THE issues before the Bench are - Whether the mere fact that an assessment order does not deal with a particular claim cannot lead to the conclusion that while allowing the claim the AO had not applied his mind and Whether the
reassessment u/s 147 can be reopened on the reasons and material obtained during the assessment proceedings for different assessment year and not the material already on record. And the verdict goes against the Revenue.
reassessment u/s 147 can be reopened on the reasons and material obtained during the assessment proceedings for different assessment year and not the material already on record. And the verdict goes against the Revenue.
Facts of the case
The assessee is a public financial institution and carries on the business of providing finance in the form of long or medium term loans, equity participation, sponsoring and underwriting new issue of shares and securities, providing hire purchase, lending etc. Its income from business of providing long term finance i.e. loans in excess of five years is referred to as fund based income while income arising from its business other than providing of long term loans is referred to as non-fund based income.
In its return of income for the AY 1995-96 the assessee had given the complete working of the fund based income (long term finance) and also disclosed that 79.99% of its total income was attributable to it. Consequently the expenses incurred were also shown to be divided between fund based activity and non fund based activity at the rate of 79.99% and 20.01%. By an order dated 19/3/1999 u/s 143(3) of the said Act, the AO assessed the assessee to a total income of Rs.193 crores and while so assessing allowed deduction u/s 36(1)(viii) of the said Act to the extent of Rs.85.00crores in respect of the special reserve created/credited, capped to the extent of 40% of the fund based income(long term finance).
Thereafter, one more notice u/s 148 of the said Act was issued on 20/3/2001 seeking to reopen the assessment for the AY 1996-97, after recording the reason that the income earned on non fund business had been included in income earned on fund based activity i.e. long term finance while claiming deduction u/s. 36(1)(viii) of the said Act. Consequently, the assessee was allowed excess deduction u/s.36 (1)(viii) to which I(sic) was not entitled to. In view of the above, the income chargeable to tax has escaped assessment within the meaning of Sec. 147. Consequent to the above, the AO reassessed the assessee and computed the assessee’s total income at Rs.264 Crores. However, while so determining the assessee’s total income, deduction available u/s 36(1) (viii) was reduced from Rs.85crores to Rs.40.22crores. This was on the basis of the estimate that the expenses incurred in respect of non fund activity was only 10% and not 20.1% as originally claimed by the assessee during the course of assessment proceeding for the AY 1996-97.
The assessee is a public financial institution and carries on the business of providing finance in the form of long or medium term loans, equity participation, sponsoring and underwriting new issue of shares and securities, providing hire purchase, lending etc. Its income from business of providing long term finance i.e. loans in excess of five years is referred to as fund based income while income arising from its business other than providing of long term loans is referred to as non-fund based income.
In its return of income for the AY 1995-96 the assessee had given the complete working of the fund based income (long term finance) and also disclosed that 79.99% of its total income was attributable to it. Consequently the expenses incurred were also shown to be divided between fund based activity and non fund based activity at the rate of 79.99% and 20.01%. By an order dated 19/3/1999 u/s 143(3) of the said Act, the AO assessed the assessee to a total income of Rs.193 crores and while so assessing allowed deduction u/s 36(1)(viii) of the said Act to the extent of Rs.85.00crores in respect of the special reserve created/credited, capped to the extent of 40% of the fund based income(long term finance).
Thereafter, one more notice u/s 148 of the said Act was issued on 20/3/2001 seeking to reopen the assessment for the AY 1996-97, after recording the reason that the income earned on non fund business had been included in income earned on fund based activity i.e. long term finance while claiming deduction u/s. 36(1)(viii) of the said Act. Consequently, the assessee was allowed excess deduction u/s.36 (1)(viii) to which I(sic) was not entitled to. In view of the above, the income chargeable to tax has escaped assessment within the meaning of Sec. 147. Consequent to the above, the AO reassessed the assessee and computed the assessee’s total income at Rs.264 Crores. However, while so determining the assessee’s total income, deduction available u/s 36(1) (viii) was reduced from Rs.85crores to Rs.40.22crores. This was on the basis of the estimate that the expenses incurred in respect of non fund activity was only 10% and not 20.1% as originally claimed by the assessee during the course of assessment proceeding for the AY 1996-97.
The Tribunal allowed the appeal of the assessee holding that the reopening proceedings initiated was only on account of mere change of opinion and would amount to review which is not permitted. Further, the Tribunal held that the issue on which the revenue had sought to reopen the assessment for the AY 1996-97 was that the income earned on non fund business had been included in income earned on fund based activity i.e. long term finance while claiming deduction u/s. 36(1)(viii) of the said Act while the reassessment order holds that expenditure claimed at 20.1% was higher then 10% which alone was allowable from non fund based income.
On appeal by the Revenue, the High Court held that,
++ the assessment is reopened within a period of 4 years from the end of the relevant AY. In such cases it is settled law that the power of the AO to reopen the assessment is not subject to the limitation provided in the proviso to Section 147 of the said Act namely failure on the part of the assessee to fully and truly disclose all material facts necessary for assessment. Consequently, even where an assessee has disclosed all facts fully and truly for the purpose of assessment, the AO would still have jurisdiction to reopen the assessment, if he has reason to believe that income chargeable to tax has escaped assessment. However, this reason to believe that any income chargeable to tax has escaped assessment even within a period of four years from the end of the relevant AY, has to arise not on account of a mere change of opinion but on the basis of some tangible material. This is particularly so as the Income Tax Officer has not been conferred with a power to review his assessment;
++ therefore the sina qua non to issue a notice for reopening of assessments even within a period of less than 4 years from the end of the AY, is reason to believe that income has escaped assessment and this reason to believe should be on the basis of tangible material, otherwise the exercise of power to reopen would be a review of the assessment order. As held by this Court in the matter of Siemens Information System Ltd. v. Asst. C.I.T in (2012-TIOL-186-HC-MUM-IT) such tangible material could be even on the basis of fresh material obtained during subsequent assessment proceedings. However the test is that the reason to believe that income has escaped assessment should emanate from tangible material;
++ as disclosed in the reasons recorded while issuing notice u/s 148 of the Act, in the present case, the impugned notice was based on the ground that the income earned from the non fund based activities of the assessee had been included in the fund based income so as to claim excess deduction u/s 36(1)(viii) of the said Act. The reasons only provide a conclusion and give no material particulars of information obtained during the course of assessment proceedings for the AY 1998-99. Therefore, the reasons recorded do not indicate any tangible material which has led to a reasonable belief that income has escaped assessment. As held by this court in the matter of Hindustan Lever Ltd. v. R.B. Wadkar (2004-TIOL-72-HC-MUM-IT), the reasons for reopening as recorded must be clear and not suffer from any vagueness so to keep the assessee guessing for the reasons. It is the reasons which provide the link between the evidence and the conclusion. In this case the reasons as recorded do suffer from the vice of vagueness.;
++ the material on the basis of which the assessment is sought to be reopened is clear in the order dated 26/3/2002 of the AO while reassessing the assessee for AY 1996-97 consequent to reopening. In the above order dated 26/3/2002 it is revealed that the case of the Department is that expenses attributable to non fund based activity should be 10% and not 20.1% as claimed by the assessee. Consequently the expenses attributable to fund based activity would be 90% and not 79.99% resulting in less profit from fund based activity (long term finance). The assessee had allocated its expenditure between fund based and non fund based activity on the basis of the ratio of the income earned between fund and non fund based activity. Therefore there was some basis for distributing the expenses. Neither the reasons nor the order of the AO dated 26/3/2002 indicate the basis on which 10% of expenditure is alone attributable to non fund activity. Therefore this again establishes absence of any tangible material obtained during proceeding for AY 1998-99 to form a reasonable belief that income has escaped assessment. In the circumstances the exercise of powers u/s 148 of the said Act is unwarranted;
++ the mere fact that an assessment order does not deal with a particular claim cannot lead to the conclusion that while allowing the claim the AO had not applied his mind. Besides the above, the reasons for reopening the assessment in this case is the material obtained during the subsequent assessment proceedings for the AY 1998-99 and not the material already on record. Therefore the revenue cannot now urge a new ground to support the reopening of an assessment for the AY 1996-97;
++ further, the AO while reassessing the assessee by an order dated 26/3/2002 has in fact taken a ground different from the grounds in the reasons recorded for reopening the assessment u/s 148 of the said Act. The reasons furnished for reopening the assessment alleged that non fund income had been shown in fund based income so as to avail of a higher deduction. However, the basis of the order dated 26/3/2002 was that 20.1% out of the gross expenses attributed to non fund income was excessive and ought to be restricted to only 10%. Thus, the basis of the order is completely different from the reasons recorded for reopening the assessment. This is clearly not permissible;
++ in view of the above reasons, the Tribunal was correct in taking the view that the reopening of assessment by notice dated 20/3/2001 u/s 148 of the said Act is not sustainable in law. We answer the question raised for our consideration in the affirmative i. e. in favour of the assessee and against the appellant-revenue. Appeal is disposed of. No order as to costs.
On appeal by the Revenue, the High Court held that,
++ the assessment is reopened within a period of 4 years from the end of the relevant AY. In such cases it is settled law that the power of the AO to reopen the assessment is not subject to the limitation provided in the proviso to Section 147 of the said Act namely failure on the part of the assessee to fully and truly disclose all material facts necessary for assessment. Consequently, even where an assessee has disclosed all facts fully and truly for the purpose of assessment, the AO would still have jurisdiction to reopen the assessment, if he has reason to believe that income chargeable to tax has escaped assessment. However, this reason to believe that any income chargeable to tax has escaped assessment even within a period of four years from the end of the relevant AY, has to arise not on account of a mere change of opinion but on the basis of some tangible material. This is particularly so as the Income Tax Officer has not been conferred with a power to review his assessment;
++ therefore the sina qua non to issue a notice for reopening of assessments even within a period of less than 4 years from the end of the AY, is reason to believe that income has escaped assessment and this reason to believe should be on the basis of tangible material, otherwise the exercise of power to reopen would be a review of the assessment order. As held by this Court in the matter of Siemens Information System Ltd. v. Asst. C.I.T in (2012-TIOL-186-HC-MUM-IT) such tangible material could be even on the basis of fresh material obtained during subsequent assessment proceedings. However the test is that the reason to believe that income has escaped assessment should emanate from tangible material;
++ as disclosed in the reasons recorded while issuing notice u/s 148 of the Act, in the present case, the impugned notice was based on the ground that the income earned from the non fund based activities of the assessee had been included in the fund based income so as to claim excess deduction u/s 36(1)(viii) of the said Act. The reasons only provide a conclusion and give no material particulars of information obtained during the course of assessment proceedings for the AY 1998-99. Therefore, the reasons recorded do not indicate any tangible material which has led to a reasonable belief that income has escaped assessment. As held by this court in the matter of Hindustan Lever Ltd. v. R.B. Wadkar (2004-TIOL-72-HC-MUM-IT), the reasons for reopening as recorded must be clear and not suffer from any vagueness so to keep the assessee guessing for the reasons. It is the reasons which provide the link between the evidence and the conclusion. In this case the reasons as recorded do suffer from the vice of vagueness.;
++ the material on the basis of which the assessment is sought to be reopened is clear in the order dated 26/3/2002 of the AO while reassessing the assessee for AY 1996-97 consequent to reopening. In the above order dated 26/3/2002 it is revealed that the case of the Department is that expenses attributable to non fund based activity should be 10% and not 20.1% as claimed by the assessee. Consequently the expenses attributable to fund based activity would be 90% and not 79.99% resulting in less profit from fund based activity (long term finance). The assessee had allocated its expenditure between fund based and non fund based activity on the basis of the ratio of the income earned between fund and non fund based activity. Therefore there was some basis for distributing the expenses. Neither the reasons nor the order of the AO dated 26/3/2002 indicate the basis on which 10% of expenditure is alone attributable to non fund activity. Therefore this again establishes absence of any tangible material obtained during proceeding for AY 1998-99 to form a reasonable belief that income has escaped assessment. In the circumstances the exercise of powers u/s 148 of the said Act is unwarranted;
++ the mere fact that an assessment order does not deal with a particular claim cannot lead to the conclusion that while allowing the claim the AO had not applied his mind. Besides the above, the reasons for reopening the assessment in this case is the material obtained during the subsequent assessment proceedings for the AY 1998-99 and not the material already on record. Therefore the revenue cannot now urge a new ground to support the reopening of an assessment for the AY 1996-97;
++ further, the AO while reassessing the assessee by an order dated 26/3/2002 has in fact taken a ground different from the grounds in the reasons recorded for reopening the assessment u/s 148 of the said Act. The reasons furnished for reopening the assessment alleged that non fund income had been shown in fund based income so as to avail of a higher deduction. However, the basis of the order dated 26/3/2002 was that 20.1% out of the gross expenses attributed to non fund income was excessive and ought to be restricted to only 10%. Thus, the basis of the order is completely different from the reasons recorded for reopening the assessment. This is clearly not permissible;
++ in view of the above reasons, the Tribunal was correct in taking the view that the reopening of assessment by notice dated 20/3/2001 u/s 148 of the said Act is not sustainable in law. We answer the question raised for our consideration in the affirmative i. e. in favour of the assessee and against the appellant-revenue. Appeal is disposed of. No order as to costs.
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