DCIT 1 (1)(2), MUMBAI vs. M/S HDFC ERGO GENERAL INSURANCE COMPANY LTD., MUMBAI

आदेश / O R D E R PER M. BALAGANESH (A.M): This appeal in CO No.75/Mum/2021 for A.Y.2008-09 arise out of the order by the ld. Commissioner of Income Tax (Appeals)-2, Mumbai in appeal No.CIT(A)-2/IT/10226/2016-17 dated 29/10/2019 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 28/03/2016 & 18/10/2010 respectively by the ld. Dy. Commissioner of Income Tax-1(1) (hereinafter referred to as ld. AO). 2. The only ground raised

3. We have heard the rival submissions and perused the materials available on record. We find that assessee company is a general insurance service provider and had filed its return of income for the A.Y.2008-09 on 25/09/2008 declaring total loss of Rs.16,38,13,477/-. The original assessment was completed u/s.143(3) of the Act on 18/11/2010 determining total loss at Rs.16,01,07,118/- after making addition on account of profit on sale of investments of Rs.27,85,238/- and disallowance on account of Amortization of debt securities of Rs.9,21,121/-. In the said assessment, loss including unabsorbed depreciation of Rs.16,01,07,118/- of the current year and loss including unabsorbed depreciation of Rs.9,22,14,754/- of the earlier years was allowed to be carried forward to subsequent years. Subsequently based on the information available with the ld. AO, it revealed that M/s. Paramount Healthcare Services P. Ltd., (PHSPL) who was a notified Third CO No.75/Mum/2021 M/s. HDFC Egro General Insurance Company Party Administrator (TPA) for settling the medical claims of the insured clients on behalf of the assessee company, had helped the assessee company in settlement of claims of reimbursement to various hospitals and of insured persons. During the year under consideration, it was observed that as against the claims settled by PHSPL, the assessee company made payments of Rs.1,80,29,609/- directly to the hospitals and Rs.1,25,30,334/- paid to the insured persons. The ld. AO observed that on the said payments, the assessee company had not deducted tax at source in terms of provisions of Section 194J of the Act and consequently, the same is required to be disallowed u/s.40(a)(ia) of the Act. For this purpose, the assessment of the assessee was sought to be reopened by issuance of notice u/s.148 of the Act on 26/03/2015. In the re- assessment completed u/s.143(3) r.w.s. 147 of the Act, disallowance u/s.40(a)(ia) of the Act was made by the ld. AO to the tune of Rs.6,72,56,249/-.

3.1. Admittedly, the reopening notice u/s.148 of the Act dated 26/03/2015 was issued beyond the period of four years from the end of the relevant assessment year. Hence, the proviso to Section 147 of the Act would automatically come into operation. We find that the ld. AO had recorded the following reasons for reopening the assessment.

“In this case, return of income was filed for AY 2008-09 on 26.09.2008 declaring total income of Rs. NIL. The assessment was completed u/s 143(3) of the I.T. Act, 1961, on 18.11.2010.

CO No.75/Mum/2021 M/s. HDFC Egro General Insurance Company Rs. 1,80,29,609/- Rs. 1,25,30,334 Rs. 3,05,59,943

3.2. From the perusal of the aforesaid reasons we find that the ld. AO had not recorded anywhere regarding the failure on the part of the assessee to make full and true disclosure of material facts in the original assessment proceedings. This is a mandatory requirement of law as held by the Hon’ble Jurisdictional High Court in the case of Hindustan Lever Ltd., vs. ITO reported in 268 ITR 332 wherein it was held as under:-

20. The reasons recorded by the Assessing Officer nowhere state that there was failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment of that assessment year. It is needless to mention that the reasons are required to be read as they were recorded by the Assessing Officer. No substitution or deletion is permissible. No additions can be made to those reasons. No inference can be allowed to be drawn based on reasons not recorded. It is for the Assessing Officer to disclose and open his mind through reasons recorded by him. He has to speak through his reasons. It is for the Assessing Officer to reach to the conclusion as to whether there was failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the concerned assessment year. It is for the Assessing Officer to form his opinion. It is for him to put his opinion on record in black and white. The reasons recorded should be clear and unambiguous and should not suffer from any vagueness. The reasons recorded must disclose his mind. Reasons are the manifestation of mind of the Assessing Officer. The reasons recorded should be self- CO No.75/Mum/2021 M/s. HDFC Egro General Insurance Company explanatory and should not keep the assessee guessing for the reasons. Reasons provide link between conclusion and evidence. The reasons recorded must be based on evidence. The Assessing Officer, in the event of challenge to the reasons, must be able to justify the same based on material available on record. He must disclose in the reasons as to which fact or material was not disclosed by the assessee fully and truly necessary for assessment of that assessment year, so as to establish vital link between the reasons and evidence. That vital link is the safeguard against arbitrary reopening of the concluded assessment. The reasons recorded by the Assessing Officer cannot be supplemented by filing affidavit or making oral submission, otherwise, the reasons which were lacking in the material particulars would get supplemented, by the time the matter reaches to the Court, on the strength of affidavit or oral submissions advanced.

3.3. We find that the ld. CIT(A) had quashed re-assessment proceedings on the mere fact that the ld. AO in the reasons recorded for reopening the assessment had not indicated any failure on the part of the assessee to make full and true disclosure of material facts during the original assessment proceedings. We find that the ld. CIT(A) had also placed reliance on various decisions of the Hon’ble High Court in support of his contentions. The relevant operative portion of the CIT(A) order is reproduced hereinbelow:-

4.3.2 Further, I find that assessment in this case was made u/s. 143(3) of the Act on 18.11.2010, determining the total loss at Rs.16,01,07,118/-. The AO has not stated in the reasons recorded that the income had escaped assessment due to failure on the part of the appellant to disclose, fully and truly all material facts necessary for the assessment for that assessment year. However, the AO has stated in the remand report that non-deduction of TDS on payments made to hospitals has not been reflected in the Tax Audit Report and even the AO did not apply his mind on the issue in the first assessment. On going through the assessment record, it is apparent that the material facts regarding non-deduction of TDS in respect of payments made to the hospitals, in the nature of professional fees, was not disclosed either in the return or during the assessment proceedings. However, the reasons as recorded by the AO, when read as a whole do not indicate even remotely any failure on the part of the appellant to disclose fully and truly any material facts necessary for assessment. The only reason recorded in this case by the AO for reopening is that certain payments have been made through the TPA to various hospitals and insured persons without deducting any tax at source under Sec.l94J(l) of the I.T Act. There is no mention in the reasons recorded regarding the non disclosure of these facts by the appellant in the return of income or in the assessment proceedings so as to infer that the income chargeable to tax had escaped assessment on account of such non disclosure. Therefore, in the present facts, the reasons as recorded for issuing the notice u/s.148 of the Act do not satisfy the CO No.75/Mum/2021 M/s. HDFC Egro General Insurance Company jurisdictional requirement in a case where assessment was completed u/s.143(3) of the Act and the notice was issued beyond a period of four years from the end of the relevant assessment year. In this regard reliance is placed on decision in the case of Allanasons Ltd. v. DCIT - 1(1) (369 ITR 648), wherein it has been held/observed by the Hon'ble High Court of Bombay as under: "The words 'failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment' is not a magician's mantra which alone would give jurisdiction to reopen an assessment. Just as it would not be open to the revenue to urge that the mere use of words 'failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment', the absence of the above words will not by itself oust the jurisdiction to reassess. If on reading of the reasons recorded as a whole implies/ points/evidences a failure on the part of the assessee to disclose fully and truly All material facts necessary for assessment, then the exercise of jurisdiction cannot be faulted. Therefore, the submission that the absence of the words ''failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment' would make the issue of notice under section 148 without jurisdiction cannot be accepted. [Para 8] • However, in the facts of the present case, the reasons as recorded, when read as a whole do not indicate even remotely any failure on the part of the assessee to disclose fully and truly any material facts necessary for assessment. The only reason recorded in this case by the Assessing Officer for reopening the subsequent decisions of Tribunal and Courts. There is no whisper of any facts indicating that the assessee had not having disclosed any fact which led to a reasonable belief that income chargeable to tax has escaped assessment. Therefore, in the present facts, the reasons as recorded for issuing the impugned notice do not satisfy the jurisdiction requirement in case of notice issued beyond a period of four years from the end of the relevant assessment year, le., 1998 - 99. (Para 9] • In the result, impugned notice is quashed and petition filed by assessee is allowed". 4.3.3 Further, it is now well settled that the reasons which are recorded by the AO for re- opening an assessment are the only reasons which could be considered and no addition could be made to those reasons and no inference could be drawn based on reasons not recorded. In this regard, reliance is also placed on the decision of Hon'ble Bombay High Court in the case of Nirmal Bang Securities Pvt Ltd Vs. ACIT (2016) 382 ITR 93 (Bom) wherein it was held as under: 22. It is now well settled that the reasons which are recorded by the Assessing Officer for re-opening an assessment are the only reasons which could be considered. No substitution or deletion is permissible. No addition can be made to those reasons and no inference can be allowed to be drawn based on reasons not recorded. The reasons which are recorded by the Assessing Officer for reopening the assessment are the only reasons which could be considered when the formation of the belief is impugned. The requirement of recording reasons is a check against arbitrary exercise of power, for it is on the basis of the reasons recorded and those reasons alone that the validity of the notice for re-opening an assessment can be sustained. The reasons cannot CO No.75/Mum/2021 M/s. HDFC Egro General Insurance Company be allowed to grow with age and ingenuity by devising and/or supplementing additional reasons in replies and affidavits not envisaged in the reasons recorded for re-opening the assessment. To put it simply, the validity of a notice under section 148 of the Act has to be tested on the basis of the reasons recorded for initiating the reassessment proceedings. The reasons recorded cannot be supplemented by affidavits and other material. In this regard, Mr Murlidharan's reliance upon the judgment of this Court in the case of Hindustan Lever Ltd. (supra) is well founded. At pages 337 and 338, this Court held as under : — “The reasons recorded by the Assessing Officer nowhere state that there was failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment of that assessment year. It is recorded by the Assessing Officer, No substitution or deletion is permissible. No additions can be made to those reasons. No inference can be allowed to be drawn based on reasons not recorded. It is for the Assessing Officer to disclose and open his mind through reasons recorded by him. He has to speak through his reasons. It is for the Assessing officer to reach the conclusion as to whether there was failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the concerned assessment year. It is for the Assessing officer to form his opinion. It is for him to put his opinion on record in black and white. The reasons recorded should be clear and unambiguous and should not suffer from any vagueness. The reasons recorded must disclose his mind. The reasons are the manifestation of the mind of the Assessing Officer. The reasons recorded should be self-explanatory and should not keep the assessee guessing for the reasons. Reasons provide the link between conclusion and evidence. The reasons recorded must be based on evidence. The Assessing Officer, in the event of challenge to the reasons, must be able to justify the same based on material available on record. He must disclose in the reasons as to which fact or material was not disclosed by the assessee fully and truly necessary for assessment of that assessment year, so as to establish the vital link between the reasons and evidence. That vital link is the safeguard against arbitrary reopening of the concluded assessment. The reasons recorded by the Assessing Officer cannot be supplemented by filing an affidavit or making an oral submission, whereas, the reasons which were lacking in the material particulars would get supplemented, by the time the matter reaches the court, on the strength of the affidavit or oral submissions advanced." 4.3.4 In view of the above discussion, I am of the considered opinion that the AO has failed to fulfil the jurisdictional requirement of the conditions provided in the first proviso to Sec. 147 since there is no allegation in the reasons recorded that any income chargeable to tax had escaped assessment for such assessment year by reason the failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment, for that assessment year. Therefore, the notice u/s. 148 issued on 26.03.2015, is hereby quashed. Consequently, the assessment order dated 28.03.2016, is held to be void and invalid. Ground No.1 is Allowed. Ground No.2, 3, & 4 are dismissed as infructuous since the notice u/s. 148 has been quashed.”

CO No.75/Mum/2021 M/s. HDFC Egro General Insurance Company 3.4. From the aforesaid elaborate reasoning given by the ld. CIT(A) wherein he had placed reliance on various decisions of Hon’ble Jurisdictional High Courts, we do not find any infirmity in the said order of the ld. CIT(A) quashing the re-assessment proceedings. The ground raised by the Revenue is dismissed.

3.5. Since the entire re-assessment has been quashed herein, the cross objections preferred by the assessee raising grounds on merits are left open as they become academic in nature and hence, dismissed as infructuous.

Order pronounced in open Court on 31/01/2022.