Reopening materials include subsequent years assessments -High Court

Reopening materials include subsequent years assessments scrutiny during the course of whose proceedings AO has occasion to see if the same, or same pattern of returns or claims were made.

ABCAUS Case Law Citation:
ABCAUS 2139 (2017) (12) HC

The Challenge/Grievance:
The Petitioner assessee by way of two writ petitions claimed the relief by way of a direction to quash the reassessment notices issued by the income tax department ( “the revenue”). The assessee was aggrieved, and submitted that the reassessment notices issued by the Assessing Officer (AO) under Sections 147/148 of the Income Tax Act, 1961 ( “the Act”) were vitiated and unsupportable in law.

Important Case Laws Cited/relied upon by the parties:
Ganga Saran vs. Income Tax Officer 130 ITR 1 (SC)
Calcutta Discount Co. Ltd. vs. Income tax Officer (1961) 41 ITR 191

Brief Facts of the Case:
The completed assessments of the appellant assessee for two years were re-opened by issuing notice u/s 147/148 of the Act by the Income Tax Department (Revenue) taking into account the documents and materials in hand. The return of both the assessment years had been scrutinised and finalized under Section 143(3) of the Act. However, while framing a similar assessment, for a subsequent assessment year, the AO noticed that the assessee had adopted a wrong method, of “purchase”, while calculating depreciation, instead of the “pooling of assets” method, in terms of a different accounting standard.

The petitioner assessee objected to the reopening pointing out that the original assessment was completed under Section 143(3) of the Act. However, the revenue rejected these objections.

Contention of the Petitioner Assessee:
It was submitted that the reasons given by the AO i.e. that a wrong accounting standard was applied, resulting in concealment of the true income, amounted to review of the same material on the record, which was impermissible. It was stated that all material facts were duly disclosed with respect to the computation of book profit under Section 115 JB of the Act.

It was contended that once returns are filed and the company’s accounts are audited and accepted – as long as they conform to schedule VII of the Companies Act, 1956 (also the “Companies Act”), the revenue cannot question them, under Section 115J of the Income Tax Act.

It was argued that the proviso to Section 147 does not empower the AO to re-open a completed scrutiny assessment, unless fresh material surfaces, disclosing that the assessee had hidden or concealed the real income.

It was also submitted that there was absolutely no material on the record to justify re-opening of an otherwise valid assessment and the citing of a more appropriate method cannot mean that there was concealment of material facts.

Observations made by the High Court:
The Hon’ble High Court observed that if the rationale for re-opening is purely factual, unless fresh facts or material having a “live link” with the issue, that can lead to inference of concealment of material facts cannot be gone into; the earlier assessment order becomes conclusive. However, if the AO comes across material subsequently, such as fresh facts, or materials which pertain to a previous assessment or assessment orders where it is felt that returns were “dressed up” or improper claims were made, that escaped inquiry, reassessment is warranted. In such cases, the materials can also include subsequent years’ assessments, which receive scrutiny during the course of whose proceedings the AO has occasion to see if the same, or same pattern of returns or claims were made. If so, the notice of reassessment would be justified.

The Hon’ble High Court observed that though it had, while accepting the scheme for amalgamation, of the company facially accepted the method which the assessee indicated. At that stage, neither did the court conduct any detailed inquiry into the question of the appropriateness of the method, nor was it competent to return findings that would have been conclusive. This event was relied upon by the assessee to argue that the court, under the Companies Act, had accepted the method. However, that ipso facto could not have barred any inquiry by the AO. Indisputably, the AO did not proceed further, but merely accepted the assessee’s arguments. In these circumstances, the materials produced for a subsequent assessment year triggered the reassessment notices.

Decision/ Conclusion/Held:
Writ petitions were dismissed as lacking merits.