Gujarat H.C : Where material on which Assessing Officer had formed belief as regards escapement of income was assessment order for year 2006-07, which on date of reopening of assessment for year under consideration was set aside by Commissioner (Appeals) and as such had no existence in eyes of law, reopening of assessment could not be sustained

High Court of Gujarat

P.G. Foils Ltd. vs. DCIT

Assessment year : 2005-06

Section : 147, 148

MS. HARSHA DEVANI AND H.B. ANTANI, JJ.

Special Civil Application No. 12910 of 2010

January 25, 2011

JUDGMENT

Ms. Harsha Devani, J. -This petition under article 226 of the Constitution of India challenges the notice dated September 25, 2009, issued by the respondent under section 148 of the Income-tax Act, 1961 (“the Act”), seeking to reopen the assessment of the petitioner in relation to the assessment year 2005-06.

2. The petitioner, a limited company, filed its original return of income for the year under consideration on October 28, 2005, declaring a total income of Rs. 1,84,42,703 under the provisions of the Act together with computation of income, tax audit report in Forms Nos. 3CB and 3CD and notes attaches to the return of income, copy of the annual accounts, copy of grouping of balance-sheet and profit and loss account for the year ended on March 31, 2005. The case was taken up for scrutiny and the respondent called for various explanations/details from the petitioner in respect of several issues including the details of expenditure on account of the keyman insurance premium. The Assessing Officer framed assessment under section 143(3) of the Act on April 10, 2007, which came to be challenged by the petitioner before the Commissioner (Appeals), who, by his order dated April 3, 2009, allowed the appeal. Thereafter, vide the impugned notice dated September 25, 2009, the respondent issued notice for reopening the assessment for the assessment year 2005-06. Pursuant to the said notice, the petitioner requested the respondent to furnish the reasons. Upon the reasons being furnished, the petitioner, vide its letter dated October 26, 2009, raised various objections on the merits and requested the respondent to drop the proceedings. Vide letter dated August 6, 2010, the respondent disposed of the objections, holding that the objections raised by the petitioner are not found to be acceptable and rejected the same in totality. It is, at this stage, that the petitioner has approached this court challenging the impugned notice.

3. Mr. S. N. Soparkar, learned senior advocate, appearing on behalf of the petitioner, invited attention to the notice issued under section 142(1) of the Act (annexure A to the petition), to point out that the respondent had called upon the petitioner to furnish particulars/details in respect of the expenditure of Rs. 4.53 crores incurred on account of the keyman insurance premium. Referring to the letter dated February 12, 2007, of the chartered accountants of the petitioner to the respondent, it was pointed out that the details of the amount paid for the keyman insurance premium along with the insurance policy had been duly submitted in response to the notice under section 142(1) of the Act. It was submitted that the respondent, upon being satisfied as regards the claim of the petitioner, had allowed the same. According to the learned counsel, though there is no discussion in respect of the keyman insurance premium in the assessment order, it is amply clear that the Assessing Officer had applied his mind to the issue in question in the light of the fact that the specific details had been called for by him in relation to the same. Inviting attention to the reasons recorded for reopening the assessment, it was pointed out that the basis for reopening is the assessment order in respect of the assessment year 2006-07 whereby, the Assessing Officer had, out of a claim of Rs. 4.50 crores, allowed only Rs.34,80,000 in respect of the petitioner’s claim for the keyman insurance premium. It was submitted that the said order was carried in appeal by the petitioner before the Commissioner (Appeals) who, vide order dated April 3, 2009, by the Commissioner (Appeals) had allowed the ground of appeal and directed the Assessing Officer to allow the petitioner’s claim with regard to the keyman insurance premium. In the circumstances on the date of reopening, the assessment order which formed the basis for the reopening was no longer in existence and as such, the said order could not have been made the basis for reopening the assessment. It was submitted that, there has to be a live nexus between the reasons and the reopening, and in the light of the fact that the assessment order for the year 2006-07 in relation to the issue in question had already been set aside by the Commissioner (Appeals), there was no order in the eyes of law which could form the basis for reopening the assessment. It was accordingly submitted that the very initiation of proceedings under section 147 of the Act being without any basis, lacks jurisdiction and is required to be set aside.

4. On the other hand, Mrs. Mauna M. Bhatt, learned senior standing counsel, appearing on behalf of the respondent, supported the action of the respondent. Inviting attention to the assessment order, it was submitted that in the entire assessment order for the assessment year 2005-06, there is no reference to the claim of the keyman insurance premium and as such, the Assessing Officer, at the relevant time, had not applied his mind to the issue in question. It was submitted that in the circumstances, this is not a case of mere change of opinion inasmuch as, in the original assessment order, the Assessing Officer has not expressed any opinion in this regard. It was further submitted that despite the fact that the assessment order for the assessment year 2006-07 has been set aside by the Commissioner (Appeals), it can still be the basis for forming an opinion for the purpose of reopening the assessment in respect of the assessment year in question. It was submitted that, in the present case, the assessment has been reopened within a period of four years and the claim as regards the keyman insurance premium has not been discussed in the original assessment order and as such no opinion had been expressed in respect thereof in the said order, hence, this being not a case of a mere change of opinion, no interference is warranted by this court.

5. The facts are not in dispute. In the present case, the assessment for the year 2005-06 is sought to be reopened by a notice dated September 25, 2009, issued under section 148 of the Act. Hence, the reopening being within a period of four years, the only condition which is required to be satisfied by the Assessing Officer for the purpose of assuming jurisdiction under section 147 of the Act is that he has reason to believe that there is escapement of income. In the present case, the reasons recorded by the Assessing Officer are as follows :

“Reasons for reopening the assessment

In this case, the assessee has filed the return of income for the assessment year 2005-06 on October 28, 2005. The assessment proceedings were finalized, vide order under section 143(3) read with section 263 dated November 17, 2008, determining the income at Rs.1,85,37,250. In the assessment order, the assessee’s claim for the keyman insurance premium of Rs. 4.50 crores was allowed in full. However, during the assessment proceedings for the assessment year 2006-07, it was established that, out of the claim of Rs. 4.50 crores, only Rs. 34,80,000 was allowable. This amount was worked out on the basis of calculation of the premium amount as per the IRDA guidelines. Hence, it is seen that the assessee has furnished inaccurate particulars with regard to the claim of premium expenses on the keyman’s insurance policies as per the IRDA guidelines which comes to Rs. 34.20 lakhs as against Rs. 4.50 crores claimed by the assessee. Therefore, excess claim of Rs. 4,15,20,000 was not allowable as expenses for the detailed reasons discussed in assessment order of the assessment year 2006-07.

Therefore, I am satisfied that the income of the assessee has escaped assessment within the meaning and as envisaged by section 147 read with Explanation 2(c)(i).

Notice under section 148 of the Income-tax Act issued accordingly.”

6. On a bare reading of the reasons recorded, it is apparent that the formation of belief that the income has escaped assessment is based upon the assessment order for the assessment year 2006-07 whereby out of a claim of Rs. 4.50 crores for the keyman insurance premium only Rs. 34,80,000 was allowed, which was worked out on the basis of calculation of premium amount as per the IRDA guidelines. It is an undisputed position that the assessment made by the Assessing Officer in relation to the keyman insurance premium for the assessment year 2006-07 was a subject-matter of appeal before the Commissioner (Appeals) who, vide order dated April 3, 2009, allowed the petitioner’s claim with regard to the keyman insurance premium. In the circumstances, as on the date when the assessment for the assessment year 2005-06 was sought to be reopened, the assessment order made by the Assessing Officer as regards the claim of the keyman insurance premium for the assessment year 2006-07 had no existence in the eyes of law as the same stood merged in the order passed by the Commissioner (Appeals). In the circumstances, once the Commissioner (Appeals) had taken a view that the petitioner was entitled to the claim for the keyman insurance premium, it was thereafter no longer permissible to the Assessing Officer to place reliance upon the original assessment order which had no existence in the eyes of law for the purpose of reopening the assessment in relation to the assessment year under consideration. It is settled legal position that since the belief as regards escapement of income is that of the Assessing Officer, the sufficiency of reasons for forming the belief, is not for the court to judge but it is open to an assessee to establish that there in fact existed no belief or that the belief was not at all a bona fide one or was based on vague, irrelevant and non-specific information. To that limited extent, the court may look into the conclusion arrived at by the Assessing Officer and examine whether there was any material available on the record from which the requisite belief could be formed by the Assessing Officer and further whether that material had any rational connection or a live link for the formation of the requisite belief. (See Phool Chand Bajrang Lal v. ITO [1993] 203 ITR 456/69 Taxman 627 (SC)).

7. In the facts of the present case, the material on which the Assessing Officer has formed the belief as regards the escapement of income is the assessment order for the year 2006-07, which on the date of reopening of the assessment for the year under consideration was set aside by the Commissioner (Appeals) and as such had no existence in the eyes of law. In the circumstances the belief cannot be said to be a bona fide belief, nor can the material on which the belief is based be said to have a live link for the formation of requisite belief. In the circumstances, the reopening of assessment without formation of the requisite belief as regards escapement of income is without jurisdiction and as such the impugned notice under section 148 of the Act as well as any proceedings taken pursuant thereto cannot be sustained be sustained.

8. Though various other contentions have been advanced by the learned advocates for the respective parties on other related issues like the reopening being based upon a mere change of opinion, etc., it is not necessary to go into the merits of the said contentions, in the light of the fact that the very basis for formation of belief that income has escaped assessment, has been found to be unjustified.

9. For the foregoing reasons, the petition succeeds and is accordingly, allowed. The impugned notice dated September 25, 2009, issued under section 148 of the Act (annexure A to the petition) as well as all proceedings taken pursuant thereto are hereby quashed and set aside. Rule is made absolute according with no order as to costs.

[Citation : 353 ITR 548]

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