Mphasis Ltd Vs DCIT & Others (Karnataka High Court)
Summary: The Karnataka High Court, in Mphasis Ltd Vs Deputy Commissioner of Income Tax & Others, Writ Petition No. 55355 of 2017, decided on 21 January 2020, held that failure to deduct tax at source (TDS) cannot, by itself, be equated with failure to disclose fully and truly all material facts necessary for assessment. The case concerned Assessment Year 2010-11 and the validity of reassessment proceedings initiated under Sections 147 and 148 of the Income Tax Act, 1961, beyond four years from the end of the relevant assessment year. The Revenue proposed to disallow ₹722,02,48,792 under Section 40(a)(i) on the allegation that the assessee had failed to deduct TDS on payments for onsite services and selling commission to associated enterprises.
The assessee challenged the reassessment proceedings as barred by limitation under the proviso to Section 147. It contended that the recorded reasons alleged only non-deduction of TDS and did not establish any failure to disclose material facts. The Revenue argued that the reasons should be examined objectively and that the statutory language need not be reproduced verbatim. It also requested an opportunity for reconsideration on the ground that the assessment file might contain further supporting reasons.
The High Court held that the proviso to Section 147, applicable to the assessment year in question, required strict construction because reopening a completed assessment was an extraordinary statutory power. Where an assessment had been completed under Section 143(3), reassessment beyond four years required escapement of income attributable to the assessee’s failure to make the prescribed return or disclose fully and truly all material facts. The recorded reasons alleged failure to deduct TDS but did not allege failure to disclose the relevant facts. These were legally distinct matters, and the former did not automatically establish the latter.
Following Hindustan Lever Ltd. Vs R.B. Wadkar, the Court emphasized that reassessment reasons must be evaluated as originally recorded and cannot subsequently be enlarged through explanations or additional grounds. It also relied upon the principle stated in Mohinder Singh Gill Vs Chief Election Commissioner that the validity of a statutory order must be judged by its recorded reasons. The Court distinguished the Revenue’s reliance on I.P. Patel & Co. Vs DCIT because sufficient material regarding disclosure failure existed in that case. Consequently, the High Court allowed the writ petition, quashed the impugned notice and proceedings, prohibited reopening of the assessee’s assessment for AY 2010-11 and made no order as to costs.
List of Cases Discussed:
1. ITO Vs Mewalal Dwarkaprasad (Supreme Court); 176 ITR 529. Relied upon for the principle that reassessment is an extraordinary statutory power and the relevant statutory restrictions require strict construction.
2. Hindustan Lever Ltd. Vs R.B. Wadkar (Bombay High Court); 268 ITR 332. Followed. Where reopening is proposed beyond four years, the recorded reasons must establish the requisite failure to disclose material facts. Reasons cannot subsequently be supplemented or modified.
3. I.P. Patel & Co. Vs Deputy Commissioner of Income Tax; 346 ITR 207. Distinguished. Although statutory expressions need not be reproduced verbatim in recorded reasons, the necessary factual foundation for invoking the extended reassessment period must exist.
4. Mohinder Singh Gill Vs Chief Election Commissioner (Supreme Court, Constitution Bench); AIR 1978 SC 851. Followed. The validity of an administrative or statutory order must be judged by the reasons originally recorded and cannot be supported through fresh reasons subsequently supplied.
FULL TEXT OF THE KARNATAKA HIGH COURT ORDER
Petitioner being an Income Tax Assessee having been found fault with in not making the Tax Deduction at Source during the Financial Year 2009-10 is knocking at the doors of writ court for assailing the re-opening of the proceedings u/s.147 of the Income Tax Act, 1961, a copy whereof is at Annexure-D which is founded on the notice dated 01.09.2017, a copy whereof is at Annexure-K.
2. After service of notice, the respondents having entered appearance through their Panel Counsel resist the writ petition making submission in justification of the impugned order essentially contending that the answering respondent has formed an opinion as to the “failure of disclosure” of not effecting the TDS and therefore the impugned action cannot be faltered.
3. Having heard the learned counsel for the parties and having perused the petition papers, this Court is of the considered opinion that the impugned proceedings are unsustainable for the following reasons:
(a) Sec.147 of the Act provides for re-opening of assessment where the income has escaped assessment; the Proviso to this section prescribes a limitation period of four years to be reckoned from the end of the assessment year unless inter alia there is a failure on the part of the assessee “to disclose fully and truly all material facts necessary for his assessment” for that assessment year. The Proviso going by its text and context needs to be construed strictly since the re-opening of an assessment is a power of an extraordinary nature vide ITO vs. MEWALAL DWARKAPRASAD, 176 ITR 529 (SC). The said section along with this Proviso (other parts not being much relevant) is reproduced below for easy reference:
“147. Income escaping assessment: If the Assessing Officer has reason to believe that any income may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recomputed the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year)
Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year”.
(b) in the notice dated 01.09.2017 at Annexure-K the 2nd respondent has assigned the reasons for resorting to re-opening of the assessment, relevant part of which reads as under:
“From the above discussion, is clear that assessee was liable to deduct TDS but failed to do so before making payments for onsite services and selling commission to the AEs. Hence, it is required to disallow the said expenses u/s.40(a)(i) of the IT Act. Therefore I have reason to believe that Rs.722,02,48,792/- has escaped assessment within the meaning of section 147 of the IT Act”.
The text of the reasons nowhere states that there is failure on the part of the petitioner to disclose the alleged non-deduction of TDS; what is stated is that the petitioner had failed to deduct the TDS; the Proviso employs the expression “by reason of the failure on the part of the assessee … to disclose fully and truly all material facts”; the expression implies some guilt in mind howsoever little it may be, attributable to the assessee; in other words, a failure to deduct the TDS per se does not fit into the said expression as rightly contended by the counsel for the petitioner;
(c) a Division Bench of Bombay High Court in HINDUSTAN LEVER LTD., vs. R.B.WADKAR, 268 ITR 332 at page 337 has observed as under:
“Reading of the proviso to section 147 makes it clear that if the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under section 147, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the concerned assessment year. However, where an assessment under sub-section (3) of section 143 has been made for the relevant assessment year, no action can be taken under section 147 after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to disclose all material facts necessary for his assessment for that assessment year.(Emphasis supplied by us)
The reasons recorded by the Assessing Officer nowhere state that there was failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment of that assessment year. It is needless to mention that the reasons are required to be read as they were recorded by the Assessing Officer. No substitution or deletions is permissible. No additions can be made to those reasons. No inference can be allowed to be drawn based on reasons not recorded. It is for the Assessing Officer to disclose and open his mind through reasons recorded by him. He has to speak through his reasons. It is for the Assessing Officer to reach the conclusion as to whether there was failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the concerned assessment year. It is for the Assessing Officer to form his opinion. It is for him to put his opinion on record in black and white. The reasons recorded should be clear and unambiguous and should not suffer from any vagueness. The reasons recorded must disclose his mind. The reasons are the manifestation of the mind of the Assessing Officer.”
The reason assigned by the answering respondent for re-opening the assessment does not satisfy the requirement of the Proviso to sec.147 as interpreted in the above decision, the ratio of which this Court is in full agreement with;
(d) the contention of Panel Counsel for the Revenue that the reasons assigned by the Assessing Officer should be viewed objectively and that the words employed by the Proviso to the section need not be reproduced in the notice, is true vide I.P.PATEL & CO., vs. DEPUTY COMMISSIONER OF INCOME TAX, 346 ITR 207 at para 16, 17 & 18; there is no quarrel with the said proposition at all; the quarrel is with the invokability thereof in the case at hands, regard being had to a specific reason assigned by the answering respondent as to non-deduction of TDS and not as to failure on the part of the assessee to disclose such deduction; even otherwise, the decision cited does not come to the rescue of the Revenue since there was sufficient material on record, to form an opinion as to the failure on the part of the assessee to disclose in that case; thus the facts of the present case are miles away from that of the decision cited; and,
(e) the last contention of the counsel for the Revenue that the matter be remanded for consideration afresh inasmuch as the file relating to the petitioner may disclose some reasons is bit difficult to countenance, even by assuming that the said contention is factually true; the Constitution Bench of the Apex Court in the case of MOHINDER SINGH GILL vs. CHIEF ELECTION COMMISSIONER, AIR 1978 SC 851 at paragraph 8 observed as under:
“8. The second equally relevant matter is that when a statutory functionary makes an order based on certain grounds, its validity must be judged by the reasons so mentioned and cannot be supplemented by fresh reasons in the share of affidavit or otherwise. Otherwise, an order bad in the beginning may, by the time it comes to court on account of a challenge, get validated by additional grounds later brought out”.
In the above circumstances, the writ petition is allowed; a Writ of Certiorari issues quashing the impugned notice and proceedings and consequently the re-opening of assessment of the income of the petitioner for the Assessment Year 2010-11 is interdicted.
No costs.
