2025 (5) TMI 830 - HC - Income Tax

Reopening of assessment u/s 147 - Reason to believe - fresh or new factual information that may come to light pursuant to an order of assessment made subsequently - HELD THAT - We find that the petitioner had unmistakeably placed copious material on the record during the original assessment proceedings and which would have been relevant and determinative of the four new issues which constitute the basis for invoking Section 147. The respondents therefore cannot justifiably urge that the petitioner had failed to make a full and true disclosure. Whether it be with regard to remittances to SMC TDS long or short term capital gains the petitioner had not only made adequate disclosures these aspects also appear to have been duly flagged and noticed by the AO in the course of the original assessment. The details of the material placed for the consideration of the AO the documentation submitted the nature of the queries that were addressed and the replies submitted leave us in no doubt that all material germane and relevant to the assessment had been duly presented by the writ petitioner. Having thus found that the petitioner has crossed the rubicon of a full and true disclosure we then proceed forward to consider whether the impugned action constitutes a change of opinion and whether the fresh material could have been validly taken into consideration for the purposes of formation of opinion that reassessment was warranted. From the nature of queries that were addressed in the course of the assessment undertaken initially as well as the material that was placed on the record it is impossible to hold that the AO was unaware of remittances made to SMC related party transactions and details of TDS deposited. The record which has been analysed by us leads us to the inevitable conclusion that it would be wholly incorrect to hold that the AO was not cognizant of the relevant facts the different heads of income and expenditure involved the remittances made to SMC as well as the issue of short and long term capital gains. The petitioner has also demonstrated that appropriate disclosures were made with respect to placement of representatives of SMC in India. This therefore clearly appears to be a case where the AO though conscious and cognizant chose not to make any additions draw any adverse inference or doubt the stand which was taken by the writ petitioner. Reopening of an assessment would be invalid if the AO merely relied on a report without independently applying its mind. As is manifest from a reading of the reasons which were assigned in support of invocation of Section 147 the AO has merely referred to the communication received from the ACIT and the obligation to review. The reasons fail to demonstrate the AO having even prima facie examined whether there was any fresh information which had been discovered in the subsequent AY and which may have led it to believe that the information which formed the basis for the original assessment was rendered false misleading or incorrect. AO also does not allude to any material fact placed on the assessment record for AY 2009-10 being either incomplete or insufficient for the purposes of formation of opinion or which may have constituted a reason for an item of income expenditure or remittance having been either overlooked or having escaped its scrutiny or attention. The lack of an independent application of mind becomes even more stark and glaring when we examine the aspect of the existence of a PE. Thus a reading of the reasons assigned establishes that the AO has not even made a token or superficial attempt to evaluate the issue from that perspective. The decision to reopen thus clearly appears to have been predicated solely on the basis of what the AO came to hold in AY 2010-11. We thus and for all the aforesaid reasons find ourselves unable to sustain or uphold the impugned action under Section 147 of the Act. WP Allowed.

Summary

The core legal questions considered by the Court in this judgment are as follows:

1. Whether the reassessment notice issued under Sections 147/148 of the Income Tax Act, 1961 for Assessment Year 2009-10 was validly issued within the prescribed limitation period under Section 149 of the Act.

2. Whether the issuance of the notice on 01 April 2016, after the limitation period expired on 31 March 2016, renders the reassessment barred by limitation.

3. Whether the reopening of assessment constituted a mere "change of opinion" by the Assessing Officer (AO), which is impermissible under the law, given that the petitioner had made full and true disclosures during the original assessment proceedings.

4. Whether the AO had independently applied mind in forming the opinion for reassessment or merely acted on the communication received from the Additional Commissioner of Income Tax (ACIT) and the assessment order for AY 2010-11.

5. Whether the four principal issues flagged in the reasons to believe-(a) Permanent Establishment (PE) of Suzuki Motor Corporation (SMC) and consequent TDS liability; (b) treatment of share transactions as business income; (c) disallowance of deductions under Section 35(2AB); and (d) disallowance of warranty provision as contingent liability-were adequately disclosed and examined in the original assessment.

6. Whether subsequent material or information that came to light during assessment of AY 2010-11 justified reopening of the assessment for AY 2009-10.

7. The legal interpretation of the term "issued" in the context of notices under Section 148 and its significance for limitation under Section 149, particularly when notices are generated digitally but dispatched after the limitation period.

Issue-wise Detailed Analysis

1. Validity and Limitation of Reassessment Notice

Legal Framework and Precedents: Sections 147, 148, and 149 of the Income Tax Act, 1961 govern reassessment proceedings and limitation for issuance of notices. The Supreme Court and various High Courts have held that the date of "issuance" of a notice is the date of its despatch and not merely the date of its generation or signing. Key precedents include Suman Jeet Agarwal v. ITO, R. K. Upadhyaya v. CIT, and decisions of the Madras, Gujarat, Madhya Pradesh, and Allahabad High Courts, which uniformly emphasize that mere generation or digital signing of a notice does not amount to issuance unless the notice is duly despatched within the prescribed limitation period.

Court's Interpretation and Reasoning: The Court examined the facts and found that the notice under Section 148 for AY 2009-10 was dispatched on 01 April 2016, after the limitation period expired on 31 March 2016. The Court relied heavily on the detailed exposition in Suman Jeet Agarwal, which clarified that generation or digital signing of a notice before the expiry of limitation is not sufficient; the notice must be despatched within the limitation period to be validly issued.

Key Evidence and Findings: The respondents did not controvert the petitioner's assertion that the notice was dispatched on 01 April 2016. The reasons to believe and the notice itself indicated that the digital signature was affixed on or after 01 April 2016, and the dispatch occurred thereafter.

Application of Law to Facts: Applying the settled legal position, the Court held that the notice was issued beyond the limitation period and was therefore barred by Section 149.

Treatment of Competing Arguments: The Department argued that generation and digital signing on the portal on the last day of limitation sufficed as issuance, but the Court rejected this, finding no legal basis for equating generation with issuance. The Court also distinguished the Department's reliance on a Supreme Court decision under a different statute (Central Excises and Salt Act) which used different language ("no order shall be made") and was thus inapplicable.

Conclusion: The reassessment notice was invalid as it was issued after the expiry of the limitation period prescribed under Section 149 of the Act.

2. Whether Reassessment Constituted a Change of Opinion

Legal Framework and Precedents: The principle that reassessment cannot be based on a mere change of opinion is well established. The Full Bench decision in CIT v. Usha International Ltd. provides a comprehensive framework distinguishing between cases where reassessment is barred due to change of opinion and cases where fresh or new material justifies reopening. Supreme Court decisions such as Indian and Eastern Newspaper Society v. CIT and A. L. A. Firm v. CIT further clarify that reassessment is impermissible if based solely on reappraisal of material already considered.

Court's Interpretation and Reasoning: The Court analyzed the original assessment record, including queries raised under Section 143(2) and 142(1), replies furnished by the petitioner, audit reports, tax audit reports, and transfer pricing documentation. It found that the petitioner had made full and true disclosures on all four issues flagged in the reasons to believe. The AO had examined these issues during the original assessment and had formed an opinion, albeit in favor of the petitioner.

Key Evidence and Findings: The petitioner responded comprehensively to queries about TDS on payments to SMC, share transactions, deductions under Section 35(2AB), and warranty provisions. The assessment order and office notes indicated that these issues were examined. The petitioner also relied on MAP proceedings confirming that SMC had no PE in India.

Application of Law to Facts: Since the AO had considered the relevant facts and formed an opinion during the original assessment, the reassessment based on the same material amounted to a change of opinion, which is impermissible. The Court emphasized that reassessment cannot be initiated merely because the AO or a successor officer disagrees with the earlier conclusion.

Treatment of Competing Arguments: The Department contended that new information came to light during assessment of AY 2010-11, which justified reopening AY 2009-10. However, the Court found no evidence that the new issues constituted fresh or previously undisclosed material facts. The Department failed to show that the disclosures made by the petitioner were false, misleading, or incomplete.

Conclusion: The reassessment was invalid as it was based on a mere change of opinion without any new material justifying reopening.

3. Whether AO Applied Independent Mind in Initiating Reassessment

Legal Framework and Precedents: The AO must independently form a reasoned opinion based on material facts before initiating reassessment. Reliance solely on communications from higher authorities or subsequent assessment orders without independent application of mind is insufficient.

Court's Interpretation and Reasoning: The Court noted that the reasons to believe were primarily based on a letter from the ACIT and the assessment order for AY 2010-11. The AO did not demonstrate any independent examination or evaluation of the material for AY 2009-10. The reasons lacked any analysis showing that the petitioner's disclosures were false or incomplete.

Key Evidence and Findings: The record showed that the AO acted on the ACIT's directive without independently assessing whether fresh material existed or whether the original assessment was flawed.

Application of Law to Facts: The Court held that the absence of independent application of mind by the AO rendered the reassessment invalid.

Conclusion: The reassessment was vitiated by lack of independent satisfaction on the part of the AO.

4. Treatment of the Four Principal Issues Raised in Reasons to Believe

Permanent Establishment and TDS Liability: The petitioner disclosed all related party transactions and TDS details in the original assessment and tax audit reports. MAP proceedings confirmed no PE of SMC in India. The AO was aware of these facts during original assessment.

Share Transactions as Business Income: The petitioner disclosed details of short-term and long-term capital gains, including scrip-wise details, and responded to queries in the original assessment.

Deductions under Section 35(2AB): The petitioner provided statutory auditor certificates, DSIR approvals, and detailed explanations in response to notices during original assessment.

Warranty Provision: The petitioner disclosed warranty provisions in financial statements and notes to accounts, and the issue had been conclusively decided in earlier assessment years.

Conclusion: All four issues were disclosed and examined in the original assessment, and thus could not form a valid basis for reassessment.

5. Principle of Consistency and Facts-Specific Nature of PE Determination

Legal Framework: The principle of res judicata does not apply to income tax assessments as each year is distinct. However, consistency in findings is desirable unless strong reasons exist to deviate. PE determinations are fact-specific and must be made for each assessment year based on prevailing facts.

Court's Reasoning: The Court noted that while previous findings of no PE in certain years are relevant, they do not preclude fresh determination if facts differ. However, no fresh facts were shown here to justify reopening.

Conclusion: The AO failed to show any change in fundamental facts justifying reassessment on the PE issue.

6. Interpretation of "Issued" in the Context of Digital Notices

Legal Framework and Precedents: The Court extensively reviewed judgments holding that "issuance" of a notice requires despatch to the assessee, whether in paper or electronic form, and mere generation or digital signing on the portal is insufficient. The date of despatch or when the electronic record leaves the control of the originator is the date of issuance.

Court's Reasoning: The Court rejected the Department's contention that generation on the portal or digital signing constituted issuance. It relied on authoritative pronouncements from various High Courts and the Supreme Court, as well as Income Tax Business Application instructions distinguishing generation from issuance.

Conclusion: The notice dispatched on 01 April 2016 was issued after the limitation period and thus invalid.

7. Application of Law on Limitation and Reopening Powers

Legal Framework: Section 149 prescribes the limitation for issuance of reassessment notices. The proviso to Section 147 requires failure to make full and true disclosure for reopening beyond four years. The principle of change of opinion bars reopening where the AO had formed an opinion in original assessment.

Court's Reasoning: The Court found that the notice was issued beyond limitation and that full and true disclosure had been made. The AO had formed an opinion in the original assessment. The reopening was therefore barred.

Conclusion: The reassessment notice was invalid on limitation and substantive grounds.

Significant Holdings

"The impugned notices dated March 31, 2021, which were despatched on April 1, 2021, or thereafter, would not meet the test of 'issued' under section 149 of the Act of 1961 and would be time barred."

"The reassessment will be invalid because the Assessing Officer had formed an opinion in the original assessment, though he had not recorded his reasons."

"An erroneous decision, which is also prejudicial to the interests of the Revenue, can be made subject-matter of adjudication under section 263 of the Act, but resort to reassessment proceedings is not permissible."

"Mere generation of a notice on the Income Tax Business Application portal or digital signing thereof does not constitute issuance of notice unless it is duly despatched within the prescribed limitation period."

"The principle of 'change of opinion' bars reassessment where the AO had examined and formed an opinion on the material facts during original assessment and the assessee had made full and true disclosure."

"The AO must independently apply mind and form a reasoned opinion before initiating reassessment; mere reliance on communication from higher authorities or subsequent assessment orders is insufficient."

"Each assessment year is distinct, and the existence of a Permanent Establishment must be determined based on facts applicable to that year; however, no reassessment can be based on mere assumption that facts remain unchanged."

"The date of issuance of a notice under Section 148 is the date of its despatch or when the electronic record leaves the control of the originator, not the date of its generation or digital signing."

"The reassessment notice issued after the expiry of the limitation period under Section 149 is invalid and liable to be quashed."