BACHHRAJ GHEWARCHAND BEGANI V. INCOME TAX OFFICER WARD 1(1)(3)

SCA/64/2022

AI Insights

The case involves Bachhraj Ghewarchand Begani, the petitioner, who challenged the notice issued by the Income Tax Officer under section 148 of the Income Tax Act, 1961, seeking to reopen his assessment for the year 2013-2014. The petitioner had initially declared income from various sources including an annuity from LIC and claimed deductions for interest expenses. The original assessment was completed under section 143(3) of the Act, and the case was reopened after more than four years based on the Assessing Officer's belief that income had escaped assessment. The court examined whether the reopening was justified and found that it was based on a change of opinion rather than new material facts, leading to the quashing of the notice and the subsequent order.

• Counselvise Citation: [2022] 140 COUNSELVISE.COM (IT) 746823 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 27-09-2022
• Assessment Year: misc
• Other Referred Cases: Raymond Woolen Mills Ltd vs ITO, Commissioner of Income tax v. Kelvinator of India Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: NIKUNT RAVAL
• Assessee Lawyers: TUSHAR HEMANI; VAIBHAVI PARIKH
• Keywords: Escapement of income; Income tax reassessment; Interest expenses; Reopening of assessment; Annuity from LIC
• Section: 147; 148; 143(3); 142(1); 151; 226

Judgement Text

"C/SCA/64/2022 JUDGMENT DATED: 27/09/2022 IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/SPECIAL CIVIL APPLICATION NO. 64 of 2022 FOR APPROVAL AND SIGNATURE: HONOURABLE MR. JUSTICE N.V.ANJARIA and HONOURABLE MR. JUSTICE BHARGAV D. KARIA ========================================================== 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India or any order made thereunder ? ========================================================== BACHHRAJ GHEWARCHAND BEGANI Versus INCOME TAX OFFICER WARD 1(1)(3) ========================================================== Appearance: MR TUSHAR HEMANI,SENIOR ADVOCATE WITH MS VAIBHAVI K PARIKH(3238) for the Petitioner(s) No. 1 MR NIKUNT RAVAL FOR MRS KALPANAK RAVAL(1046) for the Respondent(s) No. 1 ========================================================== CORAM:HONOURABLE MR. JUSTICE N.V.ANJARIA and HONOURABLE MR. JUSTICE BHARGAV D. KARIA Date : 27/09/2022 ORAL JUDGMENT Page 1 of 29 C/SCA/64/2022 JUDGMENT DATED: 27/09/2022 (PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA) 1.Heard learned Senior Advocate Mr. Tushar Hemani for the petitioner assisted by learned advocate Ms. Vaibhavi Parikh for the petitioner and learned advocate Mr. Nikunt Raval for learned advocate Ms. Kalpana Raval for the respondents. 2.Having regard to the controversy involved in this petition, with the consent of the learned advocates for the respective parties, the petition is taken up for final hearing. 3.Rule returnable forthwith. Learned advocate Mr. Nikunt Raval waives service of notice of rule for the respondents. 4.The petitioner has preferred this petition under Article 226 of the Constitution of Page 2 of 29 C/SCA/64/2022 JUDGMENT DATED: 27/09/2022 India challenging the impugned notice dated 30.03.2021 issued under section 148 of the Income Tax Act, 1961 (For short “the Act”) proposing to reopen the assessment for the Assessment Year 2013-2014. 5.Brief facts of the case are that the petitioner is an individual. During the year under consideration i.e. 2013-2014, the petitioner derived income from salary and income from other sources and also earned certain income in the form of Annuity from LIC. The petitioner also incurred interest expenses of Rs.43,56,479/-. 5.1) The petitioner filed return of income for the year under consideration on 29.03.2014 declaring total income at Rs.1,15,37,670/-. It is the case of the petitioner that while computing income for the year under consideration under the head Page 3 of 29 C/SCA/64/2022 JUDGMENT DATED: 27/09/2022 ‘Income from other sources’, interest expenses of Rs.43,56,479/- were deducted from Annuity from LIC which, in turn, resulted in Net loss under the head ‘Income from other sources’. Such loss was thereafter, set-off against the salary income. It is the case of the petitioner that the aforesaid facts are very much evident form the computation of total income as well as the return of income filed in the prescribed form being Form ITR- 2. 5.2) The case of the petitioner for the year under consideration was selected for scrutiny. Various details were called for by the then Assessing Officer from time to time and the same were duly furnished by the petitioner. The then Assessing Officer, vide notice dated 07.05.2015 issued under section 142(1) of the Act called upon the petitioner to furnish various details. Page 4 of 29 C/SCA/64/2022 JUDGMENT DATED: 27/09/2022 5.3) The petitioner, vide letter dated 14.08.2015, furnished various details as called for. 5.4) It is the case of the petitioner that the then Assessing Officer, after perusing such details and information furnished by the petitioner from time to time, consciously chose not to disturb the claim of interest expenses while framing assessment under section 143(3) of the Act vide order dated 31.03.16. 5.5) Thereafter, the respondent issued the impugned notice dated 30.03.2021 under section 148 of the Act seeking to reopen the case of the petitioner for the year under consideration. 5.6) The petitioner, in response to the Page 5 of 29 C/SCA/64/2022 JUDGMENT DATED: 27/09/2022 impugned notice, filed return of income on 16.04.2021 and further requested the respondent to supply copy of reasons for reopening. 5.7) The respondent supplied the copy of reasons for reopening vide letter dated 03.05.2021. The reasons recorded by the Assessing Officer for reopening the assessment under section 147 of the Act read as under : “1. Brief details of the assessee: The assesses company filed its return of income for AY 2013-14 on 29-03-2014 declaring total income of Rs. 1,15,37,670/-. Assessment u/s.143(3) of the Act finalized on 31.03.2016 determining total income at Rs. 1,94,24,300/- 2. Brief Details of Information collected/ received by the AQ: In this case information was received that assessee has received annuity from LIC of 20,04,193/-. It was further noticed that assessee has shown expenditure on net interest payment on loan of Page 6 of 29 C/SCA/64/2022 JUDGMENT DATED: 27/09/2022 43,56,479/-. This net interest expenditure was adjusted against annuity from LIC of 20,04,193/-. The remaining amount of 23,52,286 was adjusted against salary income. The annuity from LIC falls under the head income from other sources and for computing income under this head expenditure laid out or expended wholly and exclusively for the purpose of making or earning such income is allowable and there happened to be no expenditure in respect of earning of annuity no adjustment of interest expenditure was allowable and income from other sources was to be determined at 20,04,193 and also consequent to this loss under this head claimed and adjusted against salary is not allowable to the assessee. Therefore, the total of interest expenses adjusted against the salary income and LIC annuity amounting to Rs. 43,56,479/- was not allowable to the assessee. 3 Analysis of information collected/ received Information received has been analyzed and it is found that the total of interest expenses adjusted against the salary income and LIC annuity amounting to Rs. 43,56,479/- is not allowable to the assessee. 4. Enquiries made by the AO as sequel to information collected/received Page 7 of 29 C/SCA/64/2022 JUDGMENT DATED: 27/09/2022 On receipt of the information, the case records of the assessee alongwith the return of income has been verified. On verification of the same it is found that the information that the assessee has claimed set off of income against loss of interest with respect to LIC annuity and Salary income against interest loss. 5 Findings of the AO As per the information received, analyses made and enquiries conducted by verifying the case records and return of income, the information that the assessee has claimed setoff of income against loss of interest with respect to LIC annuity and Salary income against interest loss is found to be correct. 6. Basis of forming reason to believe and details of escapement of income In this case information was received that assessee has received annuity from LIC 20,04,193/-. It was further noticed that assessee has shown expenditure on net interest payment on loan of 43,56,479/-. This net interest expenditure was adjusted against annuity from LIC of 20,04,193/-. The remaining amount of 23,52,286 was adjusted against salary income. The annuity from LIC falls under the head income from other sources and for computing Page 8 of 29 C/SCA/64/2022 JUDGMENT DATED: 27/09/2022 income under this head expenditure laid out or expended wholly and exclusively for the purpose of making or earning such income is allowable and there happened to be no expenditure in respect of earning of annuity, no adjustment of interest expenditure was allowable and income from other sources was to be determined at 20,04,193 and also consequent to this loss under this head claimed and adjusted against salary is not allowable to the assessee. Therefore, the total of interest expenses adjusted against the salary income and LIC annuity amounting to Rs. 43,56,479/- is not allowable to the assessee. The information was analyzed enquires were made by the assessing officer by verifying the case records and return of income, the information that the assessee has claimed setoff of income against loss of interest with respect to LIC annuity and Salary income against interest loss is found to be correct. In view of the above, I have reason to believe that the income chargeable to tax has escaped assessment to the tune of Rs. 4656479/- in the case of the assessee for the A.Y. 2013-14 is required to be reopened u/s. 147 of the I. T. Act 7. Findings of AO on true and full disclosure of material facts Page 9 of 29 C/SCA/64/2022 JUDGMENT DATED: 27/09/2022 necessary for assessment under Proviso to section 147: The assesses company filed its return of income for AY 2013-14 on 29-03-2014 declaring total income of Rs. 1,15,37,670/-. Assessment u/s. 143(3) of the Act finalized on 31.03.2016 determining total income at Rs. 1,94,24,300/-. During the course of assessment proceedings the assessee failed to disclose the fact regarding set off of income against loss of interest with respect to LIC annuity and salary income against interest loss is found to be correct. Hence there is failure on the part of the assessee to disclose all material and facts truly and fully necessary for its assessment for the year under consideration. 8. Applicability of the provisions of section 147/151 to the facts of the case. The assesses company filed its return of income for AY 2013-14 on 29-03-2014 declaring total income of Rs. 1,15,37,670/-. Assessment u/s.143(3) of the Act finalized on 31.03.2016 determining total income at Rs. 1,94,24,300/-. Since, 4 years from the end of the relevant year has expired in this case, the requirements to initiate proceeding u/s. 147 of the Act are reason to believe that income for the year under consideration has escaped assessment because of failure on the part of the assessee to disclose Page 10 of 29 C/SCA/64/2022 JUDGMENT DATED: 27/09/2022 fully and truly all material facts necessary for its assessment for the assessment year under consideration. It is pertinent to mention here that reasons to believe that income has escaped assessment for the year under consideration have been recorded above (paragraph 3 to 6). I have carefully considered the assessment records containing the submissions made by the assessee in response to various notices issued during the assessment proceedings and have noted that the assessee has not fully and truly disclosed the material facts necessary for its assessment for the year under consideration. It is evident from the above facts that the assessee had not truly and fully disclosed material facts necessary for his assessment for the year under consideration thereby necessitating reopening u/s. 147 of the Act. It is pertinent to mention here that the requisite material facts as noted above in the reasons for reopening were embedded in such a manner that material evidence could not be discovered by the AO, accordingly attracting provisions of Explanation 1 of section 147 of the Act. It is evident from the above discussion that in this case, the issues under consideration were never examined by the AO during the Page 11 of 29 C/SCA/64/2022 JUDGMENT DATED: 27/09/2022 course of regular assessment. It is important to highlight here that material facts relevant for the assessment on the issue under consideration were not filed during the course of assessment proceeding and the same may be embedded in annual report, audited P & L A/c:, balance sheet and books of account in such a manner that it was not possible by the AO to extract these information. For aforesaid reasons, it is not a case of change of opinion by the AO In this case more than four years have lapsed from the end of assessment year under consideration. Hence necessary sanction to issue notice u/s. 148 has been obtained separately from Principal Commissioner of Income Tax as per the provisions of section 151 of the Act.” 5.8) The petitioner, vide letter dated 08.05.2021, raised objections against reopening of the assessment and requested to drop the reassessment proceedings. 5.9) The petitioner, vide another letter dated 08.05.2021, requested the respondent to supply the copies of various documents Page 12 of 29 C/SCA/64/2022 JUDGMENT DATED: 27/09/2022 pertaining to assessment carried out by the respondent Assessing Officer. 5.10) The respondent, vide order dated 23.07.2021, disposed off such objections and, inter-alia, held that the action of reopening initiated for the year under consideration is justified. 5.11) Being aggrieved by the impugned action of the respondent, the petitioner has preferred the present petition. 6.Learned Senior Advocate Mr. Tushar Hemani for the petitioner submitted that the impugned notice is patently bad, illegal and contrary to law inasmuch as the assessment for the year under consideration was framed under section 143(3) of the Act and the same is sought to be reopened beyond the period of four years from the end of the relevant Page 13 of 29 C/SCA/64/2022 JUDGMENT DATED: 27/09/2022 assessment year. It was submitted that an assessment framed under section 143(3) of the Act can be reopened beyond the prescribed period of four years from the end of the relevant assessment year if and only if an income chargeable to tax has escaped assessment by reason of failure on the part of the petitioner to file return under section 139 or in response to the notice issued under section 142(1) or section 148 or to disclose fully and truly all material facts necessary for his assessment for that Assessment Year 6.1) It was submitted that there is no failure on the part of the petitioner to disclose fully and truly in relation to the the interest expenses which is evident from Profit & Loss account, Computation of income, Return of income, Notice dated 07.05.2015, Letter dated 14.08.2015 and Assessment Order Page 14 of 29 C/SCA/64/2022 JUDGMENT DATED: 27/09/2022 dated 31.03.2016 and therefore, the impugned notice issued by the respondent under section 148 of the Act for the year under consideration deserves to be quashed and set aside. 6.2) It is submitted that the respondent has stated in reasons for reopening that the case has been reopened based on some information received by the respondent. However, though the petitioner specifically requested for copy of such information, the respondent has not provided copy of the same. Had it been the case that there was some information, the same would have been provided to the petitioner. This shows that there is no new information based on which, it can be said that there is escapement of income chargeable to tax. 6.3) It was submitted that in the order Page 15 of 29 C/SCA/64/2022 JUDGMENT DATED: 27/09/2022 disposing off the objections, it is stated that when the petitioner has failed to disclose material facts necessary for assessment, it is a new material in the hands of the Assessing Officer which is good enough for the Assessing Officer to reopen the case of the petitioner. It was submitted that such an observation in the order disposing off the objections shows that there is no information at all based on which, the case has been reopened. 6.4) Learned Senior Advocate Mr. Hemani submitted that the condition precedent for the purpose of resorting to reopening proceedings under the provisions of section 147 of the Act is that there must be escapement of any income chargeable to tax. In absence of escapement of any income chargeable to tax, it is not open for the Department to reopen the case of an assessee. Page 16 of 29 C/SCA/64/2022 JUDGMENT DATED: 27/09/2022 In the present case, the petitioner had incurred interest expenses on borrowed funds which were utilized for the purposes of investment in shares. Hence, set-off of such interest expenses against income of the petitioner is very much allowable, as has been done by the petitioner. It was therefore submitted that even on merits, the claim of interest expenses of the petitioner is justified in the eye of law. 6.5) It was submitted that as per section 151 of the Act, no notice shall be issued under section 148 of the Act after the expiry of a period of four years from the end of the relevant assessment year unless the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner is satisfied, on the reasons recorded by the Assessing officer, that it is a fit case for the issue of such notice. Thus, in case of Page 17 of 29 C/SCA/64/2022 JUDGMENT DATED: 27/09/2022 reopening beyond a period of four years from the end of the relevant assessment year, it is mandatory on the part of the Assessing Officer to obtain sanction from the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner. Such a sanction should not be merely mechanical in nature. The concerned Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner must record satisfaction in a detailed manner after perusing the entire material on record which has been made the basis by the Assessing officer for reopening the case of an assessee. For that purpose, it is very much essential that there is application of mind at the end of the concerned the concerned Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner. Mere endorsement of the view taken by the concerned Assessing Officer Page 18 of 29 C/SCA/64/2022 JUDGMENT DATED: 27/09/2022 would not meet the requirement of the provisions of section 151 of the Act. It was submitted that in the present case, reopening is beyond a period of four years from the end of the relevant assessment year and hence, sanction of Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner is to be mandatorily obtained. However, there is no application of mind at the end of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner while sanctioning the issuance of notice under section 148 of the Act. Rather, reopening has been sanctioned merely in a mechanical manner which is not permissible in the eye of law. 7.On the other hand learned advocate Mr. Nikunt Raval for the respondent submitted that on perusal of records, it was seen that the assessee had deducted interest expenses on Page 19 of 29 C/SCA/64/2022 JUDGMENT DATED: 27/09/2022 loan of Rs. 43,56,479/- from Annuity from LIC of Rs. 20,04,193/-, which in turn resulted in net loss from Income from other sources of Rs. 23,52,286/-. Such loss under Income from other sources was set off against salary income, but, the assessee has only provided general details during the course of regular assessment proceedings. It was submitted that assessing officer while recording reasons for reopening has formed reason to believe that for computing income under the head ‘Income from other sources, expenditure laid out or expended wholly and exclusively for the purpose of making or earning such income is allowable and there happened to be no expenditure in respect of earning of annuity, so no adjustment of interest expenditure was allowable and also consequent adjustment from salary income was also not allowable. It was submitted that the assessee has never disclosed the above fact before the Assessing Page 20 of 29 C/SCA/64/2022 JUDGMENT DATED: 27/09/2022 Officer during the course of regular assessment proceedings. 7.1) It was submitted that the assessee has never provided details with regard to question no. 13 which was asked vide questionnaire issued under section 142(1) of the Act on 31.08.2015 with respect to nexus of LIC annuity income of Rs. 20,04,193/- and interest payment expenses of Rs. 43,56,479/-. It was therefore, submitted that there was a clear failure on the part of the petitioner to disclose fully and truly facts necessary for assessment. 7.2) It was submitted that the prime criteria for reopening the case for the assessing Officer is that he should be satisfied that the income chargeable to tax has escaped assessment. In the present case, the Assessing Officer from the case records, Page 21 of 29 C/SCA/64/2022 JUDGMENT DATED: 27/09/2022 had information in his hands that an amount of Rs. 43,56,479/- has escaped assessment. The Assessing Officer has analyzed the case records and made enquires which were necessary on the basis of material available on records and then arrived at reason to believe that income has escaped assessment. Thereafter, after recording the reasons and obtaining approval from the competent authority, the Assessing Officer issued notice under section 148 of the Act. It was submitted that the merits of the case are not to be discussed at this stage and the same may be submitted by the assessee during the assessment proceedings. In support of such submission, reliance is placed on decision of the Hon’ble Apex Court in the case of Raymond Woolen Mills Ltd vs ITO reported in 236 ITR 34 wherein it is held that at the time of recording the reason for satisfaction of the assessing Officer, there should be prima Page 22 of 29 C/SCA/64/2022 JUDGMENT DATED: 27/09/2022 facie some material on the basis of which the department could re-open the case. The sufficiency or correctness of the material is not a thing to be considered at this stage. It will be open to the assessee to prove that the assumption of the fact made in the notice was erroneous at the time of assessment proceedings. 7.3) Learned advocate Mr. Raval submitted that the issue of notice under section 148 of the Act and terms of section 151 of the Act are done on systems and unless the appropriate approving authority is not satisfied with the reasons recorded and does not approve the issue of notice under section 148 of the Act, the Assessing Officer cannot issue the notice for reopening the assessment under section 148 of the Act, as per the existing system. It was submitted that the sanction/approval of the appropriate Page 23 of 29 C/SCA/64/2022 JUDGMENT DATED: 27/09/2022 authority was sought before issuance of notice under section 148 of the Act and the approval so accorded was on merits post the authority satisfying itself as to the correctness of the reopening. 8.Having heard the learned advocates for the respective parties and having considered the facts and materials on record as well as submissions made by learned advocates for both the sides, it appear that it is not in dispute that the Assessing Officer issued the impugned notice under section 148 of the Act for the Assessment Year 2013-2014 beyond the period of four years as the regular assessment order under section 143(3) of the Act was passed on 31.03.2016 after considering the relevant details, documents, explanation, certification etc. by the Assessing Officer. Page 24 of 29 C/SCA/64/2022 JUDGMENT DATED: 27/09/2022 9.On perusal of the reasons recorded, it is apparent that there is no new independent material available with the Assessing Officer which is relied upon to issue the impugned notice under section 148 of the Act. The impugned notice is issued only on analysis of the materials made available by the petitioner assessee during the course of regular assessment. The issue with regard to annuity income from LIC amounting to Rs.20,04,193/- is already disclosed by the assessee as income in the return of income and interest amount of Rs.43,56,479/- is claimed as expenditure which was considered during the course of the regular assessment. Reasons recorded also discloses it is as per the information received, analysis made and inquiry conducted by the Assessing Officer on the basis of verification of case record and return of income. Thus, there is no new Page 25 of 29 C/SCA/64/2022 JUDGMENT DATED: 27/09/2022 material available with the Assessing Officer and therefore, analysing the material which is available on record would amount to change of opinion on part of the Assessing Officer and therefore, in facts of the case, the Assessing Officer could not have assumed any jurisdiction to reopen the assessment beyond the period of four years when the assessee has disclosed truly and fully all material facts relevant for the assessment as per proviso to section 147 of the Act. 10. The Apex Court in case of Commissioner of Income tax v. Kelvinator of India Ltd. reported in (2010) 320 ITR 561(SC) has held as under: “2. A short question which arises for determination in this batch of civil appeals is, whether the concept of \"change of opinion\" stands obliterated with effect from 1st April, 1989, i.e., after substitution of Section 147 of the Income Tax Act, 1961 by Direct Tax Laws (Amendment) Act, 1987? Page 26 of 29 C/SCA/64/2022 JUDGMENT DATED: 27/09/2022 xxxx 6. …………prior to Direct Tax Laws (Amendment) Act, 1987, re-opening could be done under above two conditions and fulfillment of the said conditions alone conferred jurisdiction on the Assessing Officer to make a back assessment, but in section 147 of the Act [with effect from 1st April, 1989], they are given a go-by and only one condition has remained, viz., that 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\" failing which, we are afraid, 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. 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. One must treat the concept of \"change of opinion\" as an in-built test to check abuse of power by the Assessing Officer…..” Page 27 of 29 C/SCA/64/2022 JUDGMENT DATED: 27/09/2022 11. The Assessing Officer issued notice under section 148 of the Act only to make a roving inquiry into the facts which were already considered by the Assessing Officer at the time of framing the original assessment under section 143(3) of the Act. It appears that the Assessing Officer now wants to re-verify the facts which is not permissible to be an acceptable ground for exercising powers to reopen the assessment. 12. For the foregoing reasons, the impugned notice dated 30.03.2021 issued under section 148 of the Act by the respondent exercising the powers to reopen the assessment for the Assessment Year 2013-2014 is illegal and hereby quashed and set aside. As a consequence, order dated 23.07.2021 of the Assessing Officer disposing of the objections of the petitioner against the impugned notice Page 28 of 29 C/SCA/64/2022 JUDGMENT DATED: 27/09/2022 is also quashed and set aside. 13. The petition succeeds and is allowed. Rule is made absolute to the aforesaid extent. No order as to costs. (N.V.ANJARIA, J) (BHARGAV D. KARIA, J) RAGHUNATH R NAIR Page 29 of 29 "