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Reopening of assessment valid for non-disclosure of material facts
In briefIn a recent decision1, the Supreme Court (“SC”) affirmed the decision of the Delhi High Court (“HC”) in the case of Honda Siel Power Products Ltd.2(the “assessee”) which held that:
• The reassessment by the assessing officer (“AO”) under section 147 of the Act (which lays down criteria for reassessment) of the Income-tax Act, 1961 (the
1 Special Leave Petition no. 19085/2011
2 Honda Siel Power Products Ltd. v. DCIT [2011-TIOL-126-HC-DEL-IT]
“Act”) on the issue of deductibility of administrative expenses incurred for earning exempt income is valid in view of:
- The enactment of the retrospective amendment before the original assessment order was passed; and
- Disclosures not being made during the course of assessment proceedings by the assessee in accordance with the enacted provision.
• The issue of notice under section 148 (which lays down the criteria for issue of notice in reassessment cases) on a particular issue is not barred after issue of
Sharing insights
News Alert
10 August, 2011
PwC News Alert August 2011
2 notice under section 154 of the Act (which deals with rectification of mistakes)
on the same issue.
Facts
• For the assessment year (“AY”) 2000-01, the assessee filed its return of income on 30 November, 2000.
• During AY 2000-01, the assessee had earned dividend income which was exempt from tax. However, administrative expenses incurred for earning exempt income were not disallowed in the return of income.
• Assessment was completed under section 143(3) on 7 March, 2003.
• Subsequently, the AO issued notice under section 154 of the Act for rectification of a mistake in the assessment order of allowing the administrative expense incurred for earning the dividend income.
• In response to the notice, the assessee submitted that rectification proceedings were not justified, as there was no mistake or error apparent from the record.
Thereafter, no order under section 154 of the Act was passed.
• Afterwards, the AO issued notice under section 148 of the Act for reassessment of income (which was after four years from the end of AY 2000-01). One of the reasons recorded for issue of notice under section 148 of the Act was that the administrative expenses pertaining to earning of exempt income were wrongly allowed as expenditure, in view of the provisions of section 14A of the Act.
• Aggrieved by the notice under section 148 of the Act, the assessee filed a writ petition before the HC challenging the reassessment notice.
• The HC upheld the validity of the notice for reassessment issued under section 148 of the Act.
• The SC affirmed the decision of the HC.
Issues before the High Court
• Whether the AO can validly reopen the original assessment under section 147 of the Act for disallowing expenditure under section 14A of the Act, in view of the retrospective introduction of section 14A in the Act.
• Whether the issue of notice under section 148 of the Act on a particular issue is barred after the issue of notice under section 154 of the Act on the same issue.
Assessee’s contentions
• For AY 2000-01, the return of income was filed on November 30, 2000.
• Section 14A was introduced subsequently by the Finance Act, 2001 with retrospective effect from 1 April, 1962. Hence, the assessee was not required to disclose any fact with respect to the expenditure incurred for earning exempt income at the time of filing the return.
• In view of the first proviso to section 147 of the Act, as there was no failure on the part of the assessee to disclose fully and truly all material facts in respect of expenditure incurred for earning exempt income, the reassessment for disallowance of expenditure under section 14A of the Act, after four years from the end of AY 2000-01, was not valid.
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• The assessee relied on judicial precedents3, where, in view of the legislative amendment with retrospective effect, it was held that there was no failure on the part of the assessee to disclose fully and truly all material facts in respect of the claim, to warrant exercise of jurisdiction under section 148 of the Act, beyond four years from the end of the relevant AY.
• Furthermore, the reassessment under section 147 of the Act for AY 2000-01 was not valid in view of the proviso to section 14A of the Act.
• After the original assessment proceedings were concluded, notice under section 154 of the Act (for rectification of a mistake in the assessment order of allowing the administrative expenses incurred for earning the dividend income) was issued. The assessee had filed a reply against the rectification notice. Thereafter, nothing was heard from the AO and presumably no order under section 154 of the Act was passed.
• It was submitted that as a legal proposition once a notice under section 154 of the Act is issued, proceedings under section 147 of the Act are barred/prohibited.
Ruling of the High Court
• Failure on the part of the AO to apply section 14A of the Act when he passed the original assessment order had prima facie resulted in escapement of income.
3 CIT v. SIL Investments Ltd. [2010-TIOL-327-HC-DEL-IT]
Rallis India Limited v. ACIT [2010] 323 ITR 54 (Bom) Sadbhav Engineering Ltd. v. DCIT [2010] 333 ITR 483 (Guj.)
• The object and purpose of the proviso to section 14A of the Act is to bar reassessment/rectification of past cases which have attained finality and not an original assessment on the basis of retrospective amendment in the statute book.
• The AO was, therefore, required to disallow expenses incurred for earning exempt income in the original assessment itself.
• The full and true disclosure of all material facts is not restricted to disclosures in the income-tax return or the tax audit report but also applies at the stage of the assessment proceedings.
• The burden is on the assessee to make full and true disclosure of material facts during the course of assessment proceedings.
• Explanation 1 to section 147 of the Act stipulates that mere production of books of account or other evidence is not sufficient. Therefore, merely because the information lies embedded in documents/evidence produced before the AO, which the AO could have uncovered but did not uncover, is not a good basis to strike down a notice for reassessment. This view finds support from the SC decisions in the case of Kantamani Venkata Narayana & Sons4 and Malegaon Electricity Co. (P.) Ltd.5.
• There was an omission and failure on the part of the assessee to point out the expenses incurred for earning exempt income which prima facie have been claimed as a deduction in the income and expenditure account. Therefore, the assessee failed to disclose fully and truly all material facts.
4 Kantamani Venkata Narayana and Sons v. First Ad ITO [1967] 63 ITR 638 (SC)
5 Malegaon Electricity Co. P. Ltd. v. CIT [1970] 78 ITR 466
PwC News Alert August 2011
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• Judicial precedents relied on by the assessee are distinguishable. In those cases, the legislative amendments with retrospective effect were made after the original assessment proceedings were completed and finalised.
• In the present case, section 14A was on the statute book when the original assessment proceedings were in progress.
• When mistakes are apparent from record, the AO should invoke section 154 of the Act but in cases where mistakes are not apparent from the record, the AO can reopen assessment under section 147 of the Act when the pre-conditions are satisfied.
• The words ‘reasons to believe’ when income chargeable to tax has escaped assessment has a different connotation and requirement and cannot be equated with the powers under section 154 of the Act to rectify mistakes apparent from the record.
• Pre-requisites of reassessment are not controlled, curbed and regulated with the requirements of a mistake which is apparent from the record.
• Issue of notice under section 148 of the Act on a particular issue cannot be barred after issue of notice under section 154 of the Act on the same issue.
Conclusion
The HC held that re-opening of the assessment is valid in cases where certain material facts are not disclosed by the assessee during the course of assessment proceedings. Importantly, it was held that merely because the information lies embedded in documents/evidence produced before the AO, which the AO could have uncovered but did not uncover, is not a good basis to strike down a notice for reassessment.
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