8 Conopco Inc. vs. UOI & Anr. [W.P. No. 7388 of 2008; Date of order: 17th December, 2021; A.Y.: 2004-05 (Bombay High Court)]
Reopening of assessment – Within 4 years – Regular assessment completed u/s 143(3) after verifying the issue – Changing of opinion – Reopening bad in law
The petitioner / assessee challenged the notice dated 13th March, 2008 issued u/s 148 and the order dated 14th October, 2008 passed by the A.O. rejecting its objections to the proposed reopening of the assessment.
The petitioner was issued 420,000 shares of Rs. 10 each in Ponds (India) Limited at the time of its incorporation in 1977. It was allotted a further 159,250 equity shares of Rs. 10 each by way of a rights issue at Rs. 90 per share in 1987. Further, 51,39,75,000 equity shares of Rs. 1 each were issued by way of bonus shares from time to time. Upon merger of Ponds (India) Ltd. with Hindustan Lever Ltd. and thereafter, the petitioner was holding 6,00,86,250 shares of Rs. 1 each of Hindustan Lever Ltd.
It filed a return of income for the A.Y. 2004-2005 on 14th October, 2004 declaring long-term capital gain of Rs. 10,108,653,163. It paid Rs. 1,010,865,316 as tax on long-term capital gain @ 10% as per the proviso to section 112 and surcharge of Rs. 25,271,633 @ 2.5%.
During the course of assessment proceedings, the petitioner vide letter dated 10th November, 2006 answered the questions raised by respondent No. 2 as to why the rate of tax on capital gains in its case should be computed @ 10% and the applicability of the first proviso to section 48. The petitioner submitted a without-prejudice working of capital gains without considering the benefit of the first proviso to section 48. The A.O. thereafter passed an assessment order dated 15th November, 2006 computing the income of the petitioner after accepting its contentions.
Thereafter, the petitioner received the impugned notice dated 13th March, 2008 proposing to reassess its income for A.Y. 2004-2005 on the alleged belief that its income had escaped assessment within the meaning of section 147.
The Court observed that in the reasons for reopening provided by the A.O. vide a letter dated 11th September, 2008, the main contentions of the A.O. were (i) the petitioner admitted to the working of capital gains without considering the benefit of the first proviso to section 48; and (ii) tax had to be calculated @ 20% against 10% determined while passing the assessment order.
It is settled law that before a proceeding u/s 148 can be validly initiated certain preconditions which are jurisdictional have to be complied with. One such condition is that the A.O. must have reason to believe that income chargeable to tax has escaped assessment and such reasons must be recorded in writing prior to the initiation of the proceedings. The second condition is that reassessment must not be based merely on change of opinion by a succeeding A.O. from the view taken by his predecessor.
The Court held that both these conditions have not been complied with. In the reasons recorded, the A.O. has opined that the rate of tax to be applied to the capital gains that arose to the petitioner was 20% in terms of section 112(1)(c) and not 10% as was determined whilst passing the order u/s 143(3).
Further, the Court observed that the A.O. had examined all the relevant provisions of the Act, including sections 48 and 112, and completed the assessment by applying the rate of income tax as per the proviso to section 112(1). It was also clear from the reasons that during the assessment proceedings the A.O. had asked why capital gain should not be taxed @ 20% as provided u/s 112(1)(c)(ii) and in response the petitioner vide letter dated 10th November, 2006 had submitted an explanation and revised (without prejudice) the working of the capital gain without considering the benefit of the first proviso to section 48. It was also clear from the reasoning given by respondent No. 2 that the issue now sought to be raised in the purported reassessment proceedings was very much examined by the A.O. and he had completed the assessment proceedings after giving due consideration to the submissions made by the petitioner.
Therefore, the reassessment proceedings are initiated purely on change of opinion with regard to the rate of tax payable by the petitioner on the long-term capital gain made by it on the sale of shares of Hindustan Lever Ltd. The issue of applicability of the first proviso to section 48 as well as the rate of tax u/s 112 were discussed and considered at the time of the said assessment proceedings u/s 143(3).
The Court further observed that the reasons of reopening the assessment have to be based / examined only on the basis of reasons recorded at the time of issuing a notice u/s 148 seeking to reopen the assessment. These reasons cannot be improved upon and / or supplemented, much less substituted, by an affidavit and / or oral submissions.
Once a query has been raised by the A.O. through the assessment proceeding and the assessee has responded to that query, it would necessarily follow that the A.O. has accepted the petitioner’s submissions so as not to deal with that issue in the assessment year. Even if the assessment order passed u/s 143(3) does not reflect any consideration of the issue, it must follow that no opinion was formed by the A.O. in the regular assessment proceedings. It is also settled law that once all the material was placed before the A.O. and he chose not to refer to the deduction / claim which was being allowed in the assessment order, it could not be contended that the A.O. had not applied his mind while passing the assessment order.
When a query has been raised, as has been done in this case, with regard to a particular issue during regular assessment proceedings, it must follow that the A.O. had applied his mind and taken a view in the matter as is reflected in the assessment order. It is clear that once a query has been raised in the assessment proceedings with regard to the rate at which capital gains should be taxed u/s 112(1)(c)(ii) and the petitioner has responded to the query to the satisfaction of the A.O. as is evident from the facts in the assessment order dated 15th November, 2006, he accepts the petitioner’s submissions as to why taxation should be only 10% u/s 112 read with section 148, it must follow that there is due application of mind by the A.O. to the issue raised. Non-rejection of the explanation in the assessment order would amount to the A.O. accepting the view of the petitioner, thus taking a view / forming an opinion. Where on consideration of the material on record one view is conclusively taken by the A.O., it would not be open to reopen the assessment based on the very same material with a view to take another view.
Accordingly, the petition was allowed.
