No Reassessment After 4 Years for AO’s Error in Computing Income When Material Facts Fully Disclosed

Shrenik Kumar N. Baldota Vs DCIT (Bombay High Court)

Bombay High Court ruled in favor of Shrenik Kumar N. Baldota, quashing an income tax reassessment notice issued under Section 148 of the Income Tax Act, 1961. The case pertained to the assessment year 2015-16, with the reassessment notice issued on March 27, 2021. The petitioner challenged the validity of the proceedings, arguing that the notice lacked jurisdictional basis as required under Section 147 of the Act.

The court examined the reasons for reopening the assessment, which were based on discrepancies in interest income and deductions under Section 57(iii). The petitioner contended that there was no failure to disclose material facts, as all relevant information had been submitted during the original assessment under Section 143(3). The reassessment was sought on the ground that the previous assessing officer had not computed the income correctly. The petitioner argued that such reasoning did not satisfy the jurisdictional requirement under the first proviso to Section 147, which mandates non-disclosure of material facts as a prerequisite for reassessment after four years.

The court found that the reassessment proceedings were initiated solely on information already available in the original assessment and not based on any new material or evidence. It reiterated that mere audit objections do not constitute tangible new information for reassessment. Reassessment cannot be used as a tool for reviewing an earlier decision. Since the petitioner had disclosed all material facts, the conditions for invoking Section 147 were not met, rendering the reassessment notice invalid.

The judgment concluded that the petitioner’s objections were not adequately addressed in the reassessment order. The failure of the tax authorities to rebut the petitioner’s claims indicated acceptance of the objections. Consequently, the court quashed the reassessment notice and subsequent orders, reaffirming the principle that reopening assessments must be based on substantive grounds and not mere procedural errors or audit observations.

FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT

1. Heard learned counsel for the parties.

2. The Rule is made returnable immediately at the request and with the consent of the learned counsel for the parties.

3. This Petition is filed for the assessment year 2015-2016 challenging re-assessment notice dated 27 March 2021 under Section 148 of the Income Tax Act, 1961 (“the said Act”). The reasons recorded reads as under :-

“The assesse company has filed return of income for A.Y. 2015-16 on 25.09.2015 declaring total Income of Rs. 107,15,89,910/- under normal provisions of the IT Act, 1961. The case was selected for Scrutiny assessment under CASS selection. Assessment u/s, 143(3) of the I.T. Act was completed on 09.11.2017 accepting the same as the assessed income.

1. During the year under consideration the assessee received Income from salary, house property, business, capital gains and other sources.

2. On perusal of the Profit & Loss account for the year ending 03.2015, it is noticed that the assesse had an interest income of Rs. 2,75,81,210/- the details are as below/-

1. During the assessment proceedings the assesse has also filed details of interest receipts shown as income in capital As per the details the total interest receipt during the year is Rs. 3,92,77,790/-. The details are as under.

1. Out of these interest receipts, interest from PPF of 2,47,715/- and PF of Rs. 1,25,43,340/- totaling to Rs. 1,27,91,055/- are non taxable income, therefore rightly excluded from the computation of income. But no explanation has been submitted for non exclusion of interest from Pragati Gramin Bank of Rs. 5,48,720/-. Even there is a difference in the “interest – others’ shown in the computation and capital account. In capital account interest – others is Rs. 2,54,942/-where as in computation interest – others is Rs. 6,68,159/-. In absence any bifurcation, it is not clear whether interest of Rs. 2,54,942/- is part of interest – others shown in the computation.

2. From the above discussion, it can be concluded that interest from Pragati Gramin Bank of 5,48,720/- and interest – others of Rs 2,54,942/- has not been included in the computation of income by the assesse. The AO has accepted the computation submitted by the assesse in the assessment order. This resulted in under assessment of Rs. 8,03,662/- involving tax effect of Rs. 2,73,165/- (excluding interest u/s 234A, 234B and 234C).

3. Further it was seen that the assesse had submitted vide letter dated 09.2017 that he had borrowed funds of Rs. 20,74,59,584/- from Pragati Gramin Bank, Hospet and advanced loans amounting to Rs. 1,77,39,11,205/- The assessee further submitted that interest of Rs. 1,75,52,396/- was paid to Pragati Gramin Bank. On perusalof the details available on the records, it is seen that the assessee has received interest only from loans advanced to MSPL Gases Ltd. In his submission dated 25.10.2017, the assessee had given details of loans borrowed from the bank and loan advanced to M/s MSPL Gases Ltd. from these details, it is observed that though the loan amount from the Gramin Bank has been increased from Rs. 14,81,16,106/-as on 31.03.2014to Rs. 20,74,59,583/- as on 31.03.2015, whereas loan advanced to MSPL Gases Ltd has been decreased from Rs. 57,80,37,737/- as on 31.03.2014 to Rs. 51,93,87,961/- as on 31.03.2015. It is pertinent to mention that on perusal of loan confirmation of MSPL Gases Ltd, it is seen that no fresh loan was advanced by the assessee to the company during the financial year 2014-15. Therefore the increased amount of loan taken from Pragati Gramin Bank of Rs. 5,93,43,477/- cannot be said to have been utilized for giving loans to MSPL Gases Itd by the assessee. The AO should not have been allowed proportionate interest of Rs. 50,20,834/- on the amount of Rs. 5,93,43,477/- as deduction u/s 57(iii) of the act.

4. This resulted in total under assessment of income by 58,24,496/- (Rs. 8,03,662+ Rs. 50,20,834/-).

5. Thus I have reason to believe that income in excess of 1,00,000/- chargeable to tax has escaped assessment in this case, for the assessment year 2014-15. The word reason in the phrase ‘reason to believe’ would mean cause or justification. If the Assessing Officer has cause or justification to know or suppose the income had escaped assessment, it can be said to have reason to believe that the income had escaped assessment. The expression cannot be read to mean that the Assessing Officer should have finally ascertained the fact by legal evidence or conclusion, objectively. In the present case, since the assessee has failed to substantiate its payments towards interest on loan taken from the banks, it leads-to-enough cause for forming of belief by the undersigned regarding of income during the year under consideration.

6. The reason for re-opening the assessment u/s. 148 is enclosed herewith for your You are requested to file your objection if any, within 15 days from the receipt of this mail, otherwise it will be considered as accepted by you.”

4. The Petitioner vide letter dated 22 July 2021 filed his objections which were disposed of vide order dated 11 February Since the order rejected the objections raised by the Petitioner, the Petitioner is before us challenging the impugned proceedings.

5. Mr. Mody, learned counsel for the Petitioner, submits that there is no allegation of any failure to disclose fully and truly any material facts necessary for the assessment as mandated by first proviso to Section 147 of the said Act and, therefore, the jurisdictional condition is not satisfied. He further submits that on a perusal of the reasons recorded, it clearly demonstrates that reasons are based on what was filed during the course of the regular assessment proceedings. He further submits that the successor Assessing Officer is seeking to re- open on the ground that the predecessor officer has not computed the assessed income correctly. Mr. Mody, therefore, submits that the proceedings are without jurisdiction and bad in law.

6. Mr. Suresh Kumar, learned counsel for the Respondents placed reliance on the order rejecting the objections and the affidavit-in-reply dated 27 June 2023. He states that the re-opening is done based on the audit objections and, therefore, that constitutes new and tangible information for assuming jurisdiction. He vehemently opposed the submissions made by the Petitioner.

7. We have considered the rival submissions and perused the Admittedly, the impugned notice is issued after a period of four years from the end of the relevant assessment year and proviso to Section 147 is attracted.

8. In this case, the assessment order under Section 143(3) of the said Act was passed on 9 November Therefore, first proviso to Section 147 is clearly attracted, whereby the Assessing Officer has to satisfy the jurisdictional condition that there was failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. On a reading of the reasons for re-opening, we could not find any allegations as contemplated under the first proviso to Section 147 of the said Act indicating that there was any failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. Based on the reasons recorded, it is apparent that the information has been culled out from the documents and submissions made in the course of the regular assessment proceedings. The reasons recorded admits that the predecessor officer has not assessed the income correctly. In our view, based on the reasons as recorded the jurisdictional condition contemplated by the first proviso to Section 147 cannot be said to have been satisfied and, therefore, the impugned proceedings are required to be quashed.

9. We may also observe that the Petitioner in its objections had raised the jurisdictional objections which is required to be satisfied before re-opening the None of these objections has been rebutted by the Assessing Officer while disposing the order rejecting the objections. The order rejecting objections merely reproduces various judgments. In our view, in the absence of any rebuttal to the objections raised by the Petitioner, it shall be presumed that the Respondents have accepted the objections raised by the Petitioner and, therefore, the impugned proceeding is liable to be quashed.

10. Lastly, in the reply filed to this petition, Respondents have relied on the audit objections to justify the re-opening. It is settled position that the jurisdiction of re-opening has to be tested on the touchstone of the reasons as recorded and nothing can be added or subtracted Neither in the reasons recorded nor in the order deciding the objections it is stated that the re-opening is done on the basis of audit objections and, therefore, the contentions raised on this count is also to be rejected.

11. For the above reasons, Rule is made absolute in terms of prayer clause (a) which reads as under :-

“(a) Declare that the impugned notice under section 148 of the Act dated 27 March, 2021 (Exhibit F) and the impugned order dated 11 February, 2022 (Exhibit J) are wholly without jurisdiction, illegal, arbitrary and liable to be quashed;”

12. This Petition is disposed of with no order as to costs.