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TMI Blog2013 (3) TMI 200X X X X Extracts X X X X X X X X Extracts X X X X ..... he requirement which has been spelt out in the proviso to Section 147 of the Act. Since the assessments for those years were completed under section 143(3), the reopening of the assessments could be valid only if there was a failure on the part of the assessee "to disclose fully and truly all material facts necessary for his assessment for that assessment year". For A.Ys.2007-08 and 2008-09, the reopening is admittedly within a period of four years of the end of the relevant assessment year. The test to be applied, in view of the decision of the Supreme Court in Commissioner of Income Tax Vs. Kelvinator of India Limited (2010) 320-ITR-561 (SC), is whether, as the assessee submits, the reopening was based purely on a change of opinion or whether, there was tangible material on the basis of which the assessing officer could have proceeded to reopen the assessments. For convenience of exposition and since the reasons for reopening the assessments are similar, we are dealing with the batch of petitions by a common judgment. However, having regard to the fact that a different test would govern the two petitions where the reopening is beyond four years, we will deal with those separately ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he record it appears that for A.Y. 2008-09, an audit objection was raised by the Senior Audit Officer. The audit objection was subsequently withdrawn in pursuance of an order of the Director General dated 7 April 2011. 4. A notice was issued to the Petitioner on 30 March 2012, seeking to reopen the assessment for A.Y.2005-06. In pursuance of a request made by the Petitioner for disclosure of reasons, the following reasons were furnished for reopening the assessment under section 148 :- "The assessee filed return income of Rs. 9,82,39,900/- on 31.10.2005. The return was processed u/s 143(1) of the Income Tax Act, 1961.Order u/s 143(3) was passed on 24.12.2007 determining the total income of Rs. 9,89,17,043/-. On perusal of P & L a/c. it is observed that the assessee has paid commission of Rs. 19,00,00,000/- to Directors. In the A.Y. 2009-10, the assessing officer found that this payment is made to Directors who are shareholders in the company. As per section 36(1)(ii), only such commission payments are allowed as expenditure as "any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend, if it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the payments and there was a detailed explanation on the part of the assessee justifying the payments; and (v) In respect of the years in question, the assessee proceeded to deduct tax at source on the basis that what has been paid to the directors is salary income. The directors filed their returns of income and assessments in their hands have been completed under section 143(3) accepting the returns of income. After the amounts have been taxed as salary, the assessments of the Petitioner are now sought to be reopened by taxing the amounts as profits in the hands of the company after the expiry of a period of four years. Counsel for the Revenue has supported the reopening of assessments on the grounds as set out in the reasons disclosed. 7. Under the proviso to Section 147, where an assessment has been completed under Section 143(3), the validity of a reopening beyond four years of the end of the relevant year is pre conditioned by the requirement that there is a failure on the part of the assessee to fully and truly disclose material facts necessary for the assessment for that assessment year. Section 147 in its present form was brought into the statute by an Amending Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment year, the assessee paid a remuneration of Rs. 18.25 crores to each of its directors which was inclusive of remuneration by way of a commission/performance bonus of Rs. 17.65 crores each. The A.O. issued a questionnaire to the assessee on 16 February 2009 calling, inter alia, for the details of the shareholding pattern and for establishing the genuineness and reasonableness of the payments made to the persons specified under Section 40A(2)(b). For the assessment year under question, the assessee had shown the amounts in Schedule-10, forming part of the Balance Sheet and the Profit and Loss Account, as well as in Annexure-IV which forms part of the Tax Audit Report. In response to the questionnaire, the assessee submitted a communication on 4 September 2009 along the same lines as was addressed during the course of A.Y.2005-06 (noted above) explaining the nature and extent of the payment and seeking to justify the payment of a fixed monthly remuneration together with a commission at the rate of thirty five percent of the net profits. An order of assessment was passed under section 143(3). The reopening of the assessment is sought to be justified on the basis of the same reasons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which a deduction was claimed in respect of the commission that was paid to the two directors for services rendered. The record before the Court indicates that the assessee had specifically placed before the A.O. by its letter dated 4 September 2009, copies of the agreements dated 16 June 2005 between the assessee and its directors in pursuance of which remuneration was paid to them for the relevant year which included the payment of commission. The attention of the A.O. was clearly and specifically drawn to the quantum of the fixed monthly remuneration and in addition to the payment of commission which is computed at a stipulated proportion of the net profits. The assessee explained the basis on which a decision was taken to make the payment of commission at a fixed monthly remuneration and the rest at a proportion of the net profits. According to the assessee, this decision was based on the volatility of the stock market and having regard to the fact that the income of the assessee from share business had reduced and in fact, it was Rs. 35.51 crores in comparison to the income of Rs. 57.07 crores for the previous year. This is, therefore, a case where the nature of the payment, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld take place. One must treat the concept of "change of opinion" as an inbuilt test to check abuse of power by the AO. Hence, after 1st April, 1989, AO has power to reopen, provided there is "tangible material" to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief. Our view gets support from the changes made to S.147 of the Act, as quoted hereinabove. Under the Direct Tax Laws (Amendment) Act, 1987, Parliament not only deleted the words "reason to believe" but also inserted the word "opinion" in S.147 of the Act. However, on receipt of representations from the companies against omission of the words "reason to believe", Parliament re-introduced the said expression and deleted the word "opinion" on the ground that it would vest arbitrary powers in the AO.We quote hereinbelow the relevant portion of Circular No.549, dt.31st Oct. 1989 [(1990)82-CTR (ST)-1], which reads as follows : "7.2 Amendment made by the Amending Act, 1989, to re-introduce the expression `reason to believe' in S.148.- A number of representations were received against the omission of the words "reason to believe" from S.147 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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