In a recent judgment, Delhi High Court while quashing the notice u/s 148 for reopening of assessment observed the following important points related to reopening/jurisdiction:

(i)      One CIT cannot override the decision of three CITs by dictating AO to review its order passed on the direction of DRP. CIT can exercise such power u/s 263 only.

(ii)     An order under Section 148 of the Income Tax Act, 1961 on the dictates of the CIT is a nullity.

(iii)    Where notes/schedules to the accounts forming part of audited financial statements gives required particulars, it could not be said that the material and true particulars were not disclosed by the assessee

(iv)    Assessee is required only to make full and true disclosure and he cannot be expected to guide the AO on how he should scrutinize the accounts.

Case Details:
W.P.(C) 1707/2014 & CM No.3569/2014
AY: 2008-09
Munjal Showa Limited (Petitioner) Vs Deputy Commissioner of Income Tax & Anr (Respondents)
Date of Order : 22-02-2016
Coram: Justice S. Muralidhar and Justice Vibhu Bakhru

Facts of the Case(s):
The assessee was a public limited company incorporated in 1985 as a joint venture between Showa Corporation, Japan and Hero Group, India. It was engaged, inter alia, in the business of manufacture and sale of shock absorbers for vehicles. During the course of the assessment proceedings, notices under Section 143(2) and 142(1) were issued by the Assessing Officer (AO) requiring the Assessee to furnish information on short term loans taken, investment made, dividend income earned,  justification for nil disallowances u/s 14A and bifurcation/details of the foreign exchange (FE) fluctuations loss. All the replies were duly submitted by the company. Subsequently AO passed a assessment order u/s 143(3) since one of the issues examined concerned the determination of arm’s length price (ALP) of the international transaction entered into with foreign associate. The assessee company approached Dispute Resolution Panel (DRP) which directed AO to pass the final assessment order by issuing certain directions. On that basis, on 6th July 2012, the AO framed the assessment u/s 143(3) read with Section 144C.

On 11th March 2013, the DCIT issued notice to the Assessee u/s 148 along with the reasons proposed for reopening of the assessment for AY 2008-09.

On 17th September 2013, the Petitioner filed its legal objections to the reopening of the assessment. On 19th February 2014, an order was passed by the DCIT dismissing the objections raised by the Petitioner to the reopening of the assessment under Section 148. Thereafter the assessee filed the present writ petition under Article 226 of the Constitution challenging the validity of the notice u/s 148.

Question(s) framed by the High Court:

(i)      Whether the Assessee had made complete disclosure during the assessment proceedings? and

(ii)     whether there was any new tangible material available with the respondents for forming reason to believe that income had escaped assessment?

Contention of the Petitioner Company:
It was contended that in the course of the assessment proceedings, the relevant queries regarding issues were already raised by the Revenue to which replies were filed by the Petitioner. It was only after an exhaustive verification of the information supplied that the Revenue passed the original assessment order.

With respect to disallowance u/s 14A/Rule 8D which was computed by the Revenue, it was challenged before the DRP which confirmed the said disallowance. Thus there was no new tangible material in the possession of the Revenue which could have led to the formation of reasons to believe that income had escaped assessment and the reopening was sought to be done only on the basis of change in opinion solely upon review of the existing material on record.

The petitioner company argued that the ignorance of the AO could not be a ground for reopening the assessment. Notes to the accounts which were enclosed with the returns filed are considered as an integral part of the accounts, therefore it could not be said that the material and true particulars were not disclosed by the Assessee.

Important Excerpts from the Judgment:

In the counter affidavit filed by the Respondents, reliance has been placed on Instruction No. 15 dated 4th November 2008, in terms of which the CIT had the administrative power to review the file and the assessment order. The CIT-II made a noting on the order sheet of the review file to call for an action taken report from the concerned officer. This was followed by a direction being issued by the ITO (hqrs.) Judicial-II on 4th March 2013 to DCIT 5(1), asking that corrective action be taken and an action taken report be sent to the office of the CIT-II by 7th March 2013 without fail. It is admitted in the counter affidavit that pursuant to the above administrative direction of the CIT “which are binding on DCIT, the remedial action was taken u/s 147/148 and report dated 11th March 2013 was sent to the office of CIT-II”.

The CIT did have power under Section 263 of the Act, since the final assessment order was passed based on the order of DRP, comprising of three senior CITs, the “CIT-II i.e., one CIT cannot override the decision of 3 CITs”. It is further added that “the AO was left with no option but to take remedial action under Section 147/148”.

It is obvious from the above admission by the Respondents in the counter affidavit that the AO did not apply his mind independently and went by the order of the CIT. It is a settled law that a quasi-judicial authority cannot afford to act on the direction and in the present case on the direction of a superior officer. In Anirudhsinhji Jadega v. State of Gujarat (1995) 5 SCC 302, it was reiterated by the Supreme Court that once a discretion is vested with a certain authority, he alone should exercise that discretion vested under the statute and if he acts in accordance with “the direction or any compliance with some higher authorities instruction” it would be a case of failure to exercise discretion altogether. In Commissioner of Income Tax v. Greenworld Corporation (2009) 314 ITR 81 (SC) the AO issued an order under Section 148 of the Act on the dictates of the CIT. The Supreme Court held that without going into the question of the bona fides of the authorities under the Act, "the order of assessment passed by the Assessing Officer on the dictates of the higher authority, being wholly without jurisdiction, was a nullity".

At this juncture it may be useful to recapitulate the law in relation to reopening of assessments under Sections 147/148 of the Act. A Full Bench of this Court in CIT v. Kelvinator of India Ltd. [2002] 256 ITR 1(Del) held that an order purportedly passed without application of mind could not itself confer jurisdiction upon the AO to reopen the proceeding “without anything further” as that would amount to “giving a premium to an authority exercising quasi-judicial function to take benefit of its own wrong”. This was upheld by the Supreme Court in CIT v. Kelvinator of India Ltd. (2010) 320 ITR 561(SC). The Supreme Court examined the amendment to the proviso to Section 147 (1) of the Act with effect from 1st April 1989 and observed that the power to reopen assessments was much wider. It went on to observed,

"However, one needs to give a schematic interpretation to the words "reason to believe" failing which, we are afraid, Section 147 would give arbitrary powers to the Assessing Officer to re-open assessments on the basis of "mere change of opinion", which cannot be per se reason to re-open. We must also keep in mind the conceptual difference between power to review and power to re-assess. The Assessing Officer has no power to review; he has the power to re- assess. But re-assessment has to be based on fulfillment of certain precondition and if the concept of "change of opinion" is removed, as contended on behalf of the Department, then, in the garb of reopening the assessment, review would take place. One must treat the concept of "change of opinion" as an in-built test to check abuse of power by the Assessing Officer. Hence, after 1st April, 1989, Assessing Officer has power to re-open, 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."

Turning to the case on hand, the Court finds that in the original assessment proceedings there was complete disclosure made by the Assessee of the relevant particulars

The Court’s attention was drawn to Schedule 7 of the audited annual accounts wherein the investments were reported. It shows that in the beginning of the year, the Assessee’s investment was Rs.9664 being 961 units of Birla Sunlight Mutual Funds. They were sold during the relevant AY and therefore the balance at the end of the year was nil. The same Schedule 7 gives details of the mutual funds and number of units purchased and sold during the year. It is, therefore, not possible to accept the plea of the Revenue that the full particulars in that regard were not disclosed by the Assessee in the original assessment proceedings.

The submission of Mr. Manchanda that relevant and material facts have to be specifically discussed in the returns of income of the tax audit report appears to overlook the fact that the Assessee cannot be expected to guide the AO on how he should scrutinize the accounts. In the letter dated 28th November 2011 of the Assessee in reply to the query of the AO in the original assessment proceedings, there was a whole note on exchange fluctuation enclosed in the form of Annexure-B. Despite this it cannot be said that the AO was ignorant of what the Assessee was doing in respect of foreign exchange loss while accounting for derivatives contracts. The change in the method of accounting and the consequential change in the loss figure have been adequately explained by the Assessee. Under Note J in the “Statement of significant accounting policy” in Schedule 22 to the audited annual accounts, the Assessee had made a distinction between foreign exchange contracts not intended for trading and speculative purposes and those for trading and speculative purposes. It is, therefore not possible to accept the plea of the Revenue that there was any deliberate failure on the part of the Assessee to make full and true disclosure of the change in the accounting policy that led to computation of loss as a result of fluctuation in foreign exchange derivatives.

This has to be also appreciated in the context of the Assessee following the mercantile system of accounting and Section 145 of the Act. The income of the Assessee is to be computed consistent with the regular method of accounting followed by the Assessee. The Assessee has been following AS- 11 and AS-30 issued by the ICAI, in terms of which the loss/gains on outstanding derivatives contracts are to be recognized on mark to market basis. The Assessee is right in contending that CBDT Instruction No. 3 of 2010 cannot possibly override the existing decisions of the Supreme Court/ High Court on similar issues. The legal position in this regard has been explained in Ratan Melting (supra) and has been reiterated in CIT v. Nagesh Knitwears (P.) Ltd. [2012] 345 ITR 135 (Delhi) and CIT v. Indian Oil Co. Ltd., (2012) 254 CTR 113 (Bom).

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