Gujarat H.C : Second notice for reopening of assessment on same ground on which previous notice was issued for same purpose, but later on dropped not on technical but substantive grounds, was wholly impermissible

High Court Of Gujarat

Kunal Organics (P.) Ltd. VS. DCIT

Assessment Year : 1997-98

Section : 147, 148

Akil Kureshi And Ms. Sonia Gokani, Jj.

Special Civil Application No. 16347 Of 2004

March 3, 2014

JUDGMENT

Akil Kureshi, J. – The petitioner has challenged a notice dated March 8, 2004, issued by the Assessing Officer under section 148 of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’).

2. The brief facts are as under :

2.1 The petitioners is a company registered under the Companies Act. For the assessment year 1997-98, the petitioner filed its return of income on November 27, 1997, declaring total income of Rs.22.91 lakh (rounded off). In the return so filed, the petitioner appended a note indicating that it had debited Rs.6.22 lakh (rounded off) on account of Keyman Insurance premium. The petitioner also indicated that the Life Insurance Corporation of India would allocate guaranteed addition and bonus of Rs.8.85 lakh on such insurance. However, such amount of bonus and other additions being contingent receipts, were not offered for tax for the year under consideration.

2.2 The return of the petitioner’s income was accepted without scrutiny. On June 11, 1999, the Assessing Officer issued first notice of reopening of assessment under section 148 of the Act to the petitioner, indicating that he has reason to believe that the petitioner’s income chargeable to tax for the assessment year 1997-98 had escaped the assessment. He, therefore, proposed to reassess such income requiring the petitioner to deliver ‘the return in the prescribed format before June 30, 1999.

2.3 Being a case prior to the decision of the Supreme Court in the case of GKN Driveshafts (India) Ltd. v. ITO [2003] 259 ITR 19/[2002] 125 Taxman 963 the petitioner was not aware about the reasons recorded by the Assessing Officer for issuing such notice. The Assessing Officer issued a notice under section 142(1) of the Act on March 6, 2002, calling upon the petitioner to supply the following details :

“Details of premium paid on Insurance policy taken on Keyman’s life of your company & details of guaranteed addition and bonus intimated by LIC & received by you. The above details may please be furnished for A.Y. 1996-97 & A.Y. 1997-98.

It may please be noted that guaranteed addition & bonus are taxable as per provisions of I.T. act.”

2.4 From such communication it can be seen that the Assessing Officer had dispute with the petitioner not offering for tax the guaranteed addition and bonuses of the Keyman’s Insurance policy. Alongside the reopening of assessment for assessment year 1997-98, the Assessing Officer also desired to inquire into the taxability of such additions and bonus on the insurance policy for the assessment year 1995-96 for which the regular assessment was underway. The petitioner filed his common reply for both the assessment years under its communication dated March 11, 2002. Regarding the taxability of the amount itself, the petitioner raised several contentions. Additionally, with respect to the reopened assessment, the petitioner contended as under :

“(5) Lastly as regards taxability of bonus on keyman insurance is concerned we enclose herewith copy of policy and invite attention to condition Nos. 45 and 7 which lays down that unless insured pays premium for at least three years than only insurance policy carries value upon surrender and if insured fails to pay premium at least for 3 (three) years policies shall be having no surrender value since A.Ys. 1995-96 and 1996-97 do not fall after date of commencement of any keyman insurance policy hence question of right receive bonus within period of reassessment also arise.

In view of aforesaid submissions we request you to cancel reassessment and oblige.”

2.5 On March 11, 2002, the Assessing Officer passed two separate orders. The first order was with respect to the regular assessment under section 143(3) of the Act for the assessment year 1995-96. In this assessment order, he made no additions for the returns and bonuses under the Keyman’s Insurance policy receivable by the petitioner. There was, however, no discussion on this issue in the order of assessment. On the same day, he passed the second order for the assessment year 1997-98, which reads as under :

“The proceedings initiated u/s.148 are hereby dropped.”

2.6 Nearly two years later, the respondent issued a fresh notice under section 148 of the Act, seeking to reopen the assessment of the petitioner for the said assessment year 1997-98. The petitioner this time around was supplied the reasons recorded by the Assessing Officer for issuing such notice. The reasons read as under :

“Return of income was filed on 27.11.1997 declaring total income Rs.22,91,690/ – which was processed u/s.143(1). The assessee has deducted from the income, an amount of Rs.6,97,500/- being guaranteed addition as keyman insurance policy. Any amount received/accrued as key man insurance policy is taxable income in view of the provisions of section 2(24)(xi), read with section 28(vi) of the I.T. Act. The same is also not exempt u/s 10(10D). By wrongful (claim for exclusion of guarantee addition to Keyman insurance policy to the extent of Rs.6,97,500/- become chargeable to tax to that extent had escaped assessment. In these circumstances, the assessment for A.Y. 1997-98 for which no scrutiny assessment u/s 143(3) was made is required to be reopened u/s 147 of the Act.”

2.7 From the reasons, it can be seen that even in the reasons recorded for issuing the impugned notice, the central and, in fact, the sole question was regarding taxability of additions and bonuses guaranteed under the Keyman’s Insurance policy. The petitioner thereupon made a detailed representation dated June 11, 2004 opposing the notice for reassessment. In addition to raising various grounds on the taxability of the amount itself, the petitioner further contended that the notice itself was arbitrary and capricious and lacking in good faith. Since the Assessing Officer did not drop the proceedings, the petitioner filed this petition.

3. The learned counsel Shri Himani for the petitioner raised the following contentions :

(i) Previously the Assessing Officer had issued a notice for reopening on the same ground, but after considering the representation of the petitioner dropped the proceedings. This was, thus, an order of assessment not making any addition on the ground on which the notice was issued. The reopening on the same ground was, therefore, not permissible.

(ii) The Assessing Officer for the assessment year 1996-97 had passed an order of assessment dated March 11, 2002, accepting the petitioner’s contention that no addition could be made on the ground in question. When on the same day, the Assessing Officer passed his order for the assessment year 1997-98 dropping the proceedings, it would demonstrate that he was convinced that no additions were justified on merits.

3.1 In support of his contentions, the counsel relied on the following decisions :

(i)Decision of the learned Single Judge of Calcutta High Court in the case of Indian Tube Co. Ltd. v. ITO [2005] 272 ITR 439 in which the Assessing Officer had issued notices for reopening the assessment for the assessment years 1974-75 and 1975-76, in which it was mentioned that the notices were being issued after obtaining necessary satisfaction of the Commissioner of Income-tax. However, such paragraph was deleted. Pursuant to such notice, the petitioner filed returns for the said years. Subsequently, the Income-tax Officer issued fresh notices for the same assessment years. Declaring that such notices were issued after obtaining necessary satisfaction of the Commissioner of Income-tax, the Court held that when the petitioner had filed returns in compliance with the invalid notice under section 148 of the Act, the same should be treated as returns and before making assessment on the basis of those returns, no further notice under section 148 of the Act could be issued.

(ii) Decision in the case of KLM Royal Dutch Airlines v. Asstt. DIT [2007] 292 ITR 49/159 Taxman 191 where the Division Bench of Delhi High Court held and observed that once the assessment has been reopened and notice under section 143(2) of the Act has been issued, it would be mandatory for the Assessing Officer to complete the assessment under section 143(3) of the Act.

4. On the other hand, the learned counsel Mrs. Mauna Bhatt for the Revenue opposed the petition contending that :

(i)Original assessment was not completed after scrutiny. Reopening such an assessment was, therefore, permissible as held by the Apex Court in the case of Asstt. CIT v. Rajesh Jhaveri Stock Brokers (P.) Ltd. [2007] 291 ITR 500/161 Taxman 316.

(ii) The reassessment initiated pursuant to notice dated June 11, 1999, was dropped by the Assessing Officer without completing the assessment. This order of the Assessing Officer dated March 11, 2002, therefore, cannot be equated with the order of assessment under section 143(3) of the Act. The second notice for reassessment was, therefore, permissible. There is no limitation on the Assessing Officer to issue successive notice for reopening an assessment as long as the requirements of section 147 of the Act are satisfied.

5. Section 147 of the Act pertains to income escaping the assessment. It provides inter alia that if the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may subject to the provisions of sections 148 to 153 of the Act assess or reassess such income and other income chargeable to tax, which has escaped assessment and which comes to his notice subsequently in the course of proceedings under the said section or recompute, the loss or depreciation allowance or another allowances. It is well-settled that there is no limitation on the Assessing Officer to undertake reopening of the assessment under section 147 of the Act only once. For valid reasons and subject to fulfilment of the other procedural and substantive requirements, an assessment which has been subject matter of reopening can still be reopened under section 147 of the Act. However, the limitation of an assessment not permissible to be reopened on a change of opinion would attach not only to the reopening of the assessment under section 147 of the Act, but also to any subsequent or successive proceedings. If an assessment, therefore, was completed or if an addition though proposed in reasons recorded was later on not made for any substantive reasons, the scope for reopening the same assessment on the same ground subsequently under section 147 of the Act would not be available.

6. In this context, we may revisit the facts of the case, which are rather peculiar in nature. Undoubtedly, the return of the assessee was accepted without a scrutiny. In that view of the matter, the Assessing Officer had reasonable latitude to proceed under section 147 of the Act, if he had prima facie reason to believe that income chargeable to tax for the assessment year in question had escaped the assessment. This is precisely what he did after issuing the first notice under section 148 of the Act on June 11, 1999. At this stage, we are not concerned with the petitioner’s contention that the guaranteed addition and the bonus under Keyman’s Insurance policy was not a taxable income of the petitioner for the said assessment year. We are prepared to proceed on the basis that the Assessing Officer had reason to believe that such receipts were taxable and that they were taxable during the year under consideration.

7. As noted, since the first instance of reopening occurred when the decision in the case of GKN Driveshafts (India) Ltd. (supra) was not yet delivered, the petitioner could not avail of the reasons recorded by the Assessing Officer for issuance of such notice. However, taxability of the guaranteed return and the bonus were the only issues, as can be seen from the Assessing Officer’s notice to the petitioner dated March 6, 2002 under section 142(1) of the Act.

8. After the petitioner made a detailed representation why such amount should not be added to its total income for the assessment years 1996-97 and 1997-98, the Assessing Officer dropped the entire issue. For the assessment year 1997-98, he passed one line order ordering dropping of the proceedings under section 148 of the Act. For the assessment year 1995-96, he passed a formal order of assessment under section 143(3) of the Act, making no addition towards the said sum.

9. It may be that in technical terms the order dated March 11, 2002, dropping the proceedings under section 148 of the Act may not amount to an assessment under section 143(3) of the Act, however, it would not be open for the Assessing Officer, in the present case, to reopen the assessment on the same ground all over again. Our reasons for such conclusion are as follows :

9.1 Though no reasons were recorded for dropping the proceedings under section 148 of the Act by the Assessing Officer, from the attendant facts and circumstances, it can be safely culled out that he was convinced that no addition under the said disputed item could be made. He himself in the assessment year 1996-97 made no addition in a scrutiny assessment.

9.2 If the notice under section 148 of the Act was being dropped for any technical reasons, after curing the technicality, it perhaps may have been open for the Assessing Officer to issue a fresh notice. In the present case, however, no such ground is made out. Neither in the order dated March 11, 2002 nor in the affidavit filed before us, the Revenue has contended that the first notice under section 148 of the Act was dropped because it suffered from any technical defect and that after curing such defect, fresh notice was issued, may be on the same ground. Thus, therefore, when the Assessing Officer dropped the proceedings of reassessment on a substantive ground of the additions not being sustainable, subsequently the same Assessing Officer or even his successor in office, in our opinion, could not have reviewed such a decision and come to a different conclusion to be able to issue a notice for reassessment on the same ground. Any other view would lead to anomalous situation. Post the decision in the case of GKN Driveshafts (India) Ltd. (supra), the assessee would have access to the reasons recorded for issuing the notice for reassessment. He would also have right to raise objections, which the Assessing Officer would have been duty bound to dispose of. If an Assessing Officer in a given case accepts such objections and drops the proceedings under section 148 of the Act, can later on another Assessing Officer who steps in his position, issue a fresh notice on the same ground expressing opinion that he did not agree with the approach of his predecessor and that since his predecessor had not completed assessment under section 143(3), it would be open for him to issue fresh notice of reopening ? This for obvious reasons would be wholly impermissible.

9.3 In the result, our conclusion is that in the facts of the case, the second notice for reopening of assessment on the same ground on which the previous notice was issued for the same purpose, but later on dropped not on technical but substantive grounds, was wholly impermissible.

10. For the foregoing reasons, the present petition succeeds and is, accordingly, allowed. The impugned notice dated March 8, 2004 is, therefore, quashed. Rule is made absolute. There shall be, however, no order as to costs.

[Citation : 362 ITR 530]