Assessee must be put to notice of all provisions on which revenue relies upon – Supreme Court

Assessee must be put to notice of all provisions on which revenue relies upon. Supreme Court quashed reopening notice u/s 148

ABCAUS Case Law Citation:
ABCAUS 3293 (2020) (04) SC

Important case law relied upon by the parties:
Claggett Brachi Co. Ltd. London 1989 Supp(2) SCC 182
M/s Phool Chand Bajrang Lal and Another (1993) 4 SCC 77
Ess Kay Engineering Co.(P) Ltd (2001) 10 SCC 189
Calcutta Discount Co. Ltd AIR 1961 SC 372
Mohinder Singh Gill & Anr. (1978) 2 SCR 272

The appellant was an Indian company engaged in running television channels. It had various foreign subsidiaries including one UK based subsidiary.

For the relevant assessment year, the assessee submitted return of was processed u/s 143 of the Income Tax Act, 1961 (the Act). The case was selected for scrutiny and notice u/s 143(2) of the Act was issued and a notice u/s 142(1) of the Act was also issued. Thereafter, the case of the assessee was taken up for scrutiny and final assessment order was passed.

The said subsidiary, issued step­up coupon bonds of US$ 100 million. These bonds were subscribed to by various entities. hesebonds were to be redeemed at a premium of 7.5% after the expiryof the period of 5 years.  However, these bonds were redeemed in advance at discount. The assessee had agreed to furnish corporate guarantee for this transaction.

The Assessing Officer (AO) held that   the subsidiary had virtually no financial worth and it could not have issued the said bonds without having assurance from   the assesse company.

According to the AO the assessee should have maintained an arm’s length from its subsidiary i.e. it   should be treated like a guarantee issued by any   corporate guarantor in favour of some other corporate entity. 

The assessing officer though did not doubt the validity of the transaction but imposed guarantee fee at a notional rate by treating it as a business transaction and added it to the income of the assessee.

Later notice u/s 148 was issued alleging escapment of income. This notice did not give any reasons but were supplied when asked.  The AO was of the opinion that   there were reasons to believe that the funds received by subsidiary were the funds of the assessee under a sham transaction.

The assessee replied and claimed that there had been no failure on the part of the assessee to disclose fully and truly all material facts necessary to make assessment.     Assessee also claimed that the proceedings had been   initiated on a mere change of opinion and there was   no reason to believe. The assessee also claimed that the transaction of bonds was a legal and valid transaction.  In addition,it was claimed that the assessing officer had   treated the transaction to be genuine.

According to the assessee it had not withheld any   material facts and, therefore, limitation of 6 years as applicable to the first proviso to Section 147 would not apply.

The assessing officer did not accept these objections. The Assessee filed a writ petition in the High Court challenging the notice. The writ petition was also dismissed.

The Hon’ble Supreme Court stated that as held in various judgments, subsequent facts which come to the knowledge of the assessing officer can be taken into account to decide whether the assessment proceedings should be re­opened or not.  Information which comes to the notice of the assessing   officer during proceedings for subsequent assessment years can definitely form tangible material to invoke   powers u/s 147 of the Act.

The Hon’ble Supreme Court noted that it was the materials disclosed in the   assessment proceedings for the subsequent years and the Tax Evasion Petitions filed by the minority shareholders which formed the basis for taking action u/s 147 of the Act. The Hon’ble Supreme Court opined that at the stage of issuance of notice, the AO is to only form a prima facie view, therefore there were reasons to believe   that income had escaped.

The Hon’ble Supreme Court observed that the revenue could take the benefit of the extended period of limitation of 6 years for initiating proceedings under the first proviso Section 147 of the Act only if it can show that the   assessee had failed to disclose fully and truly all material   facts necessary for it sassessment. 

The Hon’ble Supreme Court however opined that the assessee had disclosed all the facts it was bound to disclose.  If the revenue wanted to investigate the matter   further at that stage it could have easily directed the assessee to furnish more facts.

The Hon’ble Supreme Court stated that the revenue had come up with   the plea that certain documents were not supplied but  all   those documents could not be said to be documents which the assessee was bound to disclose at the time of   assessment. The main ground raised by the revenue was that the assessee did not disclosed as to who had   subscribed what amount and what was its relationship   with the assessee.

The Hon’ble Supreme Court noted that as per communication sent to Deputy Director of Income   Tax (Investigation), the assessee had not only disclosed the names of all the bond holders but also their addresses;  number of bonds along with the total consideration received.

The Hon’ble Supreme Court observed that the Constitution Bench had held that it is the duty of the assessee to disclose full and truly all material facts which it termed as primary facts.     Non ­disclosure of other facts which may be termed as secondary facts is not necessary.

The Hon’ble Supreme Court opined that the assessee   had disclosed all the primary facts necessary for   assessment of its case to the AO and it was not required to give any further assistance to the assessing officer by disclosure of other facts. It was for the AO at that stage to decide what inference should be drawn from the facts of   the case.

Their Lordships noted that before the High Court, the submission of the Revenue was that the issue of income escaped due to failure on the part of the assessee to disclose was not relevant. The Hon’ble Supreme Court opined that the revenue could not be permitted to blow hot and cold at the same time or turn around and urge that the assessee is guilty of non­disclosure of facts.

It was also the contention of the Revenue that in terms of second proviso to Section 147 of the Act read with Section 149(1)(c) of the Act, the limitation period would be 16 years since the assessee had derived income from a foreign entity.

The Hon’ble Supreme Court observed that the High Court had reached the conclusion that the revenue could not rely upon the second proviso because the notice was silent in this regard.

The Hon’ble Supreme Court observed that the noticee or the assesee should not be prejudiced or be taken by surprise. The notice sent had no mention of any foreign entity but    it had mention of Section 148 only. Even after the   assessee specifically asked for reasons, the revenue only relied upon facts to show that there was reason to believe that income has escaped assessment and this escapement was due to the non ­disclosure of material facts. There is nothing in the reasons to indicate that the   revenue was intending to apply the extended   period   of   16 years.

The Hon’ble Supreme Court opined that this was not a fair or proper procedure.  If not in the first notice, at least at the time of furnishing the reasons the assessee should have been informed that the revenue relied upon the second proviso.  The assessee must be put to notice of all the provisions on which the revenue relies upon.

The Apex Court stated that the notice and reasons   given thereafter did not conform to the principles of natural justice and the  assessee did not  get  a proper  and adequate opportunity to reply to the allegations now raised.

The Hon’ble Supreme Court held that the notice issued showed sufficient reasons to believe on the part of the assessing officer to reopen the assessment but since the revenue failed to show non­disclosure of facts the notice having been issued after a period of 4 years is required   to be quashed. However, the revenue may issue fresh  notice taking benefit of the second proviso if otherwise permissible under law.

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