Full disclosure in the return of income does not preempt the AO from reassessment – Bom HC


Export Credit Guarantee Corporation of India Ltd v Addln CIT Writ Petition No. 502 of 2012 (order dtd January 10/11, 2013) – Bombay HC

Background:

Assessee filed a return of income for AY 2006-07 on 28 November 2006 in which it offered income computed at Rs. 385.25 crores to tax under Section 44. An order of assessment was made on 17 November 2008 under Section 143(3) by which the total income was determined at Rs.386.08 crores after making certain disallowances. A notice was issued on 24 March 2011 to the assessee seeking to reopen the assessment.

The assessee by a letter dated 18 November 2011 objected to the notice proposing to reopen the assessment for A.Y. 2006-07. The Assessing Officer by his order dated 22 November 2011 disposed of the objections. 

Assessee’s contentions:

  • There was complete disclosure on the part of the assessee of material facts during the course of the assessment.
  • There is an absence of fresh or tangible material on the basis of which the assessment can be reopened.
  • The fact that the AO has relied upon the Notes forming part of the accounts in Schedule 17 is itself indicative of the fact that there was no failure on the part of the assessee to disclose material facts.

Tax Authority’s arguments:

  • The assessment is sought to be reopened within a period of four years. Hence, in view of the judgment of the Supreme Court in CIT v. Kelvinator India Ltd. [2010] 320 ITR 561 (SC), the AO is acting within jurisdiction when he proposes to reopen the assessment on the basis of tangible material;
  • In the present case, during the course of the assessment proceedings, no query was raised by the AO in respect of any of the five points with reference to which the assessment is sought to be reopened.
  • None of those issues has been referred to in the order of AO. Hence, this is not a case where the Assessing Officer has sought to review his earlier findings, nor is this a case of a change of opinion.

HELD:

  • Where the assessment is sought to be reopened after the expiry of a period of four years from the end of the relevant year, the proviso to Section 147 stipulates a requirement that there must be a failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for that year. This stipulation does not govern a notice for reopening within a period of four years.
  • Where the assessment is sought to be reopened within a period of four years of the end of the relevant assessment year, the governing test has been formulated in the judgment of the Supreme Court in Kelvinator of India Ltd. (supra). The principle which has been enunciated by the Supreme Court is as follows :
    AO has power to reopen, provided there is “tangible material” to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief.
  • The expression “reason to believe” in Section 147 has been construed in the judgment of the Supreme Court in ACIT v. Rajesh Jhaveri Stock Brokers (P.) Ltd. [2007] 291 ITR 500 (SC) to mean a cause or justification. However, at the stage when the Assessing Officer reopens an assessment, it is not necessary that the material before the Court should conclusively prove or establish that income has escaped assessment. A reason to believe at the stage of reopening is all that is relevant.
  • The Court has laid down the following tests for reopening an assessment:
    To hold that the AO must be deemed to have accepted what he has plainly overlooked or ignored in the assessment order would be to stretch the interpretation of Section 147 to a point where the provision would cease to have meaning and content. Such an exercise of excision by judicial interpretation is impermissible.
    When an assessment is sought to be reopened within a period of four years of the end of the relevant assessment year, the test to be applied is whether there is tangible material to do so.
    What is tangible is something which is not illusory, hypothetical or a matter of conjecture. Something which is tangible need not be something which is new.
  • The salient aspect of the case is that the order of assessment that was passed by the AO under Section 143(3) is completely silent in respect of each one of the five points on the basis of which the assessment is sought to be reopened.
  • It would not be appropriate for this Court to preempt an enquiry whatsoever by the Assessing Officer, once a tangible basis has been disclosed for reopening the assessment.

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