Validity of notice u/s 148 where assessment made u/s 143(1)- SC quashes High Court order

Validity of notice u/s 148 where assessment was made u/s 143(1)- Supreme Court quashed High Court order that no substantial question of law arises 

ABCAUS Case Law Citation:
ABCAUS 2868 (2019) (04) SC

The respondent Assessee had filed its return of income for the AY in question declaring the taxable income as ‘Nil’ after setting off of business income against unabsorbed business losses and depreciation.

Since book profits were ‘Nil, the Assessee’s case was that no tax was payable under Section 115JA of the Income Tax Act, 1961 Act (the Act). However, the assessee filed a revised return reporting a business income but still showing ‘Nil’ taxable income after claiming et off of unabsorbed business losses.

There was no scrutiny of the return and an intimation under Section 143 (1) of the Act was issued to the assessee.

Subsequently, a notice under Section 148 of the Act was issued seeking to reopen the assessment. However, after the Assessee raised objections, the said notice was dropped but was later issued again.

The reasons provided to the assessee for the re-opening were that after examination of the records for the said AY, it was revealed that during the year the assessee made various provisions in the return of income for gratuity, doubtful debts, warranty, obsolescence which were in the nature of ‘unascertained liabilities’ and were not added to the book profit. This had resulted in under-assessment of income for the AY in question.

The Assessee filed its objections which were rejected by the Assessing Officer (AO). Subsequently, the AO disallowed foreign travelling expenses, provision for warranty, FOC marketing expenses as well as disallowed 25% of provision for obsolescence of inventory and also made addition to closing stock.

The Commissioner of Income Tax (Appeals) [CIT (A)] rejected the Assessee’s arguments on Section 148 but deleted the disallowance of foreign travelling expenses and provision for warranty, but sustained the other issues.

Aggrieved by the said order, both the Revenue and the Assessee filed appeals before the ITAT.

The Tribunal allowed the assessee’s appeal and dismissed the Revenue’s appeal. The Tribunal opined that the notice u/s 148 clearly showed that it was a clear change of opinion. There was no new material found by the Assessing Officer.

The Revenue went in appeal before the Hon’ble High Court and argued that since the return filed was processed under Section 143 (1) of the Act, there was there was no occasion for the AO to have formed an opinion in the first place. Consequently, there was no change of opinion when he decided to reopen the assessment. It was also submitted that the AO’s reply to the audit objection did not constitute the formation of an opinion either.

However, the Hon’ble High Court held that the ITAT was right in that the reopening was based merely on a change of opinion. Accordingly the High Court dismissed the Revenue’s appeal holding that no substantial question of law arose.

The  Revenue  felt aggrieved by the order of the High Court dismissing their appeal in limine and had filed the present appeal by way of special leave in the Hon’ble Supreme Court on the question whether the High Court was right in dismissing the Revenue’s appeal?

The Hon’ble Supreme Court opined that the High Court was not justified in dismissing the appeal on the ground that the appeal did not involve any substantial question of law.   

The Hon’ble Supreme Court opined that the following substantial  questions of  law did arise in the appeal filed by the Revenue

1. Whether the ITAT was justified in holding that the notice issued by the AO under Section 148 was bad in law when admittedly the impugned notice was issued in the case where the assessment was made under Section 143(1) of the Act but not under Section 143(3) of the Act.

2. Whether the ITAT was justified in holding that the notice issued under Section 148 of the Act was bad because it was based on mere change of opinion by overlooking the fact that there was no foundation to form any such opinion.

3. When admittedly the notice in question satisfied the requirements of Section 148 of the Act as it stood, namely, that first, it contained the facts constituting the “reasons to believe” and second, it furnished the necessary details for assessing the escaped income of the assessee, whether the  ITAT was still justified in declaring the notice as being bad in law without taking into consideration any of these admitted facts.

4. In case, if the notice is held proper and legal, whether the finding recorded by the ITAT on the merits of the case on each item, which is subject matter of the notice, is legally sustainable.

The Hon’ble Supreme Court opined that the aforementioned four questions  framed needed to be answered by the High Court on their respective merits while deciding the appeal filed by the Revenue.

Accordingly, the Hon’ble Supreme Court allowed the appeal and set aside the impugned order of the High Court and remanded the case to the High Court for deciding the appellant’s  appeal afresh on merits in accordance with law

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