2025 (7) TMI 258 - HC - Income Tax

Reopening of assessment u/s 147 - Change of opinion - link between the reasons and the evidence - proceedings have been initiated purely based on the audit objection - Notice after the expiry of four years - HELD THAT - In the present case admittedly there are no details given by the AO (the 1st Respondent) as to which fact or material was not disclosed by the Petitioner that led to its income escaping assessment. There is merely a bald assertion in the reasons that there was a failure on the part of the Petitioner to disclose fully and truly all material facts without giving any details thereto. This being the case the impugned Notice is bad in law on this ground alone and the Petitioner would be entitled to succeed in this Writ Petition. We find that in fact there was no failure on the part of the Petitioner in disclosing fully and truly all material facts for the AY 2013-14. In response to the Notice issued by Respondent No. 1 in the original assessment proceedings the Petitioner furnished details with respect to the claim of exempted income from the BPCL Trust. Firstly the claim of dividend income was very much in the Return of income as well as the details of the dividend distribution tax paid. Annual Report was filed which also at Note No.35 (in the report referred to as the KRL Trust) disclosed investment in the KRL Trust under the heading Non-current Investment as Rs. 659.10 crores. Even in the response furnished by the Petitioner in respect of the disallowance u/s 14A of the Act the Petitioner disclosed the details of the exemption claimed under Section 10(34) of the Act which included the income received from the BPCL Trust. Change of opinion - As can be seen from the reasons for reopening the only real reason given is that the BPCL Trust is not a company and hence not covered u/s 115-O of the Act. Therefore the amount distributed by it to the Petitioner would not qualify as exempt dividend income under Section 10(34) of the Act. This to our mind would be merely a change of opinion . We say this for the simple reason that even if we assume for the sake of argument that this exemption was wrongly allowed by the AO in the scrutiny assessment proceedings the same cannot be the sole ground for reopening the assessment and invoking the provisions of Section 147 r/w Section 148 of the IT Act. Merely because the Assessing Officer is now of the opinion that the deduction is wrongly granted cannot invest him with the jurisdiction to reopen the assessment especially in a case where reassessment proceedings are initiated when there is already a scrutiny assessment u/s 143(3) and which is after a period of 4 years from the date of the relevant assessment year and there has been no failure to disclose fully and truly all material facts in relation to the concerned assessment year. This has been so held by the Hon ble Supreme Court in the case of Gemini Leather Stores Vs. Income Tax Officer 1975 (5) TMI 1 - SUPREME COURT Thus we find that the impugned Notice and the impugned order are unsustainable and hence deserve to be quashed and set aside. Reopening of assessment - Petitioner for wrongly claiming a deduction u/s 32AC - whether in fact there has been any failure to disclose fully and truly all material facts in relation to the aforesaid so-called wrongful deduction? - HELD THAT - As seeing from the reasons we find that the AO after relying upon the data already furnished by the Assessee during the original scrutiny proceedings u/s 143(3) comes to the conclusion that income has escaped assessment. Once this is the case we are clearly of the view that even so far as the reasons for reopening the assessment for AY 2014-15 on the ground of the Assessee allegedly claiming a wrong deduction u/s 32AC is without jurisdiction as there is no failure on the part of the Assessee to disclose fully and truly all material facts in relation to the deduction claimed u/s 32AC for AY 2014-15. In fact on perusing the reasons it is clear that this is nothing but a change of opinion of a subsequent AO who now seeks to reopen the assessment for AY 2014-15. This is wholly impermissible in law. In these circumstances we find that even so far as this Writ Petition is concerned the same deserves to be allowed.

Summary

The core legal questions considered in the judgment are:

1. Whether the Assessing Officer (1st Respondent) had jurisdiction and power to reopen the assessment of the Petitioner under Section 147 of the Income Tax Act, 1961 (IT Act) for Assessment Years (AY) 2013-14 and 2014-15 by issuing notices under Section 148.

2. Whether the reopening was valid in light of the proviso to Section 147, especially considering that scrutiny assessments under Section 143(3) had been completed for the relevant years and the notices were issued beyond the four-year limitation period.

3. Whether there was a failure on the part of the Petitioner to disclose fully and truly all material facts necessary for assessment, which is a prerequisite for reopening after four years.

4. Whether the reassessment was based on a permissible reason or merely a change of opinion by the Assessing Officer.

5. Whether the exemption claimed under Section 10(34) of the IT Act on dividend income received from the BPCL Trust was rightly disallowed by the Assessing Officer.

6. For AY 2014-15, whether the deduction claimed under Section 32AC was wrongly allowed and whether the reopening on this ground was justified.

7. Whether the sanction accorded under Section 151 of the IT Act for reopening was valid, specifically addressing the issue of whether the sanction was signed.

Issue-wise Detailed Analysis

1. Jurisdiction to Reopen Assessment under Section 147/148 after Four Years:

The legal framework under Section 147 and the first proviso thereto was central. The proviso states that where an assessment under Section 143(3) or Section 147 has been made, no action can be taken under Section 147 after four years from the end of the relevant assessment year unless income chargeable to tax has escaped assessment due to failure by the Assessee to disclose fully and truly all material facts necessary for assessment.

The Court noted that for both AY 2013-14 and 2014-15, scrutiny assessments under Section 143(3) had been completed and the reassessment notices were issued beyond the four-year period. Therefore, the proviso to Section 147 was applicable, requiring a valid reason to believe that income had escaped assessment due to failure to disclose material facts.

Reliance was placed on precedents establishing that the Assessing Officer's reasons for reopening must disclose a clear nexus between the alleged non-disclosure and the escapement of income. The reasons must be explicit and not mere bald assertions.

The Court emphasized that reasons must be read as recorded, without addition or substitution, and must disclose the Assessing Officer's mind clearly. The Court referred to the Division Bench decision in Bombay Stock Exchange Ltd. and Hindustan Lever Ltd., which held that reasons must explain which material facts were not disclosed fully and truly, to prevent arbitrary reopening.

2. Whether There Was Failure to Disclose Fully and Truly All Material Facts:

The Assessing Officer's reason for reopening AY 2013-14 was that the Petitioner claimed exemption under Section 10(34) on dividend income from the BPCL Trust, which was not a company and hence not covered under Section 115-O, making the exemption inapplicable. The Assessing Officer alleged non-disclosure of full facts.

However, the Court found that the Petitioner had fully disclosed the details of the dividend income from the BPCL Trust during the original assessment proceedings, including in the Return of Income, Annual Report, and responses to notices under Section 143(2). The Assessing Officer had applied his mind to these facts and made disallowances under Section 14A accordingly.

The Court held that the reasons for reopening did not specify any particular fact or material that was not disclosed. The mere assertion of failure to disclose was insufficient. The Court found no failure on the part of the Petitioner to disclose material facts fully and truly for AY 2013-14.

Similarly, for AY 2014-15, the reopening on the ground of wrongly claiming deduction under Section 32AC was examined. The Assessing Officer relied on submissions and annexures furnished by the Petitioner during the original assessment, which detailed the assets on which the deduction was claimed. The Assessing Officer concluded that LPG cylinders and pressure regulators did not qualify as plant and machinery under Section 32AC.

However, the Court found that this conclusion was based on a change of opinion by the Assessing Officer rather than any failure by the Petitioner to disclose material facts. The Petitioner had disclosed all relevant details in the original assessment proceedings.

3. Change of Opinion Doctrine:

The Court reiterated the settled legal principle that reopening an assessment cannot be based merely on a change of opinion by the Assessing Officer. The Assessing Officer cannot reopen an assessment simply because he disagrees with the earlier order or opinion.

The Court cited the Supreme Court decision in Gemini Leather Stores, which held that once all primary facts are before the Assessing Officer, he must draw legal inferences but cannot reopen on the basis of mere oversight or change of opinion.

In the present case, the Court found that the reassessment notices were issued solely on the basis that the Assessing Officer now considered the exemption under Section 10(34) wrongly allowed and that the deduction under Section 32AC was wrongly claimed. This amounted to a change of opinion without any new material or failure to disclose.

4. Validity of Exemption under Section 10(34) in Relation to BPCL Trust:

The Petitioner contended that the BPCL Trust, being the sole beneficiary and formed pursuant to a merger scheme, was entitled to claim exemption under Section 10(34) for dividend income, as the dividend distribution tax was paid and the income was exempt in the hands of the Trust. The Petitioner relied on Section 161(1) which treats the beneficiary in the same manner as the Trust for assessment.

The Assessing Officer argued that since the Trust was not a company and not covered by Section 115-O, the income distributed by the Trust could not qualify as exempt dividend income under Section 10(34).

The Court noted that while this issue was disputed, the Assessing Officer's reason to reopen did not rest on any failure to disclose but on a difference in interpretation, which cannot justify reopening. The Court also noted that ITAT decisions in subsequent years had accepted the Petitioner's claim, though those decisions were not final.

5. Validity of Sanction under Section 151:

The Petitioner challenged the validity of the sanction under Section 151 on the ground that it was unsigned. The Court did not decide this issue on merits but kept it open for appropriate cases, as the primary grounds for quashing the notices were sufficient.

6. Reopening Based on Audit Objection:

The Petitioner argued that reopening based solely on audit objection was impermissible. The Assessing Officer submitted that audit objections are entitled to be examined and can form the basis for reopening if income has escaped assessment.

The Court did not decide this issue finally but noted that the Assessing Officer's reasons must still comply with the statutory requirements of disclosing failure to disclose material facts.

Application of Law to Facts and Treatment of Competing Arguments:

The Court carefully analyzed the material on record, including the original assessment order, submissions by the Petitioner, and the reasons recorded for reopening. It found that the Assessing Officer was aware of the dividend income from the BPCL Trust and had considered it in the original assessment, including applying Section 14A disallowances. Similarly, the deduction under Section 32AC was claimed with full disclosure of asset details.

The Court rejected the Revenue's contention that the non-application of Section 115-O to the Trust meant non-disclosure by the Petitioner, holding that this was a legal interpretation issue and not a failure to disclose facts.

The Court also rejected the argument that the reopening was based on fresh material, finding no new tangible material had been brought to light.

Conclusions:

1. The Assessing Officer lacked jurisdiction to reopen the assessment for AY 2013-14 and 2014-15 as the proviso to Section 147 was triggered and no valid reason to believe income had escaped assessment due to failure to disclose material facts was shown.

2. The reasons recorded for reopening were vague, bald, and did not disclose the material facts allegedly not disclosed by the Petitioner.

3. The reassessment was based on a mere change of opinion, which is impermissible.

4. The exemption claimed under Section 10(34) on income from the BPCL Trust was disclosed and considered in original assessments; hence, no failure to disclose occurred.

5. The deduction under Section 32AC was also claimed with full disclosure; reopening on this ground was also a change of opinion.

6. The impugned notices and orders rejecting objections were quashed and set aside.

Significant Holdings

"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. The reasons record should be clear and unambiguous and should not suffer from any vagueness. The reasons recorded must disclose his mind."

"Merely because the Assessing Officer is now of the opinion that the deduction is wrongly granted, cannot invest him with the jurisdiction to reopen the assessment, especially in a case where reassessment proceedings are initiated when there is already a scrutiny assessment under Section 143(3) and which is after a period of 4 years from the date of the relevant assessment year and there has been no failure to disclose fully and truly all material facts."

"Once all the primary facts are before the assessing authority, he requires no further assistance by way of disclosure. It is for him to decide what inferences of facts can be reasonably drawn and what legal inferences have ultimately to be drawn. It is not for somebody else far less the assessee - to tell the assessing authority what inferences, whether of facts or law, should be drawn."

"The reopening of assessment cannot be based merely on a change of opinion."

Final determinations:

- The impugned Notices dated 23rd March 2021 and 26th March 2021 under Section 148 for AY 2013-14 and AY 2014-15 respectively, and the orders rejecting objections thereto, are quashed and set aside.

- The Assessing Officer did not have jurisdiction to reopen the assessments as no failure to disclose fully and truly all material facts was established.

- The reassessment was based on impermissible change of opinion.