Article on Reopening of Assessment Beyond Period of Four Years when Assessment Already Finalised Under Section 143(3) and All Material Facts Disclosed During Assessment Proceedings

It is a trite law that when a statute provides a particular thing to be done in particular manner then the same has to be done in that manner only and in no other manner. While interpreting the statute no word can be added or deleted in normal course. The section has to be read as a whole and not in parts. It is now a well settled rule of construction that where the plain literal interpretation of a statutory provision produces a manifestly absurd and unjust result which could never have been intended by the legislature, the court may modify the language used by the legislature or even ‘do some violence’ to it, so as to achieve the obvious intention of the legislature and produce a rational construction. Here we are discussing Section 147 of the Income Tax Act 1961 which gives powers to Assessing Officer to re-open a case. The section is reproduced below for ready reference:

Income escaping assessment.

147. 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 148to 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 recompute 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:

The first proviso to Section 147 is very important which empowers the Assessing Officer to reopen a case after the expiry of four years from end of assessment year in case an assessment has already been made under section 143(3) and all the material facts which were necessary were not disclosed during assessment proceedings. In this regard following case laws are discussed in brief :

1. Delhi High Court in Sabh Infrastructure v. ACIT 398 ITR 198.

1. The Petitioner seeks the quashing of a notice dated 20th March, 2015 issued under Section 148of the Income Tax Act by the Assessing Officer  and the order dated 1st February, 2016 passed by the AO disposing of the objections filed by the Petitioner to the said notice.

2. The Petitioner is a company engaged in the business of real estate and property development. It filed its return of income for the AY 2008-09 on 30th September, 2008 declaring a total income of Rs.59,83,183/-. A questionnaire dated 4th August, 2010 was issued to the Petitioner by the AO seeking details and documents as a part of the assessment proceedings. One such detail sought for was with respect to ‘share application money received, if any, during the year’. The Petitioner replied to the questionnaire on 11th October, 2010. In its reply, the Petitioner disclosed complete details of share capital allotted during the year. All the documents which were necessary were produced during assessment proceedings. An assessment order under Section 143 (3) of the Act was passed by the AO on 20th December, 2010, after the details regarding the five companies and their confirmations were submitted. The assessment order, however, did not contain any discussion in respect of the share application money. It thus appeared that the AO accepted the information furnished by the Petitioner and raised no further doubt or queries in respect to the same.

3. On 20th March, 2015, a notice was issued under Section 148of the Act on the ground that income had escaped assessment. Reasons to believe were extracted and furnished on 16th December, 2015, which stated that the case is sought to be reopened on the basis of information received from Investigation Wing of Income Tax Department which is based on statement of  one Sh. Navneet Kumar Singhania, recorded on oath u/s 131 of the IT Act, 1961 on 18.03.2014. In his statement, Sh. Navneet Kumar Singhania admitted that he is an entry operator. He also admitted that his source of income is from commission earned in lieu of giving service in the form of giving cheques to his clients in return for cash. He has also admitted that he was operating paper companies which had provided book entry to M/s Sabh Infrastructure Limited. Since in the light of new facts, it has been established that these companies, from whom share premium has been received by M/s Sabh Infrastructure Limited are not genuine  the assessment was reopened. Since, in the instant case, the period of 4 years has expired and income escaped by reasons of the failure on the part of the Assessee to show true particulars of his income, Accordingly, the case falls under Section 151 (1) of the IT Act, 1961, therefore, the reasons were put up before concerned CIT for necessary approval for issue of notice u/s 148 of the IT Act, 1961 for the purpose of reopening of assessment u/s 147 of the Income Tax Act, 1961.

4. The Petitioner objected to the reopening of assessment under Sections 147 and 148 of the Act. In the said objections, the Petitioner contended that the reasons to believe do not contain any allegation as to what material facts and information the Petitioner had failed to disclose. Apart from raising various jurisdictional objections, the Petitioner also raised objections on merits. The objections were rejected by the AO on 1st February, 2016.

5. The assessee’s counsel submited that there was no failure to disclose fully and truly all material facts, during the assessment proceedings. The assessee had candidly disclosed the names of all the five companies, the share amount received from them as also the share premium amount received. All the necessary papers were filed during assessment proceedings which ultimately culminated in an assessment order not showing any addition on this account. It was also stated that the AO has merely relied on the statement of Mr. Navneet Kumar Singhania without making any further examination whereas he was duty bound to do. No report of investigation wing was supplied to assessee.

6. On behalf of the revenue it was stated that at the time of assessment proceedings, the AO never had the information that these companies were ‘paper companies’, and that this information was in fact concealed by the Petitioner. Therefore, the fact that the AO subsequently received information that the said companies were ‘paper companies’ was sufficient to justify the issuance of the notice under Sections 147and 148 of the Act.

The law on this subject is well settled, the powers under Section 147 of the Act have to be exercised after a period of four years only if there is a failure to disclose fully and truly all material facts and information, by the Assessee. This legal position has been reiterated recently by this Court in Oracle India Pvt. Ltd. v. ACIT 2017 SCC OnLine Del 9360, Unitech Limited v. DCIT 2017 SCC OnLine Del 9408, BDR Builders and Developers Pvt. Ltd. v. ACIT 2017 SCC OnLine Del 9425 and in judgment dated 30th August, 2017 in W.P.(C) 5807/2014 (Swarovski India Pvt. Ltd. v. Deputy Commissioner of Income Tax).

In this case the reopening was set aside and all further proceedings were also declared as null & void.

2. Supreme Court of India in New Delhi Television Limited v DCIT 424 ITR 607

The Hon’ble Supreme Court  has quashed the reassessment proceedings initiated on New Delhi Television Limited. The reopening was initiated beyond 4 years for alleged INR 405.09 crore ‘unaccounted money’ case introduced to the Taxpayer’s subsidiary based in United Kingdom (UK) named NDTV Network Plc. (UK Sub) by way of issuance of step-up coupon bonds during financial year (FY) 2007-08 [relevant for assessment year (AY) 2008-09], for which the Taxpayer agreed to furnish a corporate guarantee. In doing so, the Supreme Court ruled that there was no failure on the part of the Taxpayer to disclose all material facts necessary for the purpose of making assessment and thus, the reassessment proceedings were in excess of jurisdiction.

In this case, during FY 2007-08, the Taxpayer’s UK Sub issued step-up coupon bonds amounting to US $ 100 million for which the Taxpayer agreed to furnish a corporate guarantee. The Taxpayer’s case was selected for scrutiny during FY 2007-08 and an original assessment order was passed. While passing the original assessment order, the Assessing Officer observed that UK Sub had virtually no financial worth. The Assessing Officer further held that UK Sub could not have raised such a huge amount without having this assurance from the Taxpayer. Though the Taxpayer had never actually issued a guarantee, the Assessing Officer made a transfer pricing adjustment in the hands of Taxpayer by imposing a guarantee fee. Pertinently, the Assessing Officer, however, did not doubt the validity of the transaction.

Subsequently, the Assessing Officer served Notice to the Taxpayer on 31 March 2015 (i.e. within 6 years from the end of relevant AY 2008-09) wherein it was stated that he had ‘reason to believe’ that income chargeable to tax for FY 2007-08 (relevant for AY 2008-09) has escaped assessment. Thereafter, at the request of the Taxpayer seeking reasons for reopening the assessment, such reasons were provided on 04 August 2015. The reopening was mainly based on the observations of the Dispute Resolution Panel (DRP) for subsequent AY which held that Taxpayer’s transaction with its subsidiary companies based in Netherlands were ‘sham’ and ‘bogus’ transaction and that these transactions were done with a view to get the undisclosed income for which no tax was paid, back to India through circuitous round tripping. The Assessing Officer also observed that US Sub had a capital of only 40 Lakhs, no business activities were carried out by it in UK except a postal address. The Assessing Officer was thus of the opinion that it was unnatural for anyone to make such a huge investment in a virtually non-functioning company. He thus inferred that it was Taxpayer’s own funds introduced in UK Sub in the garb of the impugned bonds. The Assessing Officer also relied upon complaints received from minority shareholders in which it was alleged that the money introduced in UK Sub was shifted to another subsidiary of the Taxpayer in Mauritius from where it was taken to a subsidiary of the Taxpayer in Mumbai and finally to the Taxpayer. Further observing that UK Sub itself was placed under liquidation on 28 March 2011, the Assessing Officer opined that there were reasons to believe that the funds received by UK Sub were the funds of the Taxpayer under a ‘sham’ transaction and that the amount of INR 405.09 crores introduced into the books of UK Sub through the transaction involving the step-up coupon convertible bonds pertains to the Taxpayer.

During the reassessment proceedings, the Taxpayer objected the reopening and argued that the reassessment proceedings have been initiated merely on the basis of a ‘change in opinion’ and there was no ‘reason to believe’. It was also submitted that the transaction was treated as genuine by the Assessing Officer during original assessment proceedings by levying only the guarantee fees. Since Notice was issued after the limitation period of 4 years and as there was no failure on the Taxpayer’s part to disclose fully and truly all material facts necessary to make an assessment, reopening was not valid.

The Assessing Officer passed order dated 23 November 2015 dismissing the objections (Rejection Order) raised by the Taxpayer on the reopening. Notably, in the said Rejection Order, the Assessing Officer also stated that as UK Sub was a foreign entity, the extended limitation period of 16 years would be applicable for issuing the Notice.

The Taxpayer challenged the validity of such reopening by way of filing the writ petition before the Hon’ble Delhi High Court (High Court) which was dismissed. Aggrieved by the decision of the Hon’ble High Court, the Taxpayer filed appeal before the Hon’ble Supreme Court.

The Supreme Court observed that there was no failure on the part of the Taxpayer to fully and truly disclose primary material facts necessary for making assessment. In this regard, the Supreme Court observed as under:

  • Factum of the issuance of convertible bonds and their redemption was given. The Taxpayer had also made a disclosure about having agreed to stand guarantee for the transaction made by UK Sub
  • The fact that the bonds were discounted at a lower rate was also disclosed before the assessment was finalized. The transaction was accepted by the Assessing Officer, genuineness of the transaction was not in doubt and he was of the view that the Taxpayer was liable to receive only guarantee fees for which necessary transfer pricing adjustments were made to the Taxpayer’s income;
  • Communication dated 08 April 2011 sent by UK Sub to Deputy Director of Income-tax (Investigation), wherein name of all the bondholders along with their names, address, number of bonds along with total consideration were submitted. This details also formed part of the Taxpayer’s subsidiaries in their assessment orders dated 03 August 2012 in the case of NDTV Labs Ltd and NDTV lifestyle Ltd wherein the same Assessing Officer was involved. Thus, entire material was available with the Assessing Officer before passing the original assessment order. Relying on its Constitution bench in Calcutta Discount Co. Ltd v ITO AIR 1961 SC 372, the Supreme Court ruled that Taxpayer was only required to disclose fully and truly material facts that are ‘primary’ facts. Non-disclosure of other facts which can be termed as ‘secondary’ facts was not necessary. The Supreme Court further noted that while the tax department was arguing that the Taxpayer was guilty of non-disclosure of material facts, however, before the High Court the tax department argued that requirement of non-disclosure of material fact was not warranted as the income escapement related to foreign assets. The Supreme Court accordingly ruled that the tax department cannot now turn around and urge that the Taxpayer was guilty of non-disclosure of facts. Supreme Court further remarked that revenue could not be permitted to ‘blow hot and cold’ at the same time.

3. ITAT Delhi has in the case of Garg Zevar Palace Pvt. Limited vs. ITO Ward No. II(3), Faridabad in ITA No. 9542/Del/2019 dated 26.3.2021

It was held that Section 147 mandates that the case can only be reopened after expiry of four years only if there was a failure on the part of the assessee to fully and truly disclose all material facts necessary. The assessee has disclosed the fact of receipt of Rs.60,00,000/- towards the share capital in the regular return filed which has been scrutinized u/s 143(3). In the reasons recorded for reopening, the Assessing Officer has not mentioned anything with regard to failure on the part of the assessee to disclose all the material facts. This matter has been examined by the Hon’ble Apex Court in the case of NDTV Ltd. Vs DCIT, by the Hon’ble Jurisdiction High Court in the case of BPTP Ltd. Vs PCITHaryana Acrylic Manufacturing Company Vs CIT. The Co­ordinate bench of Tribunal in the case of RMP Holdings Pvt. Ltd. relied on judgments of the Hon’ble Courts and held that the Assessing Officer has to specifically record reasons with regard to failure of the assessee to disclose fully and truly all material facts. In view of the above, we quash the reassessment proceedings initiated u/s 147/148.

On the basis of above decided cases reopening after four years where all material facts were disclosed during assessment proceedings is not valid.

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