Reassessment quashed for being a change of opinion when view and opinion formed by AO in original assessment were doubted as erroneous-High Court
ABCAUS Case Law Citation:
ABCAUS 2108 (2017) (10) HC
The Petitioner company had filed two writ petitions impugning notices issued under Section 148 of the Income Tax Act, 1961 (‘the Act’) relating to two Assessment Years.
Important Case Laws Cited/relied upon by the parties:
Commissioner of Income Tax v. Usha International, (2012) 348 ITR 485 (Del)
Godrej and Boyce Manufacturing Company Limited v. Deputy Commissioner of Income Tax, Mumbai & Anr., (2017) 7 SCC 421
Brief Facts of the Case:
The Petitioner company, for both the assessment years had disclosed dividend income and claimed as exempt from tax under Section 10(34) of the Act. The Assessee had itself disallowed expenditure for earning the exempt income under Section 14A of the Act.
The returns were taken up for scrutiny assessment. During the course of the assessment proceedings, the petitioner was asked to furnish several details, including details of dividend income received, and details of expenses attributable for earning of this income. The Petitioner was asked to give a detailed calculation of the disallowance under Section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 (‘the Rules’).In response thereto, the assessee filed its detailed computation of disallowance under Section 14A of the Act.
In both the cases, after examining the details, the AO passed the assessment order under Section 143(3) of the Act, accepting the returned income and the disallowance made by the assessee under Section 14A.
However, the assessment was reopened and as per the reasons recorded the assessee had made an incorrect or wrong calculation which was accepted by the AO.
Observations made by the High Court:
The Hon’ble High Court held that there could not be a more clear and obvious case of change of opinion. It was noticed that the AO during the original assessment had focused himself and examined the question of appropriateness of the expenditure which was disallowed by the Assessee under Section 14A of the Act. The AO was aware of the difference between the disallowance of expenditure made by the Assessee in its computation under Section 14A of the Act, and disallowance if made by applying Rule 8D of the Rules. The AO had not only raised a specific query but did so twice in respect of the disallowances for one assessment year.
The Hon’ble High Court opined that from the queries raised during the course of assessment proceedings and the replies thereto, there could be no doubt that the AO specifically examined and went into the question of disallowance of expenditure under Section 14A of the Act as the Assessee had declared substantial dividend income, which was exempt from tax. The AO was certainly conscious and aware of the nature of business activities undertaken by the Petitioner as a strategic investor in shares, making majority or minority investments.
The Hon’ble High Court opined that the following principle of change of opinion as enunciated in Usha International would be applicable to the instant case:
(1) Reassessment proceedings can be validly initiated in case return of income is processed under Section 143(1) and no scrutiny assessment is undertaken. In such cases there is no change of opinion;
(2) Reassessment proceedings will be invalid in case the assessment order itself records that the issue was raised and is decided in favour of the assessee. Reassessment proceedings in the said cases will be hit by principle of “change of opinion”.
(3) Reassessment proceedings will be invalid in case an issue or query is raised and answered by the assessee in original assessment proceedings but thereafter the Assessing Officer does not make any addition in the assessment order. In such situations it should be accepted that the issue was examined but the Assessing Officer did not find any ground or reason to make addition or reject the stand of the assessee. He forms an opinion. The reassessment will be invalid because the Assessing Officer had formed an opinion in the original assessment, though he had not recorded his reasons.
(4) where an Assessing Officer incorrectly or erroneously applies law or comes to a wrong conclusion and income chargeable to tax has escaped assessment, resort to Section 263 of the Act is available and should be resorted to. But initiation of reassessment proceedings will be invalid on the ground of change of opinion
The Hon’ble High Court opined that the AO was `satisfied with the claim of the assessee’ while passing the original orders. Rule 8D is triggered only in a case where the AO is not satisfied with the deduction made by the Assessee. The reasons to believe assume and are predicated on the belief that the AO should not have accepted the Petitioner’s deduction as explained and justified, albeit should have applied Rule 8D. Thus, the view and opinion formed by the AO, while passing the original assessment orders was doubted as erroneous which was obviously a case of change of opinion.
The writ was allowed and the reassessment was quashed.