Income Tax Officer, Ward No. 16(2) vs M/s Techspan India Private Ltd. & Anr.

Income Tax Officer Ward No. 16(2) .... Appellant(s)

Versus

M/s TechSpan India Private Ltd. & Anr. .... Respondent(s)

JUDGMENT

R.K. Agrawal, J.

1) The present appeal has been preferred against the

impugned final judgment and order dated 24.02.2006 passed

by the High Court of Delhi in W.P.(C) No 14376 of 2005

whereby a Division Bench of the High Court, while allowing

the petition filed by the Respondent herein, quashed the notice

dated 10.02.2005 issued under Section 148 of the Income Tax

Act, 1961 (hereinafter referred to as ‘the IT Act’) and the order

dated 17.08.2005 passed by the Income Tax Officer. Signature Not Verified Digitally signed by ASHA SUNDRIYAL Date: 2018.04.24 17:40:42 IST Reason:

2) Brief facts:-

1

(a) M/s TechSpan India Private Ltd.-the Respondent is a

private limited company incorporated under the Companies

Act, 1956 and is engaged in the business of development and

export of computer softwares and human resource services. It

is also relevant to mention here that the Respondent-Company

is also eligible for deduction under Section 10A of the IT Act.

(b) On 25.10.2001, the Respondent filed its return of income

for the Assessment Year (AY) 2001-02 declaring a loss of Rs

3,31,301/-. The Respondent, while filing the return for the

aforementioned period, has declared its income from two

sources, namely, software development and human resource

development but claimed expenses commonly for both. It also

claimed deduction under Section 10 A of the IT Act for the

income from the software development. The said return was

accepted and accordingly intimated to the Respondent.

(c) The return was selected for regular assessment under

Section 143(3) of the IT Act and a show cause notice dated

09.03.2004 was issued to the Respondent to show cause as to

why the expenses claimed with regard to the allocation of

common expenses between the two heads, viz., software

2 development and human resource development do not reveal

any basis for such allocation. The issue was duly contested

and decided vide order dated 29.11.2004 and the proceedings

ended with a rectification of the Assessment Order under

Section 154 of the IT Act while arriving at an income of Rs.

31,63,570/- which was fully set-off against the loss brought

forward and the income was assessed as ‘Nil’ for the AY

2001-2002.

(d) Further, on 10.02.2005, a Notice was served upon the

Respondent by the Revenue for re-opening the assessment

under Section 148 on the ground that the deduction under

Section 10A of the IT Act has been allowed in excess and the

income escaped assessment works out to Rs. 57,36,811/- in

the original assessment. The Respondent filed a detailed reply

objecting to the re-assessment. However, by order dated

17.08.2005, the objections were rejected and reassessment

was approved by the Revenue.

(e) Being aggrieved, the Respondent challenged the above

said show cause notice dated 10.02.2005 as well as the order

dated 17.08.2005 before the High Court by filing a Writ

3 Petition (C) No. 14376 of 2005. Vide judgment and order dated

24.02.2006, the High Court set aside the show cause notice

dated 10.02.2005 as well as the re-assessment order dated

17.08.2005.

(f) Being aggrieved, the Revenue has filed this appeal before

this Court.

3) Heard Mr. Rajesh Ranjan, learned counsel for the

Appellant and Mr. C.S. Agarwal, learned counsel for the

Respondents and perused the records.

Point(s) for consideration:-

4) The only point for consideration before this Court is

whether the re-opening of the completed assessment is

justified in the present facts and circumstances of the case?

Rival contentions:-

5) Learned counsel for the Appellant contended that the

Assessing Officer (AO) was well within his powers to issue the

show cause notice under Section 148 as the deduction that

was allowed under Section 10A was in excess and had escaped

assessment for which re-assessment proceedings can be

issued under Section 147. He further contended that the High

4 Court has erroneously held that the re-assessment

proceedings initiated under Section 147 of the Act are illegal

and not sustainable in the eyes of law. Learned counsel finally

contended that the impugned judgment of the High Court is

erroneous in the eyes of law and is liable to be set aside.

6) Learned counsel appearing on behalf of the Respondent

submitted that the ground for re-assessment proceedings

under Section 147 in the present case is nothing but merely a

change of opinion on the same material facts of the case and

no new fact has come to the knowledge of the Appellant

enabling the said authority to initiate re-assessment

proceedings under the IT Act, and therefore, the High Court

was right in allowing the writ petition in light of the fact that

mere change of opinion cannot be a ground for re-assessment.

7) He further submitted that the ground on which the

re-assessment proceedings were initiated was well considered

by the competent authority during the time of original

assessment proceedings. He further contended that the order

dated 17.08.2005 was not a speaking order and was rightly set

aside by the High Court. Learned counsel finally submitted

5 that the High Court has rightly set aside the show cause

notice dated 10.02.2005 and the order dated 17.08.2005 and

no interference is called for by this Court in the matter.

Discussion:-

8) To appreciate the present controversy between the

parties, it would be appropriate to refer to Sections 147 and

148 of the IT Act. For ready reference, relevant portion of

Sections 147 and 148 of the Act are reproduced below:-

“147. Income escaping assessment:-- 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 148 to 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 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:

xxx x x x”

6 “148. Issue of notice where income has escaped assessment.-(1) Before making the assessment, reassessment or recomputation under section 147, the Assessing Officer shall serve on the assessee a notice requiring him to furnish within such period, as may be specified in the notice, a return of his income or the income of any other person in respect of which he is assessable under this Act during the previous year corresponding to the relevant assessment year, in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed, and the provisions of this Act shall, so far as may be, apply accordingly as if such return were a return required to be furnished under Section 139:

xxx xxx (2) The Assessing Officer shall, before issuing any notice under this section, record his reasons for doing so.”

The language of Section 147 makes it clear that the assessing

officer certainly has the power to re-assess any income which

escaped assessment for any assessment year subject to the

provisions of Sections 148 to 153. However, the use of this

power is conditional upon the fact that the assessing officer

has some reason to believe that the income has escaped

assessment. The use of the words ‘reason to believe’ in Section

147 has to be interpreted schematically as the liberal

interpretation of the word would have the consequence of

conferring arbitrary powers on the assessing officer who may

even initiate such re-assessment proceedings merely on his

7 change of opinion on the basis of same facts and

circumstances which has already been considered by him

during the original assessment proceedings. Such could not be

the intention of the legislature. The said provision was

incorporated in the scheme of the IT Act so as to empower the

Assessing Authorities to re-assess any income on the ground

which was not brought on record during the original

proceedings and escaped his knowledge; and the said fact

would have material bearing on the outcome of the relevant

assessment order.

9) Section 147 of the IT Act does not allow the

re-assessment of an income merely because of the fact that

the assessing officer has a change of opinion with regard to

the interpretation of law differently on the facts that were well

within his knowledge even at the time of assessment. Doing so

would have the effect of giving the assessing officer the power

of review and Section 147 confers the power to re-assess and

not the power to review.

10) To check whether it is a case of change of opinion or not

one has to see its meaning in literal as well as legal terms. The

8 word change of opinion implies formulation of opinion and

then a change thereof. In terms of assessment proceedings, it

means formulation of belief by an assessing officer resulting

from what he thinks on a particular question. It is a result of

understanding, experience and reflection.

11) It is well settled and held by this court in a catena of

judgments and it would be sufficient to refer Commissioner

of Income Tax, Delhi vs. Kelvinator of India Ltd. (2010)

320 ITR 561(SC) wherein this Court has held as under:-

“5….where the Assessing Officer has reason to believe that income has escaped assessment, confers jurisdiction to re- open the assessment. Therefore, post-1st April, 1989, power to re-open is much wider. However, one needs to give a schematic interpretation to the words "reason to believe"…..

Section 147 would give arbitrary powers to the Assessing Officer to re-open assessments on the basis of "mere change of opinion", which cannot be per se reason to re-open.

6. We must also keep in mind the conceptual difference between power to review and power to re-assess. The Assessing Officer has no power to review; he has the power to re-assess. But re-assessment has to be based on fulfillment of certain pre-condition and if the concept of "change of opinion" is removed, as contended on behalf of the Department, then, in the garb of re-opening the assessment, review would take place.

7. One must treat the concept of "change of opinion" as an in-built test to check abuse of power by the Assessing Officer. Hence, after 1st April, 1989, Assessing Officer has power to re-open, provided there is "tangible material" to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief.”

9

12) Before interfering with the proposed re-opening of the

assessment on the ground that the same is based only on a

change in opinion, the court ought to verify whether the

assessment earlier made has either expressly or by necessary

implication expressed an opinion on a matter which is the

basis of the alleged escapement of income that was taxable. If

the assessment order is non-speaking, cryptic or perfunctory

in nature, it may be difficult to attribute to the assessing

officer any opinion on the questions that are raised in the

proposed re-assessment proceedings. Every attempt to bring

to tax, income that has escaped assessment, cannot be

absorbed by judicial intervention on an assumed change of

opinion even in cases where the order of assessment does not

address itself to a given aspect sought to be examined in the

re-assessment proceedings.

13) The fact in controversy in this case is with regard to the

deduction under Section 10A of the IT Act which was allegedly

allowed in excess. The show cause notice dated 10.02.2005

reflects the ground for re-assessment in the present case, that

10 is, the deduction allowed in excess under Section 10A and,

therefore, the income has escaped assessment to the tune of

Rs. 57,36,811. In the order in question dated 17.08.2005, the

reason purportedly given for rejecting the objections was that

the assessee was not maintaining any separate books of

accounts for the two categories, i.e., software development and

human resource development, on which it has declared

income separately. However, a bare perusal of notice dated

09.03.2004 which was issued in the original assessment

proceedings under Section 143 makes it clear that the point

on which the re-assessment proceedings were initiated, was

well considered in the original proceedings. In fact, the very

basis of issuing the show cause notice dated 09.03.2004 was

that the assessee was not maintaining any separate books of

account for the said two categories and the details filed do not

reveal proportional allocation of common expenses be made to

these categories. Even the said show cause notice suggested

how proportional allocation should be done. All these things

leads to an unavoidable conclusion that the question as to

how and to what extent deduction should be allowed under

11 Section 10A of the IT Act was well considered in the original

assessment proceedings itself. Hence, initiation of the

re-assessment proceedings under Section 147 by issuing a

notice under Section 148 merely because of the fact that now

the Assessing Officer is of the view that the deduction under

Section 10A was allowed in excess, was based on nothing but

a change of opinion on the same facts and circumstances

which were already in his knowledge even during the original

assessment proceedings.

14) In light of the forgoing discussion, we are of the view that

impugned judgment and order of the High Court dated

24.02.2006 does not call for any interference. The appeal is

accordingly dismissed with no order as to costs.

…….....…………………………………J. (R.K. AGRAWAL)

…….…………….………………………J. (MOHAN M. SHANTANAGOUDAR)

NEW DELHI;

APRIL 24, 2018.

12