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2015 (8) TMI 275 - MADRAS HIGH COURT

2015 (8) TMI 275 - MADRAS HIGH COURT - TMI - Validity of reopening of assessment - petitioner contend that after four years of the assessment year 2007-08, the second respondent issued notice dated 26.03.2014 under Section 148 seeking to reopen the assessment, without any tangible materials and without assigning reasons - assessee had not furnished the true information regarding its status and the details regarding payment of dividend and not disclosed full and true material facts on the claim o .....

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year has escaped assessment within the meaning of Section 147 of the Act. Therefore, when it is clear that the reassessment resorted to by the second respondent is within the period of four years

Of-course, it is true that no fresh material was available with the second respondent to proceed with the reassessment proceedings. However, it is to be noted that the second respondent had categorically mentioned the reasons as stated supra, by which, he had a reason to believe that the inc .....

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titioner to disclose the above material facts and in such circumstances, the Assessing Officer has rightly initiated the reassessment proceedings on the basis of available material on record, which was specific, relevant and considerable, and after recording the reasons for his own belief that in the original assessment proceedings, the petitioner/assessee had not disclosed the material facts truly and fully and therefore income chargeable to tax had escaped assessment. In my opinion, he, theref .....

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between the reasons and the belief entertained by the Assessing Officer. In the present case, though the petitioner has given explanation elaborately in regard to the reasons relied on by the Assessing Officer for reopening the assessment and demonstrated the circumstances under which, there was no income chargeable to tax has escaped assessment, this Court is not supposed to decide the same since the issue involved in this Writ Petition is whether the Assessing Officer was right in reopening th .....

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ent year 2007-08 having reason to believe that the income chargeable to tax has escaped assessment; as well as the consequential order, dated 7.11.2014 passed by the third respondent, rejecting the objections filed by the petitioner for re-opening of the assessment, the petitioner has come forward with the present writ petition. 2. The Petitioner is a Private limited company incorporated under the Companies Act, 1956 in India on 23 March 1999 and is engaged in the business of development and exp .....

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rom the Director, STPI. The Petitioner has accepted the terms and conditions of the renewal vide letter dated 22.07.2004. 3. The brief case of the petitioner is that they filed its return of income for the Assessment Year ( AY ) 2007-08 on 19 October 2007 declaring a total income of ₹ 29,242/- after claiming an amount of ₹ 4,02,37,947 as deduction under Section 10B of Act and it was selected for scrutiny and a notice dated 22 July 2008 under Section 143(2) of the Act was issued. Duri .....

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Certificate from the Chartered Accountant in Form 56G in support of deduction under section 10B. The 1st Respondent vide notice dated 23 June 2009 requested for numerous details in an annexure. The Petitioner vide its reply dated 3 August 2009 furnished details as required under notice dated 23 June 2009 and has specifically disclosed the details of the directors requested in serial no. 3 of the said annexure. The 1st Respondent after discussion and verification of the details furnished by the P .....

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tice does not state whether the necessary sanction of the Chief Commissioner or Commissioner was obtained and also does not state the reasons for reopening. The Petitioner, vide letter dated 8 May 2014 sought a copy of the reasons recorded on the basis of which the impugned notice has been issued. The 2nd Respondent vide his letter dated 16 June 2014 furnished four reasons for reopening the assessment. In response to the reasons furnished by the 2nd Respondent for reopening the assessment under .....

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after obtaining the administrative sanction under Section 151 of the Act, the second respondent has exercised his jurisdiction of reopening the assessment. The petitioner company has failed to satisfy the conditions laid down in Section 2(22-A) of the Act regarding the domestic company. Out of share capital 2,80,000 equity shares of ₹ 10/- each, 2,79,999 were held by holding company Sword Global Ltd., UK and remaining 1 share was held by the ultimate holding company Sword Group, France. T .....

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elling and management fees, however, it has been wrongly included in export turnover, which has to be excluded. Therefore, it is evident that there had been omission and failure on the part of the petitioner to disclose fully and truly all the materials facts stated above. The petitioner was assessed under lower rate and excess relief was granted as per Explanation 2 to Section 147, the same shall be deemed to be cases wherein income chargeable to tax has escaped assessment under the Act. Though .....

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n 2 (c) to Section 147 which provides for reassessment in cases of excess relief or excessive allowance granted erroneously under the provisions of the Act. Therefore, there has been proper and diligent exercise of the powers conferred under Section 147 and the same has been proposed and contemplated only after due ascertainment of the jurisdictional fact that provides for a reason to believe that there has been escapement to tax warranting a revision of assessment. As the petitioner was assesse .....

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is also stated that the initiation of reassessment in terms of Section 147 has been carried out within the period of limitation which expires only on 31.3.2014, whereas notice for reassessment was issued on 26.3.2014 after getting necessary sanction from the concerned authority and hence, notice issued under Section 148 of the Act was not time barred as alleged by the petitioner. The impugned order dated 7.11.2014 was passed taking into consideration the objections filed by the petitioner in pur .....

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als. 7. Mr.Arvind P.Datar, learned senior counsel appearing for the petitioner would contend that after four years of the assessment year 2007-08, the second respondent issued notice dated 26.03.2014 under Section 148 of the Act, seeking to reopen the assessment, without any tangible materials and without assigning reasons that income chargeable to tax has escaped assessment by reason of failure on the part of the petitioner to disclose fully and truly all material facts necessary for the assess .....

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the assessment, though wide are not plenary, but it cannot be reopened merely on suspicion or for the purpose of making some enquiries. On the basis of the materials before the Assessing Officer, he has to form a belief that a particular income escaped from the assessment for the relevant assessment year by reason of any omission or failure on the part of the assessee to disclose fully or truly all material facts for the relevant assessment year. According to him, the second respondent sought fo .....

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ompetent authority, i.e. Chief Commissioner. He also contended that the second respondent erred in reopening the assessment to deny the tax holiday benefit under Section 10B of the Act without appreciating that the said claim was already accepted for preceding assessment years and having accepted the same, it is not appropriate for the respondent now denying the same on the ground that non-availability of ratification from the Board of Approval. He pointed out that though the petitioner has rais .....

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he initiation of action after the expiry of four years from the end of the assessment year. Such escapement must be by reason of the failure on the part of the assessee either to file a return referred to in the proviso or to truly and fully disclose the material facts necessary for the assessment. Unless, the condition in the proviso is satisfied, the Assessing Officer does not acquire jurisdiction to initiate any proceeding under Section 147 of the Act after the expiry of four years from the e .....

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und of the assessee's failure to disclose truly and fully all material facts, it is necessary for him to record that fact, and in the absence of a record to that effect, it cannot be held that a notice issued without recording such a fact is capable of being regarded as a valid notice. ii) Dynacraft Air Controls v Sneha Joshi 355 ITR 102 (Bom) Under section 147, for the Assessing Officer to reopen an assessment, he must have reason to believe that income chargeable to tax has escaped assessm .....

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ictional requirement which must be fulfilled where an assessment is sought to be reopened beyond a period of four years. The existence of the jurisdictional condition must be indicated in the reasons which are furnished to the assessee. The fulfilment of the condition is a prerequisite and if it is absent, an assessment cannot be reopened beyond four years. The Assessing Officer cannot improve upon the reasons for reopening the assessment or bridge the lacunae later. If the reasons disclosed do .....

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ssment, but this does not imply that the Assessing Officer can reopen an assessment on mere change of opinion. The concept of "change of opinion" must be treated as an in- built test to check the abuse of power. Hence, after April 1, 1989, the Assessing Officer has power to reopen an assessment, provided there is "tangible material" to come to the conclusion that there was escapement of income from assessment. Reason must have a link with the formation of the belief. Decision .....

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mandatory in terms of proviso to sub-section (1) of section 151 of the Act as the action under section 147 was being initiated after the expiry of four years from the end of the relevant assessment year. As highlighted above, the legislature has provided certain safeguards to prevent arbitrary exercise of powers by an assessing officer, particularly after a lapse of substantial time from completion oil assessment. The power vested in the Commissioner to grant or not to grant approval is coupled .....

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g the averments of the counter affidavit, would submit that actually, after obtaining necessary sanction from the designated authority under Section 151, the second respondent has issued notice under Section 147 of the Act and it was not mentioned in the notice and mere non-mentioning of the same, does not vitiate the proceedings. He also contended that petitioner company has not furnished true and correct details regarding the payment of dividend and the assessee company is not a domestic compa .....

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147 of the Act and accordingly, the impugned proceedings were rightly initiated and the it does not fall within the purview of change of opinion as contended by the petitioner. Hence, the learned counsel sought for dismissal of the writ petition. 12. The reasons for re-opening the assessment under Section 148 of the Act for the assessment year 2007-08 given by the second respondent, read as under: i) Since the entire share capital is held by the Foreign Companies and accounts and declaration of .....

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dividend distributed is to be considered as not covered under Section 115-O it has to be taxed as dividend received by a foreign company under Section 115A(1)(a)(i) at 20% plus Surcharge 2.5%. Since the total dividend exceeds ₹ 1 crore and education cess 3%. iii) The assessee is having EEFC accounts at Chennai as well as at London, UK. As per notes on accounts 2(d) the assessee had incurred expenditure in foreign currency to the extent of ₹ 5,77,40,000 by way of travelling ₹ 5, .....

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luded from export turnover. iv) As per Circular issued by the Board in March 2009/June 2009 undertakings claiming deduction under section 10B should get the approval ratified by the Board provided under explanation 2(iv) under section 10B of the Act. As per the particulars furnished under Form 56G, the assessee got approval as 100% EOU in May 1999. Under Foreign Trade Policy issued under foreign Trade & Development Regulations Act, the license has to be renewed at the end of each of the five .....

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e same. 14. A notice under Section 148 of the Act, dated 26.03.2014 has been issued to the petitioner proposing to re-assess the income for the assessment year 2007-08 by the second respondent, since the second respondent has reason to believe that the income in respect of the said assessment year has escaped assessment within the meaning of Section 147 of the Act. It is relevant to extract Sections 147 to 149 of the Act, which read as under: "147. If the Assessing Officer has reason to bel .....

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ction and in Sections 148 to 153 referred to as the relevant assessment year) : Provided that where an assessment under Sub-section (3) of Section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assesses to make a return under Sect .....

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or the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely: (a) where no return of income has been furnished by the assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to incometax; (b) where a return of income has been furnished by the assessee but no assessment h .....

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ct has been computed. 148. Issue of notice where income has escaped assessment.-(1) Before making the assessment, reassessment or recomputation under Section 147, the Assessing Officer shall serve on the assessee a notice requiring him to furnish within such period, as may be specified in the notice, a return of his income or the income of any other person in respect of which he is assessable under this Act during the previous year corresponding to the relevant assessment year, in the prescribed .....

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ave elapsed from the end of the relevant assessment year, unless the case falls under Clause (b); (b) if four years, but not more than six years, have elapsed from the end of the relevant assessment year unless the income chargeable to tax which has escaped assessment amounts to or is likely to amount to one lakh rupees or more for that year. Explanation.-In determining income chargeable to tax which has escaped assessment for the purposes of this sub-section, the provisions of Explanation 2 to .....

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after the expiry of a period of two years from the end of the relevant assessment year. 15. It is no doubt true that an assessment order once made is ordinarily final. Section 154 of the Act confers a power of rectification of mistakes apparent from the record. Section 147 of the Act empowers the Assessing Officer to assess or reassess the income in the circumstances mentioned therein. The power to reopen an assessment under Section 147 is in the nature of an exception to the general principle t .....

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(ii) to respond to the notices issued under Section 142(1), or (iii) to respond to the notices issued under Section 148, or (iv) to disclose fully and truly all material facts necessary for the assessment of the income for that assessment year. Explanation 1 to Section 147 lays down that mere production of the books of account or other evidence from which the Assessing Officer could, with due diligence, have discovered certain facts would not amount to disclosure within the meaning of the provis .....

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lieve" does not mean a purely subjective satisfaction on the part of the Assessing Officer. The reason must be held in good faith. It cannot be merely a pretence. It is open to the court to examine whether the reasons for the formation of the belief has a rational connection with or a relevant bearing on the formation of the belief and are not extraneous or irrelevant for the purpose of the section. To this extent, action of an Assessing Officer in starting the proceedings under Section 147 .....

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aforementioned conditions imposed must co-exist to confer jurisdiction on the Assessing Officer to reopen the assessment under Section 147. Sub-section (2) of Section 148 of the Act makes it imperative for the Assessing Officer to record his reasons before initiating proceedings. Where a notice under Section 147 of the Act is to be issued after the expiry of four years from the end of the relevant assessment year, the Commissioner or the Joint Commissioner, as the case may be, should be satisfi .....

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s stated earlier. 18. Section 147 of the Act is the source of power of the Assessing Officer for reopening of the assessment. Section 148 contains procedural restrictions for issuance of a notice for exercise of the power of reopening of an assessment conferred under Section 147. Section 149 prescribes the time limit for issuance of a notice under Section 148. Therefore, the conditions laid down under Section 147 of the Act for the purposes of reopening the assessment must be satisfied before th .....

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In other words, if the basic jurisdictional facts required for reopening of an assessment under Section 147 of the Act do not exist it would not be competent for the Assessing Officer to issue a notice under Section 148. Even where the jurisdictional facts prescribed under Section 147 exist and all conditions laid down under Section 147 and the proviso thereto are satisfied, the notice under Section 148 can be issued only after the Assessing Officer has recorded his reasons for doing so under Su .....

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income chargeable to tax has escaped assessment by reason of failure of the assessee to make a return under Section 139 or in response to a notice under Section 142 or 148 of the Act or the failure of the assessee to disclose fully and truly all material facts. If the reassessment is required to be made on account of the failure of the assessee to disclose fully and truly all material facts necessary for his assessment, obviously, the restriction of four years put under the proviso to Section 1 .....

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compared with the efforts that would be required for reopening of an assessment after a passage of seven or ten years, as the case may be. To repeat, the time-limit imposed under Section 149 of the Act for issuance of the notice is not in derogation of and is not for enlarging the time restriction imposed under the proviso to Section 147 of the Act but to put an additional time restriction even where there is no restriction of time for reopening of the assessment on account of failure of the ass .....

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ome chargeable to tax for the said assessment year has escaped assessment within the meaning of Section 147 of the Act. Therefore, when it is clear that the reassessment resorted to by the second respondent is within the period of four years, now this Court is required to examine whether there any tangible material is exist on record for the assessing officer to form the requisite belief that that the income chargeable to tax, has escaped assessment. 20. According to the third respondent, the pe .....

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reign country to the extent of ₹ 5,77,41,000, which is liable to be excluded from the export turnover for the purpose of calculating exemption under Section 10B of the Act and further, the petitioner company has not furnished the approval from the competent authorities for continuance of 100%. These factors, according to the department, were not considered at the time of original assessment proceedings since the petitioner has not disclosed full and true material facts, which prompted the .....

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tors, would prima facie establish that the income chargeable to tax for the assessment year 2007-08 has escaped assessment within the meaning of Section 147 of the Act which had formed a reason for the Assessing Officer to believe that the income has escaped assessment. 21. However, the learned senior counsel appearing for the petitioner would vehemently contend that in order to exercise the jurisdiction under section 147 of the Act, the Assessing Officer must have a reason to believe that the i .....

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luded assessment on the same material and if he resorted to the same, it would be nothing but amount to change of opinion and it is settled law that no assessment can be reopened merely because the Assessing Officer has changed his mind. 22. Of-course, it is true that no fresh material was available with the second respondent to proceed with the reassessment proceedings. However, it is to be noted that the second respondent had categorically mentioned the reasons as stated supra, by which, he ha .....

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is a failure on the part of the petitioner to disclose the above material facts and in such circumstances, the Assessing Officer has rightly initiated the reassessment proceedings on the basis of available material on record, which was specific, relevant and considerable, and after recording the reasons for his own belief that in the original assessment proceedings, the petitioner/assessee had not disclosed the material facts truly and fully and therefore income chargeable to tax had escaped ass .....

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original assessment proceedings and not at any stage subsequent thereto. The argument is too broad and general in nature and does violence to the plain phraseology Sections 147(a) and 148 of the Act and is against the settled law by this Court. We have to look to the purpose and intent of the provisions. One of the purposes of Section 147, appears to us to be, to ensure that a party cannot get away by wilfully making a false or untrue statement at the time of original assessment and when that f .....

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Assessing Officer to proceed with the reassessment proceedings which would amount to change of opinion . In such circumstances, the concept highlighted in the above decision would squarely apply to the version of the petitioner, that having wilfully made false or untrue statements at the time of original assessment and when that falsity comes to notice, it is not fair on the part of the petitioner to turn around and say you accepted my lie, now your hands are tied and you can do nothing . 24. In .....

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by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment. If either of these conditions is not fulfilled, the notice issued by the Income Tax Officer would be without jurisdiction. The important words under section 147 (a) are "has reason to believe" and these words are stronger than the words "is satisfied". The belief entertained by the Income Tax Officer must not be arbitrary or irrational .....

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