2022 (6) TMI 1531 - HC - Income Tax

Reopening of assessment - reason to believe or suspect - review v/s reopening - transfer of shares of the petitioner from the Company to LLP - respondent submitted that admittedly the petitioner is not entitled to exemption u/s 47(xiiib)(e) of the Act as the turnover of the company which is converted into LLP is more than Rs. 60 Lakh in the previous year - Notice issued beyond the period of four years - HELD THAT - There was no failure on the part of the petitioner to disclose truly and fully all material facts relevant for the assessment as the impugned notice is issued beyond the period of four years after completion of AY on 31.03.2021 for the Year under consideration. Also AO has failed to consider the contention raised on behalf of the petitioner that the petitioner is not liable to capital gains as the Company is converted into LLP without there being any change in shareholdings of the petitioner. The petitioner was holding 1.12% shares of the Company which is the same in the LLP and therefore there is no transfer of any asset in the hands of the Company on conversion to LLP. It also appears that the respondent-Assessing Officer has issued the impugned notice only on mere change of opinion by referring to section 47(xiiib)(e) to come to a prima facie conclusion that there is escapement of the income. As decided in Kelvinator of India Ltd 2010 (1) TMI 11 - SUPREME COURT AO has no power to review; he has the power to re-assess. But re-assessment has to be based on fulfillment of certain pre-condition and if the concept of change of opinion is removed as contended on behalf of the Department then in the garb of re-opening the assessment review would take place - to reopen an assessment tangible material should be there. Assessee appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court were:

(a) Whether the notice issued under section 148 of the Income Tax Act, 1961 for reopening the assessment for Assessment Year 2015-16 was valid and not time-barred;

(b) Whether the conversion of a company into a Limited Liability Partnership (LLP) amounts to a 'transfer' chargeable to capital gains under section 45 of the Act, particularly in light of the exemption under section 47(xiiib)(e) and the turnover threshold therein;

(c) Whether the Assessing Officer had valid reasons to believe that income had escaped assessment justifying reopening beyond the normal four-year period;

(d) Whether the reopening was based on mere change of opinion or on tangible failure to disclose material facts by the assessee;

(e) The applicability and interpretation of the concept of 'reason to believe' under section 147 post amendment and the limits on reopening assessments to prevent abuse of power.

2. ISSUE-WISE DETAILED ANALYSIS

(a) Validity and Timeliness of the Reopening Notice

The notice under section 148 was issued on 31.03.2021 for AY 2015-16. The Court noted that the notice was signed and issued on that date, and there was no evidence to show otherwise. Since the notice was issued within the prescribed time limit, it could not be held to be time-barred. The Court recorded that other partners' notices were issued after this date, but the petitioner's notice was timely.

(b) Whether Conversion of Company into LLP Constitutes Transfer Chargeable to Capital Gains

The Assessing Officer contended that the conversion of Mayur Dyechem Intermediates Limited into LLP did not satisfy the conditions prescribed under section 47(xiiib)(e), as the turnover of the company exceeded Rs. 60 lakhs (Rs. 199.09 crores). Therefore, the transaction did not qualify for exemption from capital gains tax.

The AO relied on the principle that though section 47 exempts certain transfers from capital gains, this exemption is conditional and cumulative. The turnover condition was not met, hence the conversion was a 'transfer' chargeable to capital gains under section 45.

The AO further relied on the Supreme Court decision in CIT vs. Grace Collis, which held that extinguishment of rights in a capital asset includes extinguishment independent of transfer, supporting the view that the conversion resulted in capital gains.

The AO calculated the capital gain as the difference between the book value of shares held (approx. Rs. 11.7 lakhs) and the value of partnership interest in the LLP (approx. Rs. 1.57 crores), which was undisclosed income.

The petitioner argued that there was no transfer as the shareholding percentage remained the same post conversion, and the conversion was a mere change in form without change in ownership or asset rights. The petitioner claimed the exemption under section 47 applied.

(c) Reason to Believe and Validity of Reopening Beyond Four Years

The reopening was sought beyond the four-year period, which under the old regime required that the Assessing Officer have 'reason to believe' that income had escaped assessment due to failure to disclose material facts.

The petitioner contended that there was no failure to disclose material facts, and the AO's reasons were based on a mere change of opinion after scrutiny and assessment had already been completed.

The Court noted that the AO had not considered the petitioner's contention that no transfer occurred and had issued the notice on a prima facie basis relying on section 47(xiiib)(e) and turnover threshold.

(d) Change of Opinion vs. Failure to Disclose Material Facts

The Court referred to the authoritative decision in CIT vs. Kelvinator of India Ltd, which clarified that post amendment to section 147, reopening assessments requires a 'reason to believe' that income has escaped assessment, and mere change of opinion cannot be a ground for reopening.

The Court emphasized the conceptual difference between power to review and power to reassess, noting that reassessment must be based on fulfillment of preconditions and not mere change of opinion to prevent abuse of power.

Applying this principle, the Court found that the AO's action amounted to a mere change of opinion without any failure on the petitioner's part to disclose material facts, and thus the reopening was not justified.

(e) Application of Law to Facts and Treatment of Competing Arguments

The Court carefully examined the facts that the petitioner had filed return declaring income, the scrutiny assessment was completed accepting the returned income, and the conversion of company to LLP was approved by MCA prior to assessment year.

The petitioner's argument that the shareholding remained unchanged and no transfer occurred was not adequately addressed by the AO.

The AO's reliance on turnover exceeding Rs. 60 lakhs to deny exemption under section 47(xiiib)(e) was noted, but the Court found that the AO failed to demonstrate any failure on petitioner's part to disclose material facts or any new tangible material justifying reopening.

The Court held that the impugned notice was issued on mere change of opinion and not on valid 'reason to believe' as required under section 147.

3. SIGNIFICANT HOLDINGS

The Court held:

"... post 1st April, 1989, power to re-open is much wider, However, one needs to give a schematic interpretation to the words 'reason to believe' failing which, we are afraid, Section 147 would give arbitrary powers to the Assessing Officer to re-open assessments on the basis of 'mere change of opinion', which cannot be per se reason to reopen."

"One must treat the concept of 'change of opinion' as an in-built test to check abuse of power by the Assessing Officer."

Applying these principles, the Court concluded that the impugned notice dated 31.03.2021 was issued on mere change of opinion without any failure on the petitioner's part to disclose material facts, and therefore, the reopening was not justified.

The Court quashed and set aside the notice under section 148 issued for AY 2015-16.