2012 (4) TMI 455 - HC - Income Tax

Jurisdictional pre-conditions for reopening under Section 147 ITAT held that conditions were not satisfied in the present case - Revenue submitted that if the by mistake or lapse he does not examine a particular entry or a note in the return and overlooks it there is no application of mind and thus it is not a case of mere change of opinion Held that - The matter should be examined by a larger Bench for elucidation and examination as the proposition clearly envisages a formation of opinion by the Income-tax Officer on the basis of material already on record provided the formation of such opinion is consequent on information in the shape of some light thrown on aspects of facts or law which the Income-tax Officer had not earlier been conscious of - it is a case where the Income-tax Officer looked at the facts and accepted the assessee s contention that the surplus was not taxable - referred to a larger Bench.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court in this appeal under Section 260A of the Income Tax Act, 1961, concerning reopening of assessment under Section 147, are as follows:

• Whether the Income Tax Appellate Tribunal (ITAT) was justified in holding that the jurisdictional pre-conditions for reopening the assessment under Section 147 were not satisfied in the present case.
• What constitutes a "change of opinion" in the context of reopening assessments under Section 147, and whether reopening is valid where the Assessing Officer had access to the material at the time of original assessment.
• Whether reopening of assessment is permissible when the assessee has furnished full and true particulars at the time of original assessment, particularly where no specific queries were raised by the Assessing Officer on the relevant entries or notes in the accounts.
• Whether the presumption under Section 114(e) of the Evidence Act, regarding regularity of official acts and application of mind by the Assessing Officer, applies to substantive facts and when such presumption can be rebutted in the context of reopening assessments.
• Whether audit objections or notes to accounts, which were available at the time of original assessment but not specifically examined, can constitute sufficient grounds for reopening assessment under Section 147.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Jurisdictional Pre-conditions for Reopening under Section 147

Legal Framework and Precedents: Section 147 empowers the Assessing Officer to reopen an assessment if he has "reason to believe" that income chargeable to tax has escaped assessment. The proviso to Section 147 restricts reopening beyond four years unless there is failure by the assessee to disclose fully and truly all material facts. The Supreme Court and various High Courts have held that reopening cannot be based on mere change of opinion and requires fresh tangible material or information that was not previously considered.

Court's Interpretation and Reasoning: The tribunal found that the Assessing Officer's reasons for reopening were based solely on the Notes to Accounts, which were available at the time of original assessment. No fresh material or evidence had come to light. The tribunal held this to be a mere change of opinion, which is not a valid ground for reopening, relying on the Full Bench decision in CIT vs. Kelvinator of India Ltd., affirmed by the Supreme Court.

Key Evidence and Findings: The audit objection dated 10th February 2005 pointed out that Rs. 1.73 crores received for transfer of exclusive distribution rights was credited to capital reserve and not treated as income. The Assessing Officer did not add this amount in the original assessment. However, the Notes to Accounts disclosing this receipt were part of the original return and assessment record.

Application of Law to Facts: Since the material was available at the time of original assessment and no new information had emerged, reopening was held to be invalid. The reopening was a result of a change of opinion by the Assessing Officer rather than discovery of new facts or evidence.

Treatment of Competing Arguments: The Revenue argued that the Assessing Officer had not applied mind to the receipt during original assessment and that failure to examine this entry was a lapse justifying reopening. The Court rejected this, holding that a lapse or failure by the Assessing Officer cannot justify reopening under Section 147.

Conclusion: The tribunal and the Court concluded that the reopening did not satisfy the jurisdictional requirements under Section 147 and was invalid.

Issue 2: Meaning and Scope of "Change of Opinion" in Reopening Assessments

Legal Framework and Precedents: The doctrine of "change of opinion" is well established in tax jurisprudence. The Supreme Court in Indian & Eastern Newspaper Society v. CIT held that an error discovered on reappraisal of the same material does not justify reopening. The Full Bench of the Delhi High Court in Kelvinator clarified that reopening requires fresh information or tangible material not considered earlier.

Court's Interpretation and Reasoning: The Court emphasized that reopening is impermissible if it is based on reassessment of the same material already considered. The Court noted that when the Assessing Officer passes an order under Section 143(3), there is a presumption of application of mind. Mere failure to refer to certain entries or notes in the assessment order does not mean the Assessing Officer did not consider them.

Key Evidence and Findings: The Court noted that the Notes to Accounts disclosing the Rs. 1.73 crores receipt were part of the return and available to the Assessing Officer. No queries were raised regarding this receipt during original assessment, but the Assessing Officer had raised other queries on different issues, indicating application of mind.

Application of Law to Facts: The Court held that since the Assessing Officer had access to full particulars, and the reopening was based on reappraisal of the same material, it amounted to a mere change of opinion. The principle of finality in assessment proceedings prohibits reopening on such grounds.

Treatment of Competing Arguments: The Revenue contended that failure to examine the entry means no application of mind and hence reopening is valid. The Court disagreed, observing that the presumption under Section 114(e) of the Evidence Act applies, and the burden is on the Revenue to rebut this presumption by showing that the Assessing Officer did not apply mind.

Conclusion: The Court reaffirmed the principle that reopening on mere change of opinion is invalid and that application of mind is presumed when assessment is completed under Section 143(3).

Issue 3: Effect of Full and True Disclosure and Non-Raising of Queries on Reopening

Legal Framework and Precedents: The proviso to Section 147 applies where the assessee fails to disclose fully and truly all material facts. However, in the present case, reopening was within four years and the proviso was not applicable. The Court examined whether absence of queries on a particular entry precludes reopening.

Court's Interpretation and Reasoning: The Court observed that the Assessing Officer had raised a detailed questionnaire covering multiple aspects but did not raise any query on the Rs. 1.73 crores receipt. This indicated that the Assessing Officer had considered the material and chose not to treat it as income. The Court held that absence of queries on a particular entry, when queries on other matters were raised, supports the presumption of application of mind.

Key Evidence and Findings: The questionnaire dated 13th August 2003, issued before original assessment, contained multiple queries but none related to the impugned receipt. The agreement governing the transfer was not sought or produced.

Application of Law to Facts: The Court held that the assessee had furnished full and true particulars, and the Assessing Officer had applied mind to the return as a whole. Non-raising of queries on the receipt did not justify reopening on the ground of escapement of income.

Treatment of Competing Arguments: The Revenue argued that failure to raise queries was a lapse justifying reopening. The Court rejected this, stating that lapses by the Assessing Officer cannot be used to reopen assessments under Section 147.

Conclusion: The Court concluded that reopening was invalid as the assessee had furnished full and true particulars and the Assessing Officer had applied mind, evidenced by the queries raised on other matters.

Issue 4: Application of Section 114(e) of the Evidence Act in Reopening Proceedings

Legal Framework and Precedents: Section 114(e) of the Evidence Act allows presumption that official acts have been regularly performed. The Court examined the extent to which this presumption applies to substantive facts in tax assessment and when it can be rebutted.

Court's Interpretation and Reasoning: The Court held that the presumption applies to procedural regularity and that in the absence of evidence to the contrary, it is presumed that the Assessing Officer applied mind and considered the material before completing assessment. The presumption can be rebutted if there is clear evidence that the Assessing Officer did not consider the material or acted mechanically.

Key Evidence and Findings: The Court noted that the assessment order was passed after scrutiny and queries were raised on other issues, supporting the presumption of application of mind. There was no evidence that the Assessing Officer acted mechanically or failed to consider the material.

Application of Law to Facts: The Court held that the presumption under Section 114(e) stands unrebutted and reopening based on the same material is barred as mere change of opinion.

Treatment of Competing Arguments: The Revenue argued that the presumption does not apply to substantive facts and that failure to examine the receipt entry rebuts the presumption. The Court disagreed, emphasizing that the presumption applies unless rebutted by clear evidence.

Conclusion: The Court concluded that the presumption of regularity and application of mind applies, barring reopening on the same material.

Issue 5: Validity of Reopening Based on Audit Objections or Notes to Accounts

Legal Framework and Precedents: The Supreme Court in Indian & Eastern Newspaper Society held that audit objections on a point of law do not constitute "information" for reopening. The Court examined whether audit objections based on material already available can justify reopening.

Court's Interpretation and Reasoning: The Court held that audit objections based on material already available to the Assessing Officer at the time of original assessment do not amount to fresh information justifying reopening. The reopening must be based on new information or tangible material not previously considered.

Key Evidence and Findings: The audit objection was based on the Notes to Accounts, which disclosed the receipt of Rs. 1.73 crores. This material was before the Assessing Officer during original assessment.

Application of Law to Facts: The Court held that reopening on the basis of audit objection alone, without any new material, is invalid and constitutes a mere change of opinion.

Treatment of Competing Arguments: The Revenue argued that audit objection raised a valid issue of escapement of income. The Court rejected this, holding that audit objections on legal interpretation do not amount to new information.

Conclusion: The Court held that reopening on audit objections based on previously available material is invalid.

3. SIGNIFICANT HOLDINGS

"We are unable to agree with the submission... that the impugned order of reassessment cannot be faulted as the same was based on information derived from the tax audit report. The tax audit report had already been submitted by the assessee... It is one thing to say that the Assessing Officer had received information from an audit report which was not before the Income-tax Officer, but it is another thing to say that such information can be derived by the material which had been supplied by the assessee himself."

"An order of assessment can be passed either in terms of sub-section (1) of section 143 or sub-section (3) of section 143. When a regular order of assessment is passed in terms of the said sub-section (3) of section 143 a presumption can be raised that such an order has been passed on application of mind... If it be held that an order which has been passed purportedly without application of mind would itself confer jurisdiction upon the Assessing Officer to reopen the proceeding without anything further, the same would amount to giving a premium to an authority exercising quasi-judicial function to take benefit of its own wrong."

"In the present case, the reopening is based on mere change of opinion which is not valid."

"Lapse on the part of the Assessing Officer cannot be a justification/cause to reopen the assessment."

"It appears to us... that the proposition is stated too widely and travels farther than the statute warrants in so far as it can be said to lay down that if, on reappraising the material considered by him during the original assessment, the ITO discovers that he has committed an error in consequence of which income has escaped assessment, it is open to him to reopen the assessment. In our opinion, an error discovered on a reconsideration of the same material (and no more) does not give him that power."

"The statute does not require that the information must be extraneous to the record. It is enough if the material, on the basis of which the reassessment proceedings are sought to be initiated, came to the notice of the Income-tax Officer subsequent to the original assessment. If the Income-tax Officer had considered and formed an opinion on the said material in the original assessment itself, then he would be powerless to start the proceedings for the reassessment."

Core principles established include:

• Reopening of assessment under Section 147 requires "reason to believe" based on fresh tangible material or information not considered earlier, not mere change of opinion.
• The presumption of application of mind arises when an order is passed under Section 143(3), and lapses or omissions by the Assessing Officer do not justify reopening.
• Audit objections based on material already available do not constitute fresh information justifying reopening.
• Failure to raise queries on a particular entry, when queries on other issues are raised, supports the presumption that the Assessing Officer applied mind.
• Reopening cannot be justified merely because the Assessing Officer overlooked or failed to examine a particular entry or note in the accounts.

Final determination: The reopening of assessment under Section 147 in the present case was invalid as it was based on a mere change of opinion, with no fresh material coming to light, and the assessee had furnished full and true particulars at the time of original assessment. The tribunal's decision to quash the reassessment proceedings was upheld.