Bombay HC: Reopening on review of same material considered in original assessment invalid
Fact and Issue of the case
The petitioner is a company engaged in the business of running a petroleum refinery. In respect of Assessment Year 2006 – 2007, the petitioner filed the return of income on 25th October, 2016. It came to be revised on 28th March, 2008. In the revised return of income the petitioner disclosed total income of Rs.Nil under the normal provisions of the Act, 1961 and “book profits” of Rs.406,11,46,046/- under Section 115JB of the Act, 1961. During the assessment proceedings, respondent no.1 had initially issued a notice under Section 142(1) of the Act, 1961 on 10th September, 2017. The petitioner furnished the requisite explanation and documents in support thereof to the aforesaid notice as well as the subsequent clarification sought by respondent no.1. Eventually, respondent no.1 passed an assessment order on 18th December, 2008 under Section 143(3) of the Act, 1961, whereby respondent no.1 determined total income of the petitioner at Rs. Nil under the normal provisions of the Act, 1961 and the book profit at Rs.806,91,33,098/- under Section 115JB of the Act, 1961.
Post assessment, the petitioner was served with an audit query dated 30th July, 2009 in which objections were noted as regards the debit of Rs.1,26,33,095/- towards “leased assets repurchase expenses” and Rs.1,78,05,149/- towards “assets written off – irregular spares”. The petitioner clarified the audit notes.
In the aforesaid backdrop, on 25th February, 2013, respondent no.1 issued the impugned notice under Section 148 of the Act, 1961 recording that he had reason to believe that petitioner’s income chargeable to tax for the Assessment Year 2006 – 2007 has escaped assessment within the meaning of Section 147 of the Act, 1961. The said belief was sought to be formed on the premise that an amount of Rs.3,04,38,244/- was debited under the head of ‘miscellaneous expenses’ to the Profit and Loss Account, comprising of ‘leased assets repurchase expenses’ amounting to Rs.1,26,33,095/- and ‘assets written off (irregular spares)’ amounting to Rs.1,78,05,149/-, as revenue expenses, though they were capital in nature and, thus, required to be disallowed.
Upon being served with the reasons recorded for the proposed reopening, the petitioner submitted objections on 8th April, 2013. By the impugned order dated 17th February, 2014, respondent no.1 rejected the objections and called upon the petitioner to submit reply for the purpose of reassessment.
Being aggrieved, the petitioner has invoked the writ jurisdiction of this Court. The principal grounds of challenge are that there was no material to form the reason to believe that income chargeable to tax has escaped assessment. Secondly, the impugned notice suffers from clear non-application of mind as respondent no.1 lost sight of the fact that the amount of Rs.1,78,05,149/- was added back to the computation of income by the petitioner itself and no deduction was claimed on the said count. Thirdly, since the scrutiny assessment under Section 143(3) of the Act, 1961 was completed in respect of Assessment Year 2006 – 2007, respondent no.1 committed an error in assuming jurisdiction without satisfying himself that the income had escaped assessment on account of failure on the part of the petitioner to disclose fully and truly all material facts necessary for the assessment. In the case at hand, the issues sought to be raised by respondent no.1 were specifically adverted to, and dealt with, in the original assessment. Fourthly, in any event, the exercise on the part of respondent no.1 was in the nature of taking a different view of the matter on the basis of a mere change of opinion with regard to the same material. Therefore, the impugned notice under Section 148 and the consequent action deserve to be quashed and set aside.
Observation of the Court
As regards the escapement of income on the score that the expenses towards leased assets repurchase amounting to Rs.1,26,33,095/- were incorrectly debited as revenue expenses, from the perusal of the communication dated 5th November 2008 addressed by the Assessing Officer it becomes evident that the petitioner was called upon to submit, inter alia, the details of miscellaneous expenses of Rs.5,95,12,84,632/- (Para 3(f)) and the petitioner did furnish details of those expenses along with the communication dated 14th November, 2008, wherein the particulars of the leased assets repurchase expenses at Rs.1,26,33,095/- were specifically shown. In addition to this, in reply to the audit query communicated vide letter dated 30th July, 2009 the petitioner had made further disclosure as regards the said expenses of Rs.1,26,33,095/- towards revenue expenditure and offered justification in support thereof. The situation which is obvious is that during the course of the scrutiny assessment under Section 143(3) of the Act, 1961, the Assessing Officer had made specific query as regards leased assets repurchase expenses and solicited explanation and documents. In compliance thereto, the petitioner furnished the requisite information and documents. It is true that in the assessment order dated 18th December, 2008, the Assessing Officer did not specifically advert to the said aspect of the matter and in terms record that the explanation so furnished was accepted and allowance upheld. However, this factor is not of decisive significance.
It is trite law that once a query is raised and the assesee furnishes explanation thereto, the Assessing Officer is presumed to have applied his mind to the question so raised and the fact that the Assessing Officer had not specifically dealt with the said aspect in the assessment order does not justify an inference that the Assessing Officer did not consider the same. On the contrary, it would be justifiable to assume that the Assessing Officer was satisfied with the explanation so furnished by the assessee. Once it becomes evident that the Assessing Officer had raised the query and reply thereto was furnished by the assessee, the endeavour on the part of the revenue to reopen the assessment is fraught with two infirmities. One, it cannot be said that the income escaped assessment on account of failure to make a true and full disclosure of the material facts (in cases where the proviso operates). Two, the exercise would then fall in the realm of mere change of opinion on the basis of the very same material, which is legally impermissible. Further, it cannot be said that there is a “tangible material” which would justify recourse to the provisions contained in Section 147 of the Act, 1961. The third count of challenge to the impugned action that, it suffers from the vice of non-application of mind is equally well-merited. The second leg of the alleged escapement of income to the tune of Rs.1,78,05,149/- towards ‘assets written off (irregular spares)’, is not at all borne out by the material on record.
The claim of the petitioner that in the return submitted by the petitioner, the said amount of Rs.1,78,05,149/- came to be added back, finds support in the computation of income submitted along with the tax audit report. Evidently, the Assessing Officer had not at all adverted to the fact that the petitioner had not claimed the said amount of Rs.1,78,05,149/- as deduction towards the revenue expenses. Failure to take cognizance of the fact that the said amount of Rs.1,78,05,149/- came to be added back as income erodes not only the sanctity of the reasons recorded by the Assessing Officer but also the sanction accorded by the Principal Commissioner, under Section 151 of the Act, 1961. Lastly, it would be contextually relevant to note that the rejection of the objections to the reopening also suffers from a familiar error, which the notices for reopening usually manifest. The Assessing Officer in the impugned order recorded that though the details of the expenses were called for and brought on record, no further inquiry regarding the expenses was conducted and, thus, the Assessing Officer (during the course of the scrutiny assessment) cannot be said to have applied his mind and recorded a finding as to the allowability or otherwise of the said expenses. These reasons betray a clear change of opinion on the same material. The conspectus of the aforesaid consideration is that the impugned notice under Section 148 and the consequent action are required to be quashed and set aside.
The court has disposed off the appeal and ruled in favour of the assessee