Navkar Share and Stock Brokers Vs ACIT (Gujarat High Court)
Summary: The Gujarat High Court, in M/s Navkar Share and Stock Brokers Vs Assistant Commissioner of Income Tax, allowed the assessee’s writ petition challenging the reopening of assessment for Assessment Year 2011-12 under Sections 147 and 148 of the Income Tax Act, 1961. The dispute arose from a notice dated 27 March 2018 and a subsequent order dated 15 June 2018, issued after completion of the original scrutiny assessment under Section 143(3) on 12 March 2014. The Revenue alleged that income of ₹38,43,866 had escaped assessment because the assessee had incorrectly claimed set-off of business losses and unabsorbed depreciation and had failed to deposit tax deducted at source on commission payments within the prescribed period. The High Court examined whether these matters, already forming part of the original scrutiny proceedings, could justify reassessment beyond four years from the end of the relevant assessment year.
The assessee had originally filed its return of income for AY 2011-12, which was selected for scrutiny. During those proceedings, the Assessing Officer sought explanations regarding various aspects of the assessee’s financial affairs, including bank accounts, dividend income, mutual fund investments, disallowance under Section 14A read with Rule 8D, earlier assessments for AYs 2008-09, 2009-10 and 2010-11, and additions or disallowances relating to depreciation. The assessee furnished the relevant documentary evidence and explanations. After considering the material, the Assessing Officer completed the assessment on 12 March 2014, determining total income at ₹24,73,826. The assessment also included additions relating to Section 14A, bad debts and Annual Maintenance Contract expenses. For the purposes of Section 115JB, a disallowance of ₹5,02,284 under Section 14A was added back, resulting in recomputed book profit of ₹7,61,312.
Notwithstanding the completed scrutiny assessment, the Assessing Officer issued a notice under Section 148 on 27 March 2018, proposing to reopen the assessment on two grounds. First, the Department alleged that the assessee had not disclosed correct facts regarding set-off of business losses and unabsorbed depreciation amounting to ₹32,01,046. According to the Revenue, the assessee was aware of the positive income assessed for preceding assessment years but had nevertheless claimed incorrect relief in AY 2011-12. Second, the Department alleged that TDS amounting to ₹64,282 on commission had been paid on 31 January 2012, after the due date for filing the return, resulting in disallowance under Section 40(a)(ia). On the basis of these two objections, the Revenue maintained that income chargeable to tax had escaped assessment.
Appearing for the assessee, Senior Advocate R.K. Patel contended that neither ground disclosed any failure to furnish material facts during the original assessment. Both issues had been specifically examined by the Assessing Officer under Section 143(3). The assessee had supplied explanations concerning the depreciation position for earlier assessment years and had clarified the relevant claims made in AY 2011-12. The assessment order demonstrated that the Assessing Officer had considered the accounts, made the disallowances considered necessary and computed the assessed income. Regarding the TDS issue, the assessee submitted that the matter had already been examined and subsequently dropped. It was therefore argued that reopening the assessment on the same material amounted to an impermissible review of the Assessing Officer’s own earlier decision rather than a lawful reassessment.
The Revenue, represented by Senior Standing Counsel Maunil G. Yajnik, opposed the petition. Relying on the affidavit-in-reply, the Department argued that the assessee had failed to disclose the correct position regarding earlier years’ taxable income and the set-off of business losses and unabsorbed depreciation. The Department also maintained that the TDS on commission had been deposited after the prescribed due date of 30 September 2011, thereby attracting disallowance under Section 40(a)(ia). According to the Revenue, these discrepancies had resulted in underassessment of income and furnished sufficient justification for initiating reassessment proceedings. The Department consequently urged the High Court not to interfere with the reopening at that stage.
After examining the documents and the original scrutiny assessment proceedings, the High Court found that the reassessment notice could not be sustained. The Court noted that the Assessing Officer had called for and examined information regarding the assessee’s bank accounts, investments, dividend receipts, earlier assessments, disallowances and depreciation claims. The assessee had furnished detailed explanations, and the original assessment had been completed after consideration of these matters. Importantly, the assessee had expressly clarified that depreciation had not been claimed during the assessment year under consideration. The Court therefore found that the relevant particulars concerning unabsorbed depreciation had already been fully disclosed. The attempt to reopen the assessment on that ground was consequently based on a reconsideration of material available during the original scrutiny.
On the second issue concerning TDS, the High Court referred to the assessee’s objections dated 15 May 2018, which addressed the allegation of escapement of income arising from the deposit of TDS on commission. The judgment records the amount in this context as ₹64,202, while the earlier description of the reopening grounds mentions ₹64,282. The Court observed that the Assessing Officer had already dropped proceedings concerning the TDS issue. Having done so, the officer could not once again pursue the same matter through a notice under Section 148. The Court emphasised that the reassessment notice itself referred to shortcomings allegedly noticed upon scrutiny of the assessment proceedings, thereby demonstrating that the Assessing Officer was attempting to review the earlier assessment decision. Such an exercise could not be justified merely by identifying alleged lacunae in the same assessment record.
The High Court relied on the Supreme Court’s decision in Parshuram Pottery Works Company Limited Vs ITO, (1977) 106 ITR 1 (SC), which emphasises the necessity of finality in legal and tax proceedings. The Supreme Court precedent was applied for the proposition that reopening after expiry of four years from the end of the relevant assessment year is impermissible, in the applicable statutory circumstances, unless there has been a failure by the assessee to disclose fully and truly all material facts necessary for the assessment. The Gujarat High Court found that the petitioner had already supplied the necessary documentary evidence during scrutiny and that the Revenue’s grounds did not establish the requisite failure of disclosure. The reopening therefore represented an impermissible reconsideration of matters already examined in the original proceedings.
Accordingly, the Gujarat High Court held that the reassessment proceedings initiated for AY 2011-12 were unsustainable. The Court allowed the writ petition and quashed and set aside the notice dated 27 March 2018 issued under Section 148 as well as the order dated 15 June 2018. The decision reiterates that where the assessee has made a full and true disclosure of material facts and the Assessing Officer has already examined the relevant issues during scrutiny, the Revenue cannot reopen the assessment beyond the applicable four-year period merely to reconsider the original conclusions. The ruling reinforces the statutory limitation on reassessment powers and the principle that completed assessments cannot be subjected to repeated review without satisfying the jurisdictional requirements of Section 147.
Cases Discussed
- Parshuram Pottery Works Company Limited Vs Income Tax Officer, (1977) 106 ITR 1 (Supreme Court) — The Gujarat High Court relied on this decision for the principle that tax proceedings must attain finality and that reopening after four years requires the statutory condition relating to failure to disclose fully and truly all material facts to be satisfied. See also the TaxGuru discussion of the Supreme Court precedent.
FULL TEXT OF THE JUDGMENT/ORDER OF GUJARAT HIGH COURT
1. In the present writ petition, the petitioner has prayed for quashing and setting aside notice dated 27.03.2018 issued under Section 148 of the Income Tax Act, 1961 (for short ‘the IT Act’) along with the order dated 15.06.2018. The petitioner filed return of income for Assessment Year (for short ‘A.Y.’) 2011-12 which was subjected to scrutiny assessment under Section 143(3) of the IT Act, and a final assessment order dated 12.03.2014 was passed. Thereafter impugned notice dated 27.03.2018 was served upon the petitioner Company seeking reopening of the assessment for A.Y. 2011-12 for the two reasons; one, that the petitioner did not disclose the correct facts and claimed set off of business loss and unabsorbed depreciation of Rs.32,01,046/- for A.Y. 2011-12 which resulted into escapement of income, and second, the assessee paid Tax Deducted at Source (for short ‘TDS’) on commission amounting to Rs.64,282/- on 31.01.2012 after filing return of income, which resulted into the under assessment of income as the entire amount is to be disallowed under Section 40(a)(ia) of the IT Act. Thus, it is alleged that a total income of Rs.38,43,866/- has escaped assessment.
2. Learned Senior Advocate Mr.R.K. Patel at the outset has submitted that in the scrutiny assessment both the facets were examined by the Assessing Officer after the petitioner had pointed out the relevant documentary evidence and the explanation and the assessment order under Section 143(3) of the IT Act on 12.03.2014 was passed. He has invited attention of this Court to both the issues which are pointed out by the petitioner in his reply which had been examined by the Assessing Officer.
2.1 It is submitted that second aspect of the TDS which is already paid by the petitioner was undertaken in the scrutiny assessment but was thereafter dropped, whereas the non-claiming of the depreciation is concerned, the petitioner in his reply had also pointed out the same and ultimately the Assessing Officer has examined the disallowance of depreciation for A.Y. 2008-09, 2009-10 and 2010-11. While pointing out the assessment order passed under Section 143(3) of the IT Act he has submitted that the Assessing Officer after computation of the income of the petitioner has confined the disallowance of amount of Rs.24,73,826/- and had recomputed the book profit which worked out to be Rs.7,61,312/- under Section 115JB of the IT Act and the income is ultimately assessed at Rs.24,73,826/-. Thus, it is submitted that by the impugned notice issued under Section 148 of the IT Act the Assessing Officer has attempted to review his own decision after again scrutinizing the assessment under Section 143(3) of the IT Act, which lacks proprietary as well as jurisdiction on behalf of the Assessing Officer. Thus, it is submitted that the provision of Section 147 of the IT Act would not get attracted in the present case as there is no suppression by the petitioner in any manner in disclosing the amount as well as the claims in the original scrutiny assessment.
3. Per contra, learned Senior Standing Counsel Mr.Maunil G. Yajnik while placing reliance on the affidavit-in-reply, has submitted that the assessee in the scrutiny assessment has not disclosed the correct facts and claim set off of business loss and an unabsorbed depreciation of Rs.32,01,046/- for A.Y. 2011-12 has resulted into escapement of income. It is submitted that though the assessee was well aware of the income assessed for the previous years 2009-10 and 2010-11 which was assessed as a positive income, after having paid the taxes, did not disclose the correct income of A.Y. 2011-12, and hence on this aspect the reopening of the assessment may not be disturbed. Similarly, it is submitted that the assessee paid the TDS on commission amounting to Rs.64,282/- on 31.01.2012 after filing of the return of income of A.Y. 2011-12 i.e. after the due date of 30.09.2011. Hence, the TDS so deducted was required to be deposited in the government account before due date of filing of the return, which has resulted into under assessment of income and the entire amount is to be disallowed under Section 40(a)(ia) of the IT Act. Thus, it is urged that the reassessment may not be interfered at this stage.
4. Upon close scrutiny of the documents which are produced on record and on analysis of the scrutiny assessment proceedings for A.Y. 2011-12, we find that the impugned notice issued under Section 148 of the IT Act seeking reopening of the assessment for A.Y. 2011-12 in case of the petitioner is required to be quashed. As previously recorded by us the revenue has attempted to reopen the assessment for A.Y. 2011 on two aspects; one, relating to the unabsorbed depreciation, and the second on the deduction of TDS.
5. It is noticed by us that in the scrutiny assessment proceedings when the petitioner was called upon to explain the nature of all the bank accounts which were maintained by the petitioner, details on disallowance under section 14A of the IT Act, the details of dividend received by the petitioner, details of investment made in mutual funds, details of preceding years of assessment under Section 143(3) of the IT Act for years 2008-09, 2009-10 and 2010-11, and the additions made in the disallowance of depreciation, the petitioner explained the same in detail.
6. Thereafter, the assessment order on 12.03.2014 under Section 143(3) of the IT Act was passed by the Assessing Officer, and the income of the assessee was assessed at Rs.24,73,826/-. We find that the Assessing Officer computed the income of the assessee after disallowance under Section 14A of the IT Act read with Rule 8D of the Income Tax Rules, 1962, disallowance of bad debts and disallowance of Annual Maintenance Contract (for short ‘AMC’), and arrived at the total income of Rs.24,73,826/-. Simultaneously, the sum of Rs.5,02,284/- being disallowance under Section 14A of the IT Act is added back to the book profit and the book profit under Section 115JB of the IT Act which was recomputed and revised to Rs.7,61,312/-. Thus, we find that the petitioner had fully disclosed the unabsorbed depreciation of the previous years in the scrutiny proceedings. The petitioner had categorically in its reply had clarified that it had not claimed the depreciation during the year under consideration.
7. So far as the aspect of TDS is concerned, the petitioner had objected the alleged escapement of income on dposit of TDS on commission of Rs.64,202/- after filing the return of income for A.Y. 2011-12 before the Assessing Officer vide its objection dated 15.05.2018, and we find that the respondent Assessing Officer has already dropped the proceedings, and hence, after such dropping of the proceedings, it was not open for the Assessing Officer to again venture on the such issue by issuing the notice under Section 148 of the IT Act. Thus, in fact, by reopening of the assessment and issuance of notice under Section 148 of the IT Act, the Assessing Officer has attempted to review its own decision, and the same is reflected from the impugned notice as it specifically mentions that on the scrutiny of the assessment proceedings the aforesaid lacuna has been noticed which led to the belief of the Assessing Officer to reopen the assessment.
8. The Hon’ble Supreme Court in case of Parshuram Pottery Works Company Limited Vs. ITO, 1977 (106) ITR 1, has held that the provisions of Section 147 of the IT Act can only be attracted if there is a failure on the part of the tax-payer to fully and correctly disclose the income. It is also held that the policy of law is that there must be a point of finality in all legal proceedings and that stale issues should not be reactivated beyond a particular stage. It was held that the reopening of the assessment is not permissible after a period of expiry of four years from the end of assessment year unless there is omission or failure on the part of assessee to disclose fully and truly all material facts necessary for the assessment.
9. We find that the petitioner in the scrutiny proceedings had already disclosed all the aspects by providing the necessary documentary evidence, which resulted into the assessment order dated 12.03.2014.
10. In light of the foregoing observations, the writ petition stands allowed. The impugned notice dated 27.03.2018 as well as the order dated 15.06.2018 are hereby quashed and set aside.
