Reopening of assessment – Beyond four years – Precondition – Failure on part of the assessee to disclose fully and truly all material facts necessary – No power to review

Reopening of assessment – Beyond four years – Precondition – Failure on part of the assessee to disclose fully and truly all material facts necessary – No power to review

The petitioner had filed its return for A.Y. 2012-13 u/s 139 along with its audited profit and loss account, balance sheet and auditor’s report. It received a notice u/s 143(2) and also u/s 142(1) calling upon it to furnish the documents mentioned as per the annexure to the notice. There were four relevant items mentioned in the annexure… By its letter dated 14th August, 2014, the petitioner submitted all the documents asked for and also clarified that the tax audit report in Form 3CD for the A.Y. 2012-13 was not applicable.

Thereafter, the petitioner received another notice calling upon it to provide certain details, one of which was ‘details of interest expenses claimed u/s 57’. These details were provided vide a letter dated 3rd December, 2014. A personal hearing was granted at which even further details were sought. The petitioner provided even more documents and details by its letter of 17th December, 2014.

After considering all the details supplied, an assessment order dated 20th February, 2015 was passed accepting the petitioner’s explanations and computation of income. But more than four years after this assessment order, the petitioner received yet another notice dated 26th March, 2019 u/s 148 stating as under:

‘I have reasons to believe that your income chargeable to tax for the A.Y. 2012-13 has escaped assessment within the meaning of section 147 of the Income Tax Act, 1961’.

In response, the petitioner, without prejudice to its rights and contentions, sought the reasons for this belief. The respondent by its letter dated 28th May, 2019 provided the reasons recorded for reopening of the assessment. In short, the issue raised in the reopening was in regard to deduction claimed u/s 57.

The petitioner responded by its letter dated 19th June, 2019 filing its objections to the reopening of the assessment. According to it, there was no failure to truly and fully disclose material facts and, in any case, it was a mere change of opinion and there was no fresh tangible material for initiating reassessment proceedings. Respondent No. 1 then passed an order dated 30th September, 2019 with reference to the objections raised by the petitioner to the issuance of notice u/s 148.

It was stated by the Department that subsequent to the assessment proceedings it was noticed that the assessee had wrongly claimed deduction u/s 57. Accordingly, the A.O. found reasons to decide on reopening the assessment. This issue had gone unnoticed by the A.O. during the course of the original assessment proceedings for A.Y. 2012-13 and therefore the jurisdictional requirement u/s 147 was fulfilled and reopening u/s 147 cannot be challenged. Further, the A.O. has not had any discussion in respect of the points on which assessment has been reopened, thus it can be hardly stated that the A.O. had formed an opinion on such points during the original assessment proceedings.

The High Court held that the A.O. had no jurisdiction to issue the notice u/s 148. It further observed as follows:

A) It is settled law that where the assessment is sought to be reopened after the expiry of a period of four years from the end of the relevant year, the proviso to section 147 stipulates a requirement that there must be a failure on the part of the assessee to disclose fully and truly all necessary material facts. Since in the present case the assessment is sought to be reopened after a period of four years, the proviso to section 147 is applicable.

B) It is also settled law that the A.O. has no power to review an assessment which has been concluded. If a period of four years has lapsed from the end of the relevant year, the A.O. has to mention what is the tangible material to come to the conclusion that there is an escapement of income from assessment and that there has been a failure to fully and truly disclose material facts.

C) After a period of four years even if the A.O. has some tangible material to come to the conclusion that there is an escapement of income from assessment, he cannot exercise the power to reopen unless he discloses what was the material fact which was not truly and fully disclosed by the assessee. Considering the reasons for reopening, the Court noticed that except stating that a sum of Rs. 7,66,66,663 which was chargeable to tax has escaped assessment by reason of failure on the part of the assessee to disclose fully and truly all material facts necessary, there is nothing else in the reasons. The Court held that a general statement that the escapement of income is by reason of failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment is not enough. The A.O. should indicate what is the material fact that was not truly and fully disclosed to him. In the affidavit in reply, it is stated that the reassessment proceedings was based on audit objections.

D) The Court held that the reason for reopening an assessment should be that of the A.O. alone and he cannot act merely on the dictates of any another person in issuing the notice. The Court said that in every case the Income Tax Officer must determine for himself what is the effect and consequence of the law mentioned in the audit note and whether in consequence of the law which has come to his notice he can reasonably believe that income has escaped assessment. The basis of his belief must be the law of which he has now become aware. The opinion rendered by the audit party in regard to the law cannot, for the purpose of such belief, add to or colour the significance of such law. Therefore, the true evaluation of the law in its bearing on the assessment must be made directly and solely by the Income Tax Officer.

E) In the present case, the reasons which have been recorded by the A.O. for reopening of the assessment do not state that the assessee had failed to disclose fully and truly all material facts necessary for the purpose of assessment. The reasons for reopening an assessment have to be tested / examined only on the basis of the reasons recorded at the time of issuing a notice u/s 148 seeking to reopen an assessment. These reasons cannot be improved upon and / or supplemented, much less substituted by affidavit and / or oral submissions.

F) As regards the ground that the A.O. had not held any discussion in respect of those points on which assessment was reopened and hence he had not formed any opinion and thus the window of reopening of assessment would remain open for the A.O. on those points, these were not the grounds in the reasons for reopening. The entire case of the respondent while issuing the reason for reopening was ‘failure to disclose truly and fully material facts’.

G) As regards the ground that the disclosure of material facts with respect to the setting off of the interest expenses u/s 57 might be full but it cannot be considered as true, and hence it is failure on the part of the assessee, the mere production of books of accounts or other documents are not enough in view of Explanation 1 to section 147, etc., the words used are ‘omission or failure to disclose fully and truly all material facts necessary for his assessment for that year’. It postulates a duty on every assessee to disclose fully and truly all material facts necessary for assessment. What facts are material, and necessary for assessment, will differ from case to case. In every assessment proceeding, the assessing authority will, for the purpose of computing or determining the proper tax due from an assessee, require to know all the facts which help him in coming to the correct conclusion. From the primary facts in his possession, whether on disclosure by the assessee or discovered by him on the basis of the facts disclosed, or otherwise, the assessing authority has to draw inferences as regards certain other facts; and ultimately, from the primary facts and the further facts inferred from them, the authority has to draw the proper legal inferences and ascertain the proper tax leviable on a correct interpretation of the taxing enactment..

Thus, when a question arises whether certain income received by an assessee is capital receipt or revenue receipt, the assessing authority has to find out what primary facts have been proved, what other facts can be inferred from them, and taking all these together to decide what should be the legal inference. There can be no doubt that the duty of disclosing all the primary facts relevant to the decision of the question before the assessing authority lies on the assessee.

H) Whether it is a disclosure or not within the meaning of section 147 would depend on the facts and circumstances of each case and the nature of the document and circumstances in which it is produced. The duty of the assessee is to fully and truly disclose all primary facts necessary for the purpose of assessment. It is not part of his duty to point out what legal inference should be drawn from the facts disclosed. It is for the Income Tax Officer to draw a proper reference. In the case at hand, the petitioner had filed its annual return along with computation of taxable income along with MAT (minimum alternate tax) calculation as per provisions of section 115JB, audited annual financials including auditor’s report, balance sheet, profit and loss account and notes to accounts, annual tax statement in Form 26AS u/s 203AA in response to the notices received u/s 142(1) and 143(2). The petitioner also explained how the borrowing costs that are attributable to the acquisition or construction of assets have been provided for, what are the short-term borrowings and from whom have they been received. It also gave details of interest expenses claimed u/s 57 in response to the further notice of 10th October, 2014 u/s 142 (1), attended personal hearings and explained and gave further details as called for in the personal hearing vide its letter dated 17th December, 2014 – and after considering all this, the assessment order dated 20th February, 2015 was passed accepting the return of income filed by the assessee.

The A.O. had in his possession all primary facts and it was for him to make necessary inquiries and draw a proper inference as to whether from the interest paid of Rs. 75,79,35,292 an amount of Rs. 7,66,66,663 has to be allowed as deduction u/s 57 or the entire interest expenses of Rs. 75,79,35,292 should have been capitalised to the work in progress against claiming just Rs. 7,66,66,663 as deduction u/s 57.

The A.O. had had all the material facts before him when he made the original assessment. When the primary facts necessary for assessment are fully and truly disclosed, he is not entitled to change of opinion to commence proceedings for reassessment. Even if the A.O. who passed the assessment order may have raised too many legal inferences from the facts disclosed, on that account the A.O. who has decided to reopen the assessment is not competent to reopen assessment proceedings. Where on consideration of the material on record one view is conclusively taken by the A.O., it would not be open to him to reopen the assessment based on the very same material in order to take another view. As noted earlier, the petitioner has filed the annual returns with the required documents as provided for u/s 139. There was nothing more to disclose and a person cannot be said to have omitted or failed to disclose something when he had no knowledge of such a thing. One cannot be expected to disclose a thing or said to have failed to disclose it, unless it is a matter which he knows or knows about. In this case, except for a general statement in the reasons for reopening, the A.O. has not disclosed what was the material fact that the petitioner had failed to disclose.

The Court observed that the petitioner had truly and fully disclosed all material facts necessary for the purpose of assessment. Not only material facts were disclosed truly and fully, but they were carefully scrutinised and figures of income as well as deduction were reworked carefully by the A.O. In the reasons for reopening, the A.O. has, in fact, relied on the audited accounts to say that the claim of deduction u/s 57 was not correct, and the figures mentioned in the reason for reopening of assessment are also found in the audited accounts of the petitioner. In the reasons for reopening, there is not even a whisper as to what was not disclosed. In the order rejecting the objections, the A.O. admits that all details were fully disclosed. Thus, this is not a case where the assessment is sought to be reopened on the reasonable belief that income had escaped assessment on account of failure of the assessee to disclose truly and fully all material facts that were necessary for computation of income, but this is a case where the assessment is sought to be reopened on account of change of opinion of the A.O. about the manner of computation of the deduction u/s 57.

Consequently, the petition is allowed. The notice dated 26th March, 2019 issued by respondent No. 1 u/s 148 seeking to reopen the assessment for the A.Y. 2012-13 and the order dated 30th September, 2019 are quashed and set aside.