Stumpp Schuele and Somappa Private Limited Vs ACIT (Karnataka High Court)
Summary: The Karnataka High Court examined the writ petition filed by Stumpp Schuele and Somappa Private Limited challenging a reassessment notice dated 05.02.2019 issued under Section 148 of the Income-tax Act, 1961, for Assessment Year 2013-14, along with the order dated 08.04.2019 rejecting its objections. The company had filed its return and paid Minimum Alternative Tax under Section 115JB, following which a regular scrutiny assessment was completed under Section 143(3) on 29.12.2016. The reassessment related to a transaction involving transfer of rights in land situated at Hosur Road, Koramangala, Bengaluru, to M/s SSS Realty and Co., a concern in which the petitioner held an overwhelming ownership interest. The Revenue alleged that the property had been revalued at Rs.21,57,75,680 and that the corresponding revaluation reserve of approximately Rs.21.49 crore had not been properly accounted for in computing taxable book profits under Section 115JB.
The Assessing Officer relied upon discrepancies allegedly detected during the scrutiny proceedings for Assessment Year 2016-17 and a survey under Section 133A conducted on 06.12.2018. The recorded reasons referred to alleged suppression of taxable book profits, failure to examine capital gains arising from the transfer of land and applicability of the Minimum Alternative Tax provisions. The Revenue relied upon Ess Ess Kay Engineering Co. Pvt. Ltd. Vs CIT, Consolidated Photo Invest Vs ACIT and Income Tax Officer Vs TechSpan India Private Limited to support its reopening action. The petitioner argued that the reopening was beyond four years from the end of the relevant assessment year, that there had been no failure to disclose fully and truly the material facts, and that the proposed reassessment amounted to an impermissible change of opinion after a completed scrutiny assessment.
The High Court first considered whether the recorded reasons sufficiently alleged failure to disclose material facts, a requirement relevant under the first proviso to Section 147 as applicable to the assessment year. The petitioner argued that the reasons did not specifically reproduce the statutory requirement of failure to make full and true disclosure. The Court rejected this particular contention, holding that the recorded reasons need not repeat the exact statutory language if their substance adequately conveyed the allegation. In the present case, paragraph 5 of the recorded reasons referred to discrepancies discovered during later scrutiny and survey proceedings. The Court considered that statement sufficient to constitute an allegation of non-disclosure, although this finding did not finally determine the legality of reopening.
On examining the original assessment records, the Court found that the company had disclosed the disputed transaction and associated revaluation in several documents. Note 2 referred to the revaluation reserve of Rs.21,49,44,377, Note 10 described the consideration for transferring land to M/s SSS Realty and Co., and Note 11 disclosed the corresponding investment in that concern. Related-party disclosures under Accounting Standard AS-18 also recorded the transaction. More importantly, the Assessing Officer had issued pointed queries during the original scrutiny concerning the transfer of the Koramangala property, the investment in SSS Realty and Co., and the valuation details. The petitioner furnished the partnership deed, ledger extracts, financial statements, valuation information and other supporting documents. Although the Assessing Officer made certain additions for purposes of Section 115JB, no addition was made concerning the disputed land transaction or revaluation reserve.
The High Court held that where an Assessing Officer repeatedly seeks explanations regarding a particular transaction, examines the supporting records and completes assessment without making an addition on that issue, an opinion on the issue must be presumed to have been formed. Relying particularly upon the Full Bench decision of the Delhi High Court in CIT Vs Kelvinator of India Ltd., the Court held that the subsequent reopening was founded upon the very same transaction already examined during scrutiny. It therefore constituted a change of opinion, which was impermissible. Accordingly, the petition was allowed and both the notice under Section 148 dated 05.02.2019 and the order disposing of objections dated 08.04.2019 were quashed. The decision reinforces that a completed assessment cannot be reopened merely to revisit an issue previously examined through detailed scrutiny.
Cases Discussed
- LSI India Research and Development Pvt. Ltd. Vs Additional Commissioner of Income Tax, Special Range-12 (Karnataka High Court) – W.P. No. 51208/2019 (T-IT); Order dated 14.03.2022. Cited by the petitioner against reopening based on change of opinion.
- Mphasis Ltd. Vs Deputy Commissioner of Income Tax and Others (Karnataka High Court) – W.P. No. 55355/2017 (T-IT); Judgment dated 21.01.2020. Cited by the petitioner concerning the requirement of alleging failure to disclose fully and truly material facts before reopening beyond four years.
- Commissioner of Income Tax Vs Kelvinator of India Ltd. (Delhi High Court, Full Bench) – 2002 (64) DRJ 109; (2002) 256 ITR 1. Relied upon for the presumption of application of mind following regular assessment under Section 143(3) and the prohibition on reopening merely because the Assessing Officer subsequently changes opinion.
- Income Tax Officer, Ward No. 16(2) Vs TechSpan India Private Limited & Another (Supreme Court) – Civil Appeal No. 2732 of 2007. Referred to in the Assessing Officer’s recorded reasons relating to failure to examine essential aspects of taxation.
- Consolidated Photo Invest Vs ACIT (Delhi High Court) – Referred to in the recorded reassessment reasons concerning the Assessing Officer’s alleged failure to examine a relevant issue with due diligence.
- Ess Ess Kay Engineering Co. Pvt. Ltd. Vs CIT (Supreme Court) – (2001) 247 ITR 818 (SC). Cited in the recorded reasons for the proposition that findings made in proceedings for a subsequent year may furnish material for reopening an earlier assessment.
FULL TEXT OF THE ORDER OF KARNATAKA HIGH COURT
The petitioner has called in question the notice dated 05.02.2019 (Annexure-A) issued by the respondent under Section 148 of the Income Tax Act, 1961 (for short, ‘the I.T. Act’) for the assessment year 2013-2014, and the respondent’s order dated 08.04.2019 (Annexure-B) disposing of the petitioner’s objections to the reasons furnished to justify reopening assessment.
2. The petitioner has filed its returns for the assessment year 2013-2014 and has paid Minimum Alternative Tax (MAT) under Section 115JB of the I.T. Act. This is after appropriate assessment order under Section 143(3) of the I.T. Act on 29.12.2016. With the issuance of the notice dated 05.02.2019 (Annexure-A), the petitioner has requested for reasons for reopening the assessment on 15.02.2019 and in response thereto, the respondent has furnished reasons on 19.02.2019 (Annexure-G). The petitioner’s objections dated 18.03.2019 (Annexure-H) to the reasons offered to justify reopening of assessment, is disposed of by the impugned order dated 08.04.2019.
3. The summary of the reasons offered for reopening the assessment is mentioned in the impugned order dated 08.04.2019, and it reads as hereunder:
“2.3 To summarize the reasons for reopening is based on the following aspects:
a) Detection of suppression of Taxable Book profits as a result of survey u/s 133A
b) Findings relating to a preceding year (A. Y. 2013-14) that surfaced when the scrutiny proceedings were undertaken in the subsequent year (A.Y. 2016-17) – Ess Ess Kay Engineering Co. Pvt. Ltd Vs CIT [247 ITR 818] (SC)
c) Failure on part of the Assessing Officer to examine the case with due diligence – Delhi HC in the case Consolidated Photo Invest Vs ACIT
d) Failure on part of the Assessing Officer to even touch the essential aspect of taxation Civil Appeal No 2732 of 2007 Income Tax Officer Ward No. 16(2) Vs. M/s TechSpan India Private Ltd. & Anr.”
4. The aforesaid are stated in the backdrop of the following. The transfer of rights in the immovable land in Sy.No.139/2 of Hosur Road, Koramangala, Bengaluru to M/s. SSS Realty and Co in which the petitioner holds 99% shares is not fully disclosed inasmuch as the petitioner has not mentioned in the Returns that the value of this property was revalued at Rs.21,57,75,680/- as a consequence of transfer of this property. The petitioner, who should have added the value of Rs.21,49,44,377/- for the computation of book profit as per Clause J to Explanation-1 of Section 115JB of the I.T. Act, has not declared capital gains for this transfer.
5. The petitioner’s principal objections to the reasons assigned are two fold. Firstly, there is no deliberate failure to truly and fully disclose the transaction with M/s. SSS Realty and Co., and because the assessment is proposed to be opened after a lapse of four [4] years from the end of March 2014, there cannot be a proposal for reassessment unless there is a specific allegation of deliberate failure to fully and truly disclose material facts. Secondly, the reassessment is because of the “change in opinion”.
6. Sri. S.Annamalai, the learned counsel for the petitioner, submits that this Court must intervene with the impugned order because there is no specific allegation of failure to disclose truly and fully material facts and unless there is such an allegation in the reasons to reopen assessment, the respondent cannot assume jurisdiction. In this regard he draws the attention of this Court to the reasons assigned, and draws support from the decision of this Court in Mphasis Ltd Vs. Deputy Commissioner of Income Tax and Others1.
7. Sri. S.Annamalai next submits that the records indicate that all the necessary disclosures are made not just at the time of filing the returns with the necessary declaration in Form No.3CD, but also when notices were issued on two [2] occasions under Section 142(1) of the I.T. Act. After these disclosures. The assessment is framed under Section 143 (3) of the I.T. Act making certain additions for the purposes of Section 115JB of the I.T. Act, but without any addition for the transaction in favour of M/s. SSS Realty and Co. This demonstrates that the impugned notice is because of a change of opinion, and in that event, there cannot be reopening of a closed assessment. In support of this contention he proposes to rely upon a decision of this Court in LSI India Research and Development Pvt. Ltd Vs. Additional Commissioner for Income Tax Special Range-12.
8. The first ground is considered, as emphasized by Sri. E.I.Sanmathi, the learned counsel for the respondent in the light of what is stated in paragraph No.5 of the reasons dated 19.02.2019. This paragraph reads as under:
“5. The above narrated discrepancies were detected during the course of scrutiny proceedings for AY 2016-17 and also during the survey proceedings u/s 133A carried out at assessee premises on 06.12.2018. With respect to AY 2013-14, the Assessing Officer has failed to examine the crucial aspect of taxation of Capital Gains on transfer and also the applicability of MAT provisions as per 115JB. The finding in the assessment of a subsequent year enforces correction in the preceding year when the issues are found identical.”
9. It is indeed trite that if the assessment is to be reopened after four [4] years as contemplated under the first proviso to Section 147 of the I.T. Act [as it stood in the relevant time] there should be allegations of failure to truly and fully disclosed material facts unless the other conditions are satisfied3. As argued by Sri. E.I. Sanmathi, in the present case the reassessment is because there is a failure to disclose material fact truly and fully, and according to Sri. S.Annamalai, there is not even an allegation in this regard. In paragraph No.5 as aforesaid there is specific assertion that discrepancies were detected during the course of scrutiny proceedings for the assessment year 2016-2017 and during the survey proceedings under Section 133A of the I.T.Act carried out at assessee’s premises on 06.12.2018.
10. This Court must ask the question whether the allegation that there is failure to disclose material fact fully and truly should be stated in the exact words that are found in the statute, and then the answer is obvious. In law it is not mere repetition of the requirement in the exact words but a disclosure of the requirement as would be justified in the facts and circumstances of the case. It is obvious that the respondent alleges that the material facts are detected in scrutiny and survey proceedings under the relevant provisions of the I.T.Act. This Court must opine that the opening statement in paragraph No.5 as extracted would satisfy the requirement of an allegation, and hence the petitioner cannot succeed on the ground that there is no allegation. As such, the petitioner is not granted any indulgence on the first ground.
11. It is seen from the records, as enclosed to this writ petition, that the petitioner’s transaction for the subject land with M/s. SSS Realty and Co. is declared in the returns filed and it would be useful to refer to the different notes where there is a reference not just to the Revaluation Reserve as mentioned consequent to the transaction, but the transaction itself. The details are as follows:
Note–2: Mentions a revaluation reserve of a sum of Rs.21,49,44,377/-.
Note-10: Mentions the amount that is transferred as consideration for the transfer of the subject land to M/s. SSS Realty and Co., and
Note–11: Mentions the corresponding investment in M/s. SSS Realty and Co., (99.95% of its share)
The transaction is also reflected as Related Party Disclosures under the head Accounting Standard [AS-18], and further, the value of the transaction in favour of M/s. SSS Realty and Co., is part of a separate Note on revaluation of land and investment in M/s. SSS Realty and Co.
12. The petitioner is issued with notice for scrutiny on 23.10.2015 calling for certain documents and details, and it is seen from a copy of such notice that the petitioner is called upon to furnish:
i. The details of document relating to transfer of land at Koramangala towards investment in a partnership firm (the Auditor’s report).
ii. The details of investment made in M/s. SSS Realty and Co., (mentioned in this notice as Rs.21.58 Crores), and
iii. To explain the transactions relating to investment in M/s. SSS Realty and Co., along with relevant documents and financial statements of the Firm.
13. The petitioner has responded to this notice on 29.02.2016 furnishing additional information such as a copy of the Partnership Deed, ledger extract of the details of the investment made in M/s. SSS Realty and Co., its financial statement, and a note on creation of Revaluation Reserve (Rs.21.49 Cr) with relevant documents. Insofar as the query on Revaluation Reserve4, the petitioner has furnished a note appended as Annexure – 1 to its submission dated 28.12.2016 (Annexure-L). It is stated in this note that the petitioner has revalued the property at Rs.21,57,75,680/- on the basis of fair market value as certified by an independent valuer and the difference between the book value and the book value on the date of the revaluation Rs.21,49,44,337/-, is shown as Revaluation Reserve. A copy of the valuation report is also furnished.
14. The Assessing Officer, in the light of these disclosures, while framing the assessment order dated 29.12.2016 under Section 143(3) of the I.T. Act has made certain addition for the purposes of Section 115JB of the Act but without any other addition because of the subject transactions. In these circumstances, the question insofar as the Revaluation Reserve, or the transfer in favour of M/s. SSS Realty and Co., would be whether there is a deemed opinion by the Assessing Officer on the question of Revaluation Reserve and transfer to M/s. SSS Realty and Co.
15. If the Assessing Officer has repeatedly asked pointed questions and clarifications about the transaction in the light of the declarations made in the Returns, but without additions while framing assessment under Section 143(3) of the I.T. Act, there must be a presumption that the Assessing Officer has applied his/her mind and has framed an opinion. In this regard, a useful reference could be made to the decision of the Full Bench of the High Court of Delhi in the Commissioner of Income-Tax, Vs Kelvinator of India Ltd.5 wherein it is exposited that in terms of Clause (e) of Section 114 of the Indian Evidence Act 1872, the judicial and official acts have been regularly performed.
16. It flows from the above that if repeated and detailed queries are asked after the issuance of notice under Section 143(2) of the I.T.Act but without any addition, or disallowance, there is a deemed opinion and reassessment is proposed despite such opinion. It would be a case of change in opinion, and in that event reassessment would be impermissible. In the fact and circumstances of this case, this Court must opine that the respondent’s reasons to say that there is no change in the opinion because the details were not available until there was a scrutiny and survey proceedings, cannot be accepted and the proposed reassessment is based on clear change in opinion. Hence, the following:
ORDER
The petition is allowed. The impugned notice dated 05.02.2019 (Annexure-A) and the order dated 08.04.2019 (Annexure-B) are quashed.
Notes:
1 W.P.No.55355/2017 (T-IT) decided on 21.01.2020
2 W.P.No.51208/2019 (T-IT) disposed of on 14.03.2022
3 The other conditions would be the failure to make a return under Section 139 or in response to a notice issued under Section 142 (1) or Section 148 of the I.T.Act.
4 Query No.6 in the notice dated 23.10.2015
5 2002 (64) DRJ 109
