Supreme Court Quashes Reassessment Notice for Income Tax: TechSpan India Pvt. Ltd. (2018)

Date of the Judgment: 24 April 2018

Citation: 2018 INSC 351

Judges: R.K. Agrawal, J. and Mohan M. Shantanagoudar, J.

Can an income tax assessment be reopened simply because the Assessing Officer has a change of opinion? The Supreme Court addressed this crucial question in a case involving M/s TechSpan India Private Ltd. The court held that a reassessment notice based solely on a change of opinion is not valid. This judgment clarifies the limits of the Assessing Officer’s power to reopen assessments under the Income Tax Act, 1961. The judgment was delivered by a division bench comprising of Justice R.K. Agrawal and Justice Mohan M. Shantanagoudar, with the opinion authored by Justice R.K. Agrawal.

Case Background

M/s TechSpan India Private Ltd., the Respondent, is a company involved in developing and exporting computer software and providing human resource services. The company is eligible for tax deductions under Section 10A of the Income Tax Act, 1961. For the Assessment Year 2001-02, the Respondent filed a return declaring a loss of Rs 3,31,301, with income from both software development and human resource services. The company claimed common expenses for both sources and sought a deduction under Section 10A for its software development income. The initial return was accepted by the Income Tax Department.

The case was selected for regular assessment under Section 143(3) of the Income Tax Act, 1961. A show cause notice was issued on 09.03.2004, questioning the allocation of common expenses between the two income sources. The matter was contested, and an order was passed on 29.11.2004, rectifying the assessment. The final assessed income was Rs. 31,63,570, which was set off against brought forward losses, resulting in a ‘Nil’ assessment for the Assessment Year 2001-2002.

Subsequently, on 10.02.2005, the Income Tax Department issued a notice under Section 148 of the Income Tax Act, 1961, to reopen the assessment, alleging that the deduction under Section 10A had been allowed in excess, leading to an escaped income of Rs. 57,36,811. The Respondent objected to the reassessment, but the objections were rejected on 17.08.2005. The Respondent then challenged the reassessment notice and order before the High Court of Delhi.

Timeline

Course of Proceedings

The Respondent challenged the show cause notice dated 10.02.2005 and the order dated 17.08.2005 before the High Court of Delhi. The High Court allowed the petition and set aside the reassessment notice and order. The High Court held that the reassessment was based on a mere change of opinion, which is not a valid ground for reopening an assessment. Aggrieved by the High Court’s decision, the Income Tax Department filed an appeal before the Supreme Court.

Legal Framework

The Supreme Court referred to Section 147 and Section 148 of the Income Tax Act, 1961. Section 147 deals with income escaping assessment, stating that if the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment, they may reassess such income. However, this power is subject to the provisions of Sections 148 to 153 of the Income Tax Act, 1961. The proviso to Section 147 states that no action can be taken after four years from the end of the relevant assessment year unless there was a failure on the part of the assessee to disclose all material facts.

Section 148 of the Income Tax Act, 1961, outlines the procedure for issuing a notice when income has escaped assessment. It requires the Assessing Officer to serve a notice on the assessee to furnish a return of income. Sub-section (2) of Section 148 mandates that the Assessing Officer must record their reasons for issuing the notice before doing so. The relevant portions of the sections 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:
x x x
x x x”

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

The Court clarified that the power to reassess income is conditional upon the Assessing Officer having a “reason to believe” that income has escaped assessment. This phrase must be interpreted carefully to prevent arbitrary use of power. Reassessment cannot be initiated merely due to a change of opinion on the same facts already considered during the original assessment.

Arguments

Appellant’s Arguments (Income Tax Department):

• The Assessing Officer (AO) had the power to issue a show cause notice under Section 148 of the Income Tax Act, 1961, because the deduction allowed under Section 10A was excessive, and this income had escaped assessment.
• Reassessment proceedings can be initiated under Section 147 of the Income Tax Act, 1961, when income has escaped assessment.
• The High Court erroneously held that the reassessment proceedings were illegal and unsustainable.
• The High Court’s judgment should be set aside.

Respondent’s Arguments (M/s TechSpan India Private Ltd.):

• The reassessment proceedings were initiated based on a mere change of opinion on the same facts.
• No new facts had come to the knowledge of the Appellant that would justify reassessment.
• The issue of deduction under Section 10A was already considered during the original assessment proceedings.
• The order dated 17.08.2005 was not a speaking order and was rightly set aside by the High Court.
• The High Court was correct in setting aside the show cause notice and the reassessment order.

The core of the dispute was whether the reassessment was based on a new discovery or merely a change of opinion. The Appellant argued that the excess deduction under Section 10A constituted escaped income, justifying reassessment. The Respondent contended that the issue of deduction under Section 10A was already considered during the original assessment, making the reassessment a mere change of opinion.

Innovativeness of the argument: The respondent’s argument was innovative in highlighting that the reassessment was based on a mere change of opinion, which is not permissible under the Income Tax Act, 1961. This argument effectively challenged the Revenue’s attempt to reopen the assessment on the same set of facts.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

1. Whether the re-opening of the completed assessment is justified in the present facts and circumstances of the case?

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

The Supreme Court considered the authorities as follows:

• The Supreme Court followed Commissioner of Income Tax, Delhi vs. Kelvinator of India Ltd. (2010) 320 ITR 561 (SC), which held that reassessment cannot be based on a mere change of opinion. The court emphasized that there must be tangible material to conclude that income has escaped assessment.
• The Supreme Court explained the provisions of Section 147 of the Income Tax Act, 1961, stating that it provides the power to reassess income that has escaped assessment, but this power is conditional upon the Assessing Officer having a “reason to believe” that income has escaped assessment.
• The Supreme Court explained the provisions of Section 148 of the Income Tax Act, 1961, which outlines the procedure for issuing a notice when income has escaped assessment.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the principle that reassessment proceedings under Section 147 of the Income Tax Act, 1961, cannot be initiated based on a mere change of opinion. The Court emphasized that the Assessing Officer must have a valid reason to believe that income has escaped assessment, which should not be a result of a different interpretation of the same facts already on record. The Court noted that the issue of deduction under Section 10A was already considered during the original assessment proceedings, and the reassessment was simply a change of opinion on the same facts. The Court was also concerned that allowing reassessment based on a change of opinion would effectively give the Assessing Officer the power of review, which is not permitted under Section 147 of the Income Tax Act, 1961.

Logical Reasoning:

The Court considered the argument that the reassessment was based on a change of opinion. The Court noted that the Assessing Officer had already considered the issue of deduction under Section 10A during the original assessment proceedings. The Court concluded that the reassessment was not based on any new material or facts, but rather on a different interpretation of the same facts. The Court held that such a change of opinion is not a valid ground for reassessment under Section 147 of the Income Tax Act, 1961.

The Court rejected the argument that the reassessment was justified because the deduction under Section 10A was excessive. The Court stated that the issue of the deduction was already considered in the original assessment proceedings, and therefore, the reassessment was based on a change of opinion. The Court also rejected the argument that the order dated 17.08.2005 was a speaking order, noting that it did not address the core issue of whether the reassessment was based on a change of opinion.

The Supreme Court quoted the following from Commissioner of Income Tax, Delhi vs. Kelvinator of India Ltd. (2010) 320 ITR 561(SC):

“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.”

There was no minority opinion in this case; both judges concurred with the decision and reasoning.

Key Takeaways

• Reassessment under Section 147 of the Income Tax Act, 1961, cannot be initiated based on a mere change of opinion by the Assessing Officer.
• The Assessing Officer must have a valid reason to believe that income has escaped assessment, which cannot be a result of a different interpretation of the same facts already on record.
• The issue of deduction under Section 10A of the Income Tax Act, 1961, was already considered during the original assessment proceedings.
• The Assessing Officer does not have the power to review an assessment; they only have the power to reassess.
• This judgment reinforces the principle that reassessment proceedings should be based on new material or facts, not a change of opinion on the same facts.
• Taxpayers are protected from arbitrary reassessment proceedings.

Directions

The Supreme Court did not issue any specific directions in this case. The appeal was dismissed, and the High Court’s judgment was upheld.

Development of Law

The ratio decidendi of this case is that a reassessment under Section 147 of the Income Tax Act, 1961, cannot be initiated based on a mere change of opinion by the Assessing Officer. This judgment reinforces the principle established in Commissioner of Income Tax, Delhi vs. Kelvinator of India Ltd. (2010) 320 ITR 561(SC), and it clarifies that the Assessing Officer’s power to reassess is not a power to review. The Supreme Court has consistently held that reassessment must be based on new material or facts, not a change of opinion on the same facts.

Conclusion

The Supreme Court dismissed the appeal filed by the Income Tax Department, affirming the High Court’s decision to quash the reassessment notice and order. The Court held that the reassessment was based on a mere change of opinion by the Assessing Officer, which is not a valid ground for reopening an assessment under Section 147 of the Income Tax Act, 1961. This judgment provides clarity on the scope of the Assessing Officer’s power to reassess and protects taxpayers from arbitrary reassessment proceedings.