Brief- High Court held that when a claim was processed at length and after calling for detailed explanation from the assessee, the same was accepted, merely because a certain element or angle was not in the mind of the Assessing Officer while accepting such a claim, cannot be a ground for issuing notice for reassessment.
Facts of the Case
The Assessing Officer carried out scrutiny assessment of the return filed by the assessee. One of the claims was of capital gain arising out of sale of shares. In the context, the assessee had claimed various expenditures in the nature of professional services for investment portfolio and such other services. The Assessing Officer disallowed the expenditure holding that such expenditure was not for the purpose of assessee’s business. The issue was carried in appeal. CIT(Appeals) confirmed the disallowance on slightly different grounds.
To reopen such assessment, the Assessing Officer issued notice dated 28.4.2008. In the reasons recorded, he had stated as under :
“In this case assessment order for A.Y. 200506 was passed u/s. 143(3) on 31.12.2007 by the Addl. CIT, Range1, Baroda. It was observed by him that the assessee has shown huge income as short term capital gains and long term capital gains arising out of investments. These incomes were held to be income assessable under the head “profits and gains of the business or profession” to the tune of Rs. 16,54,53,272/ and thereby brought to the net of higher slab of the tax net.
The perusal of the records for the year under consideration shows identical facts. The assessee has earned huge profits of Rs. 19,12,92,135/ on sales of investments. However, it has shown long term capital gain of Rs.3,81,32,086/under the head “Capital Gains” and thereby income has escaped assessment under the head “profits and gains of the business or profession’.
In View of the facts of the case as above, I have reason to believe that income chargeable to tax under the head “profits and gains of the business or profession” has escaped assessment.
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Held by ITAT
By the impugned judgement, the Tribunal held that the process of reopening was invalid on two grounds. First, that the Assessing Officer had examined the claim at length and that therefore, by virtue of judgement of the Supreme Court in case of CIT v. Kelvinator of India Ltd. reported in (2010) 320 ITR 561, without there being anything more, reassessment would not be permissible. The second ground was that according to the Tribunal the issue was carried in appeal before the CIT(Appeals) and thus the decision of Assessing Officer merged with that of CIT(Appeals).
Held by High Court
Thus clearly the Assessing Officer was acutely conscious of the nature of transactions, the assessee’s contention that the income was in the nature of capital gain and not business income. It was in this context that the assessee had claimed such expenditure for earning such income. Assessing Officer disallowed such expenditure while not disturbing the source of income disclosed by the assessee. In fact, the Assessing Officer proceeded on the basis that the income was in the nature of capital gains and this is precisely why the Assessing Officer disallowed the expenditure. Any reassessment of the said issue, would permit the Assessing Officer a second innings which is not envisaged under the power of reassessment. Division Bench of this Court in case of Gujarat Power Corporation Ltd. v. Assistant Commissioner of Incometax reported in (20 13) 350 ITR 266(Guj), in context of earlier judgement in case of Praful Chunilal Patel v. M.J. Makwana, Asst. CIT reported in (1999) 236 ITR 832 (GUJ) held as under:
“44. At this stage, we may examine the decision of the Division Bench of this Court in the case of Praful Chunilal Patel v. M. J. Makwana, Assistant Commissioner of Income Tax, (supra) more closely. This was a case wherein assessment previously framed under section 143(3) of the Act was sought to be reopened within a period of four years from the end of the relevant assessment year. The case concerned assessment year 199394 and therefore, the amended section 147 of the Act was applicable. On certain claims of the assessee which were not rejected by the Assessing Officer in the scrutiny assessment, the court held that in cases where the Assessing Officer has not made an assessment of any item of income chargeable to tax while passing the assessment order, it cannot be said that such income was subjected to an assessment. The court was of the opinion that in the original assessment, the Assessing Officer never really formed an opinion on a particular contentious issue. It was in this background that the Court was of the opinion that since no opinion was formed in this regard, consequently there would be no question of a mere change of opinion. The Court also expressed an opinion that in view of the explanation 2 to section 147 of the Act, power to make assessment or reassessment within four years would be attracted even in cases where there has been complete disclosure of all material facts.
46. The decision in case of Praful Chunilal Patel v. M. J. Makwana, Assistant Commissioner of Income Tax, however, goes beyond the above proposition. The Bench went on to hold that, “On a proper interpretation of s. 147 of the Act, it would appear that the power to make assessment or reassessment within four years of the end of the relevant assessment year would be attracted even in cases where there has been a complete disclosure of all relevant facts upon which a correct assessment might have been based in the first instance, and whether it is an error of fact or law that has been discovered or found out justifying the belief required to initiate the proceedings. In our view, the words “escaped assessment” where the return is filed, are apt to cover the case of a discovery of a mistake in the assessment caused by either an erroneous construction of the transaction or due to its nonconsideration, or, caused by a mistake of law applicable to such transfer or transaction even where there has been a complete disclosure of all relevant facts upon which a correct assessment could have been based.”.
47. The above observations of the Bench, in our opinion, need not be seen as a ratio of the decision since in the said case, the facts were that assessment was reopened within four years on the ground that a part of the income though disclosed by the assessee had not been considered for assessment in the original proceedings. Such observations, therefore, would not be in the nature of laying down a ratio as the question whether even where a particular claim had been examined by the Assessing Officer in the original assessment can be subject matter of reopening on the ground that such claim was accepted on erroneous construction of the transaction or by mistake of law applicable to such a transaction. We are also of the opinion that by virtue of such observations if the revenue contends that post 1.4.1989, reopening of an assessment would be permissible on change of opinion, it would run counter to the decision of the Apex Court in case of Commissioner of Income Tax v. (1) Kelvinator of India Ltd. (SC) (supra).”
In case of Cliantha Research Ltd. v. Deputy Commissioner of Incometax, Ahmedabad CircleI reported in (2013) 35 taxmann.com 61(Gujarat), the Court observed as under:
“17. From the above it can be seen that the petitioners claim for deduction under Section 80IB(8A) of the Act came for detailed scrutiny by the Assessing Officer in the original scrutiny assessment. Series of queries were raised by the Assessing Officer. All such questions were answered at length by the assessee. He filed several replies before the Assessing Officer. Only after considering such replies and documents accompanying such replies, Assessing Officer framed the assessment in such assessment order. He disallowed only a small portion of the petitioners claim for deduction. To the extent the petitioner had claimed deduction for sample storage income, the same was disallowed, rest of the claim was accepted. By no stretch of imagination, can it be stated that the claim under Section 80IB(8A) of the Act was not examined by the Assessing Officer in the original assessment. Entire claim was thoroughly and painstakingly scrutinized. His queries were not restricted to sample storage income alone. For example, in his communication dated 21.10.2009 he called upon the petitioner to furnish details of transactions with various companies, such as M/s Cadila Healthcare Ltd., Lupin Ltd. Etc. These are the companies with whom the petitioner had entered into detailed agreements for carrying out scientific research. In paragraph 4 of such notice, he called upon the petitioner to furnish note on claim of deduction under Section 80IB(8A) of the Act to produce necessary evidence in support of such claim. He also directed the petitioner to furnish note on how all the conditions laid down under Rule 18DA were fulfilled.
18. In addition to such queries with respect to the entire claim, he also raised pointed queries with respect to sample storage income and miscellaneous income for which the petitioner had claimed deduction.
19. In response to such queries, the petitioners had given detailed replies and produced voluminous material to support the claim of deduction. It cannot be stated by any stretch of imagination that such claim of deduction under Section 80IB(8A) of the Act was not examined by the Assessing Officer in the original assessment. It may be that he did not raise specific query to allowability of the claim on the premise that the petitioner was doing scientific research for and on behalf of the companies. However, merely for the failure of the Assessing Officer to raise such a question, in our opinion, would not authorize him to reopen the assessment even within the period of 4 years from the end of the relevant assessment year. Any such attempt on his part would be based on mere change of opinion. To reiterate when a claim was processed at length and after calling for detailed explanation from the assessee, the same was accepted, merely because a certain element or angle was not in the mind of the Assessing Officer while accepting such a claim, cannot be a ground for issuing notice for reassessment.”
Under the circumstances, we do not find any error in the Tribunal quashing the reassessment proceedings on the first of the two grounds pressed in service. Therefore, though we are not in agreement with second ground of merger, we see no reason to interfere. Both the Tax Appeals are dismissed.