Failure of AO to draw inferences cannot mean that the petitioner had not disclosed all the material facts – High Court
In a recent judgment, Hon’ble High Court has held that assessee’s duty is only to disclose primary facts and it is for the Assessing Officer (AO) to draw inferences therefrom. Failure on the part of the AO to draw inferences cannot mean that the petitioner had not disclosed all the material facts.
ABCAUS Case Law Citation:
4615 (2025) (06) abcaus.in HC
In the instant case, the Petitioner assessee had challenged the notice under section 148 of the Income Tax Act, 1961 (the Act) issued by the Assessing Officer (AO), notice issued under section 142(1) by the National Faceless Assessment Centre, Delhi and the Order disposing objections to reopening issued by the NFAC as being in violation of the principles of natural justice, without jurisdiction, patently illegal, arbitrary, violative of Article 14 and Article 19(1)(g) of the Constitution of India.
The petitioner company was interalia, engaged in the manufacture and supply of coffee and other related products. The petitioner filed its Return of Income for the Assessment Year 2015-2016 and all the audited financials including Tax Audit Report in Form 3CA and Form 3CD under Section 44AB of the Act, balance sheets and statement of profit and loss.
The petitioner received a notice under section 142(1) of the Act from the AO requesting the petitioner to furnish accounts for the conduct of income tax assessment. The petitioner had complied with the notice received and furnished the required information and accounts including the tax audit report under Form 3CA, Balance sheets and statement of profit and loss. In particular, the petitioner also furnished information regarding interest expenses and the purchased shares as requested by the 1st respondent. The AO completed the scrutiny assessment under section 143(3) of the Act and passed an assessment order.
Subsequently, the petitioner again was issued a notice under Section 148 of the Act by the AO stating that the he had reasons to believe that the petitioner’s income chargeable to tax for the relevant Assessment Year had escaped assessment within the meaning of section 147 of the Act and hence, proposing to reassess the income and requiring the petitioner to furnish a return for the same.
In response to the Notice, the petitioner submitted its Return of Income who issued a notice to the petitioner under section 143(2) read with section 147 of the Act stating issues as per recorded for reopening and that income chargeable to tax had escaped assessment under Section 147 of the Act for the relevant Assessment Year.
The petitioner was also issued with a notice stating that as per the information available on record, it was noticed from the balance sheets submitted that the total investments made by assessee in shares during the previous year had increased substantially. This notice also stated that the assessee has debited the P&L Account an amount towards finance costs and in view of these facts, given that expenses were incurred by the petitioner relatable to earning of exempt income and section 14-A read with rule 8D are applicable whereby such expenses incurred be disallowed.
The notice further stated that a disallowance was never made by the petitioner while filing its income tax return and hence such income had escaped assessment within the meaning of section 147 of the Act.
The Petitioner filed its objection to the reopening of assessment.
Again, the petitioner was issued with a notice under section 142(1) of the Act requesting various information. Also, the petitioner was issued with an order disposing the objections to the reopening of assessment under section 147 of the Act.
Before the Hon’ble High Court, the assessee contended that the reopening of assessment based on mere change of opinion is not permissible under law, reopening of assessment after the expiry of four years from the end of relevant assessment year was not permissible under law, impugned order was a non speaking order and it was violative of principles of natural justice and as such it is liable to be set aside. He further contended that no exempt income has been received by the petitioner for the relevant assessment year. There was no fresh material or tangible material available on record. The first proviso of section 147 of the Income Tax Act was not dealt with by the department. The proviso to section 147 and the proviso to section 149 of the Act shall be read together.
The Hon’ble High Court observed that the AO issued notice to the petitioner to furnish the accounts and documents specified as per the Annexure to the said notice which included interest expenses, number of shares of Ngon Coffee Company purchased by the petitioner and what is the actual cost paid per share in VND and in INR at the time of purchase and what is the face value of each share at the time of purchase etc., apart from the other information to be furnished as detailed. Accordingly, the details of interest expenses were submitted. On furnishing the entire information by way of Return of Income by the petitioner, the AO had completed the assessment under section 143(3) of the Act.
The Hon’ble High Court observed that contrary to the first proviso of section 147 of the Act, the impugned notice and the impugned order were issued without there being any fresh information / material available on record and in the absence of any valid reasons / grounds to allege that certain income chargeable to tax had escaped from assessment, which came to the notice of the respondent department subsequently, for the purpose of reopening of reassessment proceedings by way of the impugned action which is not permissible under law.
The Hon’ble High Court noted that in the instant case the assessee had disclosed the full details in the Return of Income as discussed above. The Assessing Officer had no power to review. Hence, the impugned action of the respondents was nothing but mere change of opinion on the assessment made already, which cannot be per se reason to reopen the earlier assessment order to reassess contrary to the law. There was no tangible material to come to the conclusion that there is escapement of income from the assessment. The above said impugned action of the respondent department thus did not establish that there was any failure to disclose fully and truly all the material facts necessary for the assessment. There had been no averment in the above said impugned notices and the order that the amount of income tax involved is more than Rs.1 lakh to attract section 149(1)(b) of the Act.
The Hon’ble High Court opined that failure to mention in the above said impugned notices that there has been a failure to disclose fully and truly all the material facts and that the income involved is more than one lakh would vitiate the assessment sought to be reopened after four years.
The Hon’ble High Court further observed that it was the assessing officer who needed to assess any disallowance under section 14A based on the information provided by the petitioner. Onus to make an appropriate determination of amount of expenditure in terms of section 14A of the Act lies on the assessing officer and when there is no failure on the part of the assessee in making available all the relevant account books, materials and documents, the assessing officer cannot assume jurisdiction under section 147 of the Act and more specifically cannot do so in an attempt to reopen the assessment after expiry of 4 years from the relevant assessment year when original assessment was made under Section 143(3) of the Act.
The Hon’ble High Court pointed out that in any event, the assess’s duty was only to disclose primary facts and it was for the assessing officer to draw inferences there from. Failure on the part of the Assessing Officer to draw inferences cannot mean that the petitioner had not disclosed all the material facts. None of the impugned notices and the impugned order issued to the petitioner even mentioned as to what were the exempt income received by the petitioner for the relevant assessment year.
Accordingly, the impugned notices and the impugned order were set aside by allowing the writ petition.
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