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January 26, 2021

Mere change of opinion would not confer jurisdiction upon the AO to initiate proceedings under Section 147 – SC

by CA Shivam Jaiswal in Income Tax

Mere change of opinion would not confer jurisdiction upon the AO to initiate proceedings under Section 147 – SC

Section 147 of the Income Tax Act deals with provisions of “income escaping assessment”. The grounds or reasons which led to formation of the belief that income chargeable to tax has escaped assessment must have a material bearing on the question of escapement of income of the assessee from assessment because of his failure or omission to disclose fully and truly all material facts. The expression “reason to believe” does not mean a purely subjective satisfaction on the part of the Income Tax Officer. The reason must be held in good faith. It cannot merely be a pretense. Any assessee could receive a notice under section 148 in case the AO believes that such individual’s income chargeable to tax might have escaped assessment.

Let us refer to the case of ITO v. Techspan India (P) Ltd. (2018), where the issue under consideration was whether an assessment could be reopened on the issue of excess deductions claimed under section 10A, where during the original assessment proceedings, the question of allocation of expenses was considered or not.

Facts of the Case:

  • The assessee was engaged in the business of development and export of computer software and human resource services.
  • Assessee filed its return declaring a loss after claiming a deduction common expenses from its two sources of income, namely, software development and human resource development.
  • The assessee also claimed deduction under section 10A for the income from software development.
  • The return was selected for assessment under section 143(2) and a specific query was raised regarding the allocation of common expenses between the two heads, viz., software development and human resource development.
  • The issue was duly explained and an order passed assessing the income as ‘Nil’.
  • Subsequently a notice under section 148 was issued on the ground that an excess deduction under section 10A had been allowed.
  • The assessee filed objections against the proposed reopening. The objections of the assessee were rejected. On writ, the High Court set aside reassessment notice.

Observations of the SC on whether the re-assessment proceeding initiated in the present case was without jurisdiction

  • The assessee had contended that the reasons recorded for issuance of a notice under Section 148 merely disclosed that there was a change in opinion.
  • It was clear from the decision of SC in Jindal Photo Films Ltd. v. DCIT that where the Income Tax Officer attempted to reopen an assessment because the opinion formed earlier by him was in his opinion incorrect, the reopening could not be done.
  • SC clearly held that the power to reopen an assessment was conferred by the legislature not with the intention to enable the Income Tax Officer to reopen the final decision made against the Revenue in respect of questions that directly arose for decision in earlier proceedings.
  • If that were not the legal position it would result in placing an unrestricted power of review in the hands of the assessing authorities depending on their changing moods.
  • It was also held that if an expenditure or deduction was wrongly allowed while computing the taxable income of the assessed, the same could not be brought to tax by reopening the assessment merely on account of the Assessing Officer (AO) subsequently forming an opinion that earlier he had erred in allowing the expenditure or the deduction.
  • Mere change of opinion would not confer jurisdiction upon the AO to initiate proceedings under Section 147.
  • In this context, SC had to examine as to whether the facts of the present case disclosed that the reopening of the assessment was based upon a mere change of opinion.
  • During the original assessment proceeding a detailed inquiry was conducted by the AO.
  • After a detailed examination, the assessment was completed and a deduction under Section 10A to the extent of Rs 4,86.62,452 was allowed.
  • In the reasons given for reopening, all that was indicated, is that the deduction under Section 10A was allowed in excess and, therefore, income had escaped assessment to the tune of Rs 57,36,811.
  • In the said reasons it was indicated that the deduction under Section 10A ought to be only Rs 3,73,77,462 as that would be derived from the formula: Business Profits x Total Export of Computer Software Total Business Turnover
  • In the speaking order, however, the only reason purportedly given for rejecting the objections raised by the assessed was that the assessed was not maintaining any separate books of accounts.
  • But this was clearly considered by the AO during the original assessment proceedings.
  • In fact, this was expressly stated in the show cause notice itself.
  • It was evident that no new material came to light and on the same set of facts, the subsequent AO merely had a change of opinion with regard to the deduction under Section 10A allowed to the assessed.
  • In this view of the matter, the reopening of the assessment would not be justified and would be without jurisdiction.
  • Accordingly, the reopening of the assessment by issuance of the notice under Section 148 as well as the speaking order and proceedings pursuant thereto were liable to be quashed.

Therefore, initiation of the re-assessment proceedings under section 147, merely because of the fact that now the AO is of the view that the excess deduction was allowed, was based on nothing but a change of opinion on the same facts and circumstances which were already in his knowledge even during the original assessment proceedings.

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