Reassessment on change of opinion on the same facts and circumstances as in original assessment proceedings invalid-SC

Reassessment on change of opinion on the same facts and  circumstances already in AO’s knowledge during the original assessment proceedings invalid-SC

ABCAUS Case Law Citation:
ABCAUS 2301 (2018) (04) SC

The appellant Revenue had filed the instant appeal against the judgment of Delhi High Court quashing the notice issued u/s 148 of the Income Tax Act, 1961 (‘the Act’) and the order passed by the Income Tax Officer.

The Respondent company had filed its return of income for the relevant Assessment Year declaring a loss of Rs 3,31,301/-. The Respondent, while filing the return for the aforementioned period, had declared its income from two sources, namely, software development and human resource development but claimed expenses commonly for both. It had also claimed deduction under Section 10 A of the IT Act for the income from the software development. The said return was accepted u/s 143(1).

Reassessment on change of opinion on the same facts circumstances

The return was selected for regular assessment under Section 143(3) of the Act and a show cause notice was issued as to why the expenses claimed with regard to the allocation of common expenses between the two heads, viz., software development and human resource development do not reveal any basis for such allocation. The issue was duly contested and decided and the proceedings ended with a rectification of the Assessment Order u/s 154 of the IT Act while arriving at an income of Rs. 31,63,570/- which was fully set-off against the loss brought forward and the income was assessed as ‘Nil’.

Further, a Notice was served upon the Respondent by the Revenue for re-opening the assessment u/s 148 on the ground that the deduction under Section 10A of the Act has been allowed in excess and the income escaped assessment worked out to Rs. 57,36,811/- in the original assessment.

The Respondent filed a detailed reply objecting to the re-assessment. However, the objections were rejected and reassessment was approved by the Revenue.

Being aggrieved, the Respondent company challenged the above said show cause notice as well as the order before the High Court by filing a Writ Petition. The High Court set aside the show cause notice as well as the re-assessment order.

The Hon’ble Supreme Court observed that the use of the words ‘reason to believe’ in section 147 has to be interpreted schematically as the liberal interpretation of the word would have the consequence of conferring arbitrary powers on the assessing officer who may even initiate such re-assessment proceedings merely on his change of opinion on the basis of same facts and circumstances which has already been considered by him during the original assessment proceedings. Such could not be the intention of the legislature. The said provision was

incorporated so as to empower the Assessing Authorities to re-assess any income on the ground which was not brought on record during the original proceedings and escaped his knowledge; and the said fact would have material bearing on the outcome of the relevant assessment order.

The Hon’ble Supreme Court opined that Section 147 of the Act does not allow the re-assessment of an income merely because of the fact that the AO has a change of opinion with regard to the interpretation of law differently on the facts that were well within his knowledge even at the time of assessment. Doing so would have the effect of giving the assessing officer the power of review and Section 147 confers the power to re-assess and not the power to review.  

The Apex Court observed that the word “change of opinion” implies formulation of opinion and then a change thereof. In terms of assessment proceedings, it means formulation of belief by an assessing officer resulting from what he thinks on a particular question. It is a result of understanding, experience and reflection.

The Hon’ble Supreme Court stated that before interfering with the proposed re-opening of the assessment on the ground that the same is based only on a change in opinion, the court ought to verify whether the assessment earlier made has either expressly or by necessary implication expressed an opinion on a matter which is the basis of the alleged escapement of income that was taxable. If the assessment order is non-speaking, cryptic or perfunctory in nature, it may be difficult to attribute to the assessing officer any opinion on the questions that are raised in the proposed re-assessment proceedings. Every attempt to bring to tax, income that has escaped assessment, cannot be absorbed by judicial intervention on an assumed change of opinion even in cases where the order of assessment does not address itself to a given aspect sought to be examined in the re-assessment proceedings.

The Hon’ble Supreme Court observed that the fact in controversy was with regard to the deduction u/s 10A of the Act which was allegedly allowed in excess. The show cause notice reflected the ground for re-assessment in the present case, that is, the deduction allowed in excess under Section 10A and, therefore, the income had escaped assessment to the tune of Rs. 57,36,811/-.

It was noted that in the order in question, the reason purportedly given for rejecting the objections was that the assessee was not maintaining any separate books of accounts for the two categories, i.e., software development and human resource development, on which it has declared income separately. However, a bare perusal of notice which was issued in the original assessment proceedings u/s 143 makes it clear that the point on which the re-assessment proceedings were initiated, was well considered in the original proceedings. In fact, the very basis of issuing the show cause notice was that the assessee was not maintaining any separate books of account for the said two categories and the details filed do not reveal proportional allocation of common expenses be made to these categories. Even the said show cause notice suggested how proportional allocation should be done.

The Hon’ble Supreme Court opined that all these things leads to an unavoidable conclusion that the question as to how and to what extent deduction should be allowed under Section 10A of the Act was well considered in the original assessment proceedings itself. Hence, initiation of the re-assessment proceedings under Section 147 by issuing a notice under Section 148 merely because of the fact that now the AO is of the view that the deduction u/s 10A was allowed in excess, was based on nothing but a change of opinion on the same facts and circumstances which were already in his knowledge even during the original assessment proceedings.

Accordingly, the Hon’ble Supreme Court dismissed the appeal of the Revenue.

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