on record.

It is the case of the Revenue that, the assessee was   required   to   disallow   an   amount   of Rs.5,13,06,096/­   under   Section   14A   of   the   Act and during the original assessment, disallowance was   made   only   upto   Rs.34,08,859/­   restricting the extent of exempted income. Therefore, as per the   case   of   the   revenue,   the   income Rs.4,78,99,237/­   has   escaped   assessment   for which the assessee failed to disclose fully and truly   all   material   facts   necessary   for   the assessment for the year under consideration. It is also undisputed fact that, the case of the assessee   selected   for   further   scrutiny   and notice   under   Section   143(2)   of   the   Act   was issued   and   thereafter,   notice   under   Section 142(1) of the Act along with questionnaire was served   and   pursuant   to   these   notices,   the assessee   had   furnished   required   details   along with copy of return, audited accounts, balance sheet, profit and loss account etc. The issue of disallowance   was   considered   by   the   respondent authority at length and disallowance of interest was   restricted   upto   Rs.34,06,859/­. The observations with regard to disallowance made in the original assessment order reads thus:

The   submission   of   the   assessee   has   been perused and considered carefully. However, same is not acceptable. On perusal of the Balance Sheet, it is  verified   that   assessee  has   invested   amount   of Rs.2,04,22.70,664/­

Subject to the above remarks and data made available,   the   total   income   of   the   assessee   is computed as under: Total income from business or   (­)Rs.2,51,48,441/­ profession as per the computation of income (current year business loss) Add: Long term Capital Loss    (­)Rs.1,15,45,388/­ carried forward Total carried forward loss (­) Rs.3,66,93,809/­ Add: Additional/Disallowance as discussed above

We   have   perused   the   reasons   for   re­opening, wherein,   the   Assessing   Officer   observed   that, during   the   course   of   original   assessment, disallowance   was   made   only   Rs.34,06,859/­ restricting to the extent of exempted income, as a result, income of Rs.4,78,99,237/­ has escaped assessment   on   the   ground   that,   there   was   an omission on the part of the assessee to disclose fully and truly all the material facts. It was further observed by the Assessing Officer that; “it is true that the assessee has filed copy of annual   report   and   audited   P&L   account   and balance­sheet along with return of income where various   information   /material   were   disclosed. However, requisite full and true disclosure of all material facts necessary has not been made, but it would require due diligence by the AO to extract   these   information.   For   aforesaid reasons, it is not a case of change of opinion.

A bare perusal of the reasons and  original  the assessment   order   made   under   Section   143(3)   of the Act, the facts emerge that, the respondent authority   had   determined   the   issue   of disallowance   after   considering   the   material available   and   now   again   without   any   tangible material   available   with   the   Assessing   Officer based on the same materials, which were relied at the time of original assessment proceedings, has reason to believe that there is escapement of income. Therefore, in this circumstances, we are   of   the   view   that,   the   material   available with   the   Assessing   Officer,   at   the   relevant point of time, while making original assessment under Section 143 (3) of the Act and at the time of re­opening of the assessment, the materials available   with   the   Assessing   Officer   were   the same and there was no any new material surfaced during the reassessment proceedings.

After   close   scrutiny   of   the   reasons   for   re­ opening of assessment, we are of the view 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)   320   ITR 577] 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 Bank   of   Patiala   [(2018)   99   Taxmann.com   286], provisions   for   re­opening   of   the   assessment under Section 147 of the Act is bad in law.

We may also refer to and rely upon the case of State of U.P. Vs .Aryaverth Chaval Udhyog [2015 (17) 324]. Paras 28 and 29 thereof reads thus:

Considering the facts and circumstances of the present case as well as legal principles on the subject “change of opinion” as propounded by the Apex Court, we have no hesitation to hold that, 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. Therefore, the impugned notice dated 26.07.2018 issued under Section 148 of the Act is required to be quashed and set aside and accordingly, the same is hereby quashed and set aside.

In view of the aforesaid foregoing reasons, the present writ application is allowed. There shall be no order as to costs. (J. B. PARDIWALA, J) (ILESH J. VORA,J) SUCHIT