Change of Opinion on A Particular Matter, Whether Reopening of Assessment Possible?

CHANGE OF OPINION BY AO/SUCCESSOR AO ON A PARTICULAR MATTER WHETHER REOPENING OF ASSESSMENT POSSIBLE?

There has been constant reopening of assessments by Assessing Authorities on mere change of opinion while law is well settled on the point that an assessment cannot reopened by recourse to section 147/ 148 of the Income tax Act, 1961(for short ‘the Act’) on mere change of opinion of the Assessing Officer(AO).

Recently, in Director Of Income Tax International Taxation-II vs. Rolls Royce Industrial Power India Ltd [ITA No. 1058/2011 with ITA Nos. 1061/2011 and 1063/2011, decided on 18.05.2017], the main question was whether on the facts and circumstances of the case, ITAT was right in law in holding that assumption of jurisdiction under section 148 of the Act was not valid.

The issue in brief:

In the above case, the AO reopened the assessments under Section 147 read with 148 of the Act for the three AYs in question, i.e., 1998-1999, 1999-2000 and 2001-2002 of the assessee-company incorporated under the laws of the United Kingdom (U.K.) which during the AYs in question, was engaged, inter alia, in the business of erection, commissioning, supervision, operation and maintenance of power plants. The business activities in India were carried out by the assessee through various projects, offices, located in India. The reasons were issued by the AO on 28.03.2005. It was noted inter alia by him therein that in the original assessment orders under section 143(3) of the Act that no opinion with regard to taxation of technical services in question has been formed by the then AO. It was further stated that the facts relating to the nature of income being fees for technical services have never been brought to the notice of the AO.

The assessee objected to the reopening inter alia on the ground that it was based on mere ‘change of opinion’. Its objections were rejected by an order dated 09.09. 2005.

The reassessments were completed by treating the payments as fee for technical services(FTS). The assessee then carried the matter by way of appeals to the CIT(A). By a common order dated 29.12.2006 passed in the appeals pertaining to the three AYs in question, CIT(A), relying on the decision of the Division Bench (DB) of Delhi High Court in Consolidated Photo and Finvest Ltd. vs. ACIT [2006] 281 ITR 394(Del), came to the conclusion that since the original assessment orders were silent on the aspect of treating the payments received by the assessee as FTS, the jurisdictional pre-condition for attracting section 147 of the Act stood fulfilled.

On appeal to the Delhi ITAT, it examined the assessment orders, queries raised by the AO and the other material on record and concluded that the assessee had duly disclosed the very nature of its activities. As regards the observation of the AO that the assessee should have filed the accounts of each project individually, instead of filing the consolidated statement of accounts, the ITAT noted that the assessee had been filing audited accounts. It opined that it was the duty of the AO to have examined this aspect in the scrutiny assessment. Further, the AO had called for information in that regard and the assessee had submitted an explanation on its activities. The ITAT, therefore, held that it was a different perception of the new incumbent on the same details. Thus, the assessment has been reopened by the AO only on the basis of the change of opinion. Further, the ITAT noted that for the AYs 1998-1999 and 1999-2000, the AO was unable to point out which material facts had not been disclosed by the assessee. The assessee’s appeals were allowed and the reassessment orders set aside.

The decision on the issue by Delhi High Court:

On further appeal to Delhi High Court by Revenue, it observed that the fact of the matter was that later Benches of Delhi High Court, including two Full Benches in CIT vs. Kelvinator of India Ltd. [(2002) 256 ITR 1 (Del)] and CIT vs. Usha International Ltd. [(2012) 348 ITR 485] have disagreed with the view expressed by the DB in Consolidated Photo and Finvest Ltd. vs. ACIT [(2006) 281 ITR 394(Del)]. In fact, the decision of the FB in CIT vs. Kelvinator of India Ltd.(supra) was affirmed by the Supreme Court in CIT vs. Kelvinator of India Ltd. [2010] 320 ITR 561 (SC). Even prior thereto, in KLM Royal Dutch Airlines vs. ADIT [2007] 292 ITR 49, another DB of the Delhi High Court noticed the anomaly that had resulted from the decision in Consolidated Photo and Finvest Ltd. vs. ACIT (supra), which was contrary to other decisions, including the decision of the FB in CIT vs. Kelvinator of India Ltd.(supra). The fact of the matter was that during the course of the original assessments under section 143 (3) of the Act, the AO did serve upon the assessee a detailed questionnaire. The AO examined the nature of the transactions involving the assessee and the payments received therefore. The reopening was not based on any fresh material. By revisiting the same materials the successor AO now concluded that the payments received by the assessee pursuant to the O&M Agreements should be treated as FTS. In the circumstances, the view taken by a successor AO on the same material was indeed nothing but a mere change of opinion. It is a well-settled legal proposition, as explained in Calcutta Discount Co. Ltd. vs. ITO [1961] 41 ITR 191(SC), that once an assessee has discharged the burden of not only producing the account books and other documents, but also the specific material relevant to the assessment, “it is for the Income-tax Officer to draw the proper inferences of fact and law therefrom and the assessee cannot further be called upon to do so for him.” In Indian Oil Corporation vs. ITO [(1986) 159 ITR 956 (SC)], the Court pertinently observed “it is for the taxing authority to draw inference. It is not necessary for the assessee to draw inference.” These observations apply on all fours to the case on hand. Here the assessee had discharged its burden of disclosing fully and truly all the material facts before the AO during the original assessments. There was no basis for the successor AO to conclude that “no opinion with regard to taxation” of the payments received for the services rendered had been formed by the AO. It is plain that the pre-condition for invoking section 147 of the Act did not exist. The assumption of jurisdiction under Section 148 of the Act was not valid.

The appeals were decided against the Revenue by the Delhi High Court.