Kerala H.C : Where reassessment proceedings were initiated in case of assessee on basis of wrong figure representing total unsecured loans from shareholders and if correct figure had been adopted there would have been no escapement of income, reasssessment proceedings being without jurisdiction had to be set aside

High Court Of Kerala

Parthas Info Park (P.) Ltd. vs. ACIT, Circle 1(1) Trivandrum

Section 69, 147 and 148

Assessment year 2008-09

A.K. Jayasankaran Nambiar, J.

W.P..(C) No. 4761 Of 2016

June  7, 2017

JUDGMENT

1. The petitioner is an assessee under the Income Tax Act. During the assessment year 2008-2009, there was a search and seizure operation in the premises of the petitioner on 11.10.2007. Following the said search operation, the petitioner company filed its return on 30.09.2008 admitting a total income of Rs.38,37,69,710/-. The return filed by the petitioner was subjected to scrutiny pursuant to a notice under Section 142 (1) dated 27.08.2009. The petitioner was asked to submit an explanation including the details of loans and computation statement of profit on sale of land shown in the profit and loss account to the tune of Rs.38,29,33,402/-. Ext.P1 is the notice issued to the petitioner. The petitioner filed his reply to the said notice, enclosing a copy of a calculation statement of capital gains, including therein a detailed break up of the figures. The said reply is produced as Ext.P2. Inasmuch as the Department was not satisfied with the said explanation of the petitioner, a further notice under Section 142 was issued to the petitioner, seeking for some more clarifications. The said notice is produced as Ext.P3. The petitioner, therefore, filed another reply dated 11.11.2009 furnishing the clarifications sought for in Ext.P3 notice. Thereafter, the 2nd respondent issued Ext.P4 pre-assessment notice dated 30.11.2009 in connection with the completion of the assessment for the year 2008-2009. After considering the objections of the petitioner to the pre-assessment notice, and after hearing the petitioner, Ext.P5 assessment order dated 31.12.2009 was passed by the 2nd respondent. Thereafter, by Ext.P6 notice dated 31.03.2015, issued under Section 148 of the Income Tax Act, the 1st respondent indicated that he had reason to believe that income chargeable to tax for the assessment year in question had escaped assessment for the purposes of Section 147 of the Income Tax Act. The petitioner, on receipt of Ext.P6 notice, promptly replied to the same seeking, inter alia, the reasons that prompted the 1st respondent to issue the notice under Section 148 of the Act. In response to the petitioner’s query, with regard to the reasons that necessitated the issuance of 148 notice, the petitioner was informed that the reasons for the reopening were two fold, namely,

“(1) the total unsecured loans from the shareholder is Rs.18,11,18,977/- however, it is seen that the details of source of funds are not produced.

(2) Out of the above unsecured loans, Rs.15,98,11,653/- is the cost of construction of 13.83 acres of land. Out of this 13.83 acres of land, 5.344 acres of land was sold on 5.6.2007. In the computation of cost of acquisition of land for the purpose of calculation of capital gains, there is an under assessment being the difference in interest liability on sold land.”

The petitioner was informed of the said reasons through Ext.P8 communication. The petitioner, thereafter, filed detailed objections to the said notice by Ext.P9 communication dated 15.07.2015. The said objection of the petitioner was, however, rejected by the 1st respondent, who proposed to go ahead with the re-assessment proceedings pursuant to the notice already issued to the petitioner under Section 148. It is at this stage that the petitioner has approached this Court through the present writ petition impugning the notice issued by the 1st respondent under Section 148 of the Income Tax Act, proposing a reopening of the assessment for the assessment year 2008-2009.

2. The petitioner would point out that, Ext.P6 notice was issued by invoking the provisions of the 1st Proviso to Section 147 of the Income Tax Act, which alone enables the Assessing Officer to proceed with a reassessment proceedings after the expiry of four years from the end of the relevant assessment year. It is the case of the petitioner that the assessment year in question is 2008- 2009 and the notice dated 31.03.2016 cannot be legally sustained unless the Assessing Officer establishes that the escapement of assessment for the assessment year in question was on account of a failure on the part of the assessee, inter alia, to disclose fully and truly all material facts necessary for the assessment for that assessment year. This requirement, contends the petitioner, is over and in addition to the basic requirement under Section 147 of the Income Tax Act that, a reopening of a completed assessment cannot be done on a mere change of opinion of the Assessing Officer. The petitioner also contends that Ext.P6 notice did not specifically refer to any reasons that prompted the Assessing Officer to issue the notice proposing reassessment, and the reasons that weighed with the Assessing Officer for issuing the notice were made available to the petitioner only subsequently through Ext.P8 communication. It is stated that even the reasons stated in Ext.P8 are vague, and hence, the entire proceedings that were initiated against the petitioner for reassessment under Section 147 have necessarily to be quashed. As regards the reasons stated in Ext.P8 communication, which have been extracted in an earlier portion in of this judgment, it is stated that the Assessing Officer erred in adopting the figure of Rs.18,11,18,977/- as the total unsecured loans from the share holders. It is pointed out that the aforesaid amount was taken by the Assessing Officer from the balance sheet of the Company, and a perusal of the said balance sheet, which was available with the Department, would clearly indicate that the figure that was taken included the interest component on the unsecured loans also, a fact that appears to have escaped the notice of the Assessing Officer. It is stated that, insofar as the very basis for the issuance of notice under Section 148 is flawed, the proceedings itself have to be held illegal. It is also pointed out that, since there was no non-disclosure by the assessee of the necessary facts and accounts for the purposes of assessment, as already enumerated above, the re-assessment, even if proposed at this stage, could only be viewed as a change of opinion by the Assessing Officer, since the Assessing Officer would be taking a different view, based on material that was already available before him at the time of the initial assessment.

3. A counter affidavit has been filed on behalf of the respondents wherein the proceedings of the Assessing Officer are sought to be justified on the reasons stated in Ext.P8 notice. In particular, it is pointed out that, while granting the necessary deduction, for interest on loan attributable to the land that was subsequently sold by the petitioner, while computing the cost of acquisition of the said land in a computation of capital gains, excess amount towards interest had been reckoned by the Department, and it was found that this was occassioned on account of the assessee not placing the relevant facts before it at the time of assessment. Rebutting the averments in the writ petition, that suggest that the necessary permission from the Commissioner of Income Tax had not been obtained as contemplated in Section 151 of the Income Tax Act, the respondents would rely on Ext.R1(c) and R1(d) documents, which suggest that the notice under Section 148 was issued only after getting the necessary approval from the Commissioner of the Income Tax.

4. I have heard the learned counsel appearing for the petitioner as also the learned Standing counsel appearing for the respondents.

5. On a consideration of the facts and circumstances of the case and the submissions made across the bar, I find that, going by the provisions of Section 147 of the Income Tax Act, where an Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year he may, subject to compliance with the procedural requirements under Section 148 to 153, assess or reassess such income, which has escaped assessment and which came to his notice subsequently. The normal period which is granted under Section 147 for the purposes of reassessment is four years from the end of the relevant assessment year. During the said period of four years, the Assessing Officer would be well within his rights to embark upon an exercise of reassessment subject only to the limitation that the re-assessement cannot be based merely on a change of opinion. In those cases where the period of four years from the end of the relevant assessment year has already expired, the proviso to Section 147 enables an Assessing Officer to still proceed with the reassessment, subject to the condition that he must establish that the income chargeable to tax has escaped assessment for the assessment year by reason of the failure on the part of the assessee, inter alia, to disclose fully and truly all material facts necessary for his assessment for that assessment year. In other words, over and above the general requirement, of a reassessment not being prompted by a mere change of opinion of the Assessing Officer, it would also be incumbent upon the Assessing Officer, in cases where a reassessment is proposed after the expiry of the period of four years from the end of the assessment year in question, to establish that the alleged escapement of income was on account of the failure on the part of the assessee to disclose fully and truly all material facts that were necessary for the assessment. In the instant case, it is not in dispute that the notice for reassessment was served only after the expiry of the period of four years from the end of the assessment year, and hence, the only issue to be considered, while examining the legality of the impugned notices, is whether the Department has been able to establish that the alleged escapement of income was on account of a failure on the part of the petitioner to disclose fully and truly all material facts necessary for the assessment. I note in this connection that the reasons furnished by the Department itself are based on the figure of Rs.18,11,18,977/- adopted by the Assessing Officer as the total unsecured loans availed by the company from its shareholders. The documents available before me, including Exts.P13 document produced by the petitioner, which is an extract from the balance sheet of the company that was made available before the Assessing Officer at the time of initial assessment, clearly reveal that the figure mentioned above was wrongly adopted by the Assessing Officer as representing the total unsecured loans from the share holders. As a matter of fact, the figure adopted by the Assessing Officer is one that is inclusive of the interest component of the unsecured loans. It is clear, therefore, that the Assessing Officer arrived at a wrong conclusion that there had been an escapement of income in the assessment. If the correct figures had been taken, then there would have been no escapement of income. Under such circumstances, I am of the view that the proceedings initiated against the petitioner under Section 148, on a wrong premise, cannot be legally sustained. It is also relevant to note that, there is nothing to suggest that there was any non-disclosure, by the petitioner assessee, of the full and true facts that were necessary for the purposes of the assessment, so as to justify the invocation of the 1st Proviso to Section 147, while issuing the notice under Section 148 to the petitioner. I, therefore, find that the proceedings initiated against the petitioner through Ext.P6 notice, the reasons for which were communicated to the petitioner by Ext.P8 communication, are wholly without jurisdiction and cannot be legally sustained. The writ petition is therefore allowed by quashing Ext.P6 notice, and the consequential proceedings that followed, and declaring that the proceedings initiated against the petitioner under Section 148 of the IT Act, for the assessment year 2008-2009, is without jurisdiction and therefore illegal and invalid.

[Citation : 396 ITR 682]