INCOME TAX OFFICER WARD NO. 16 (2) versus M/S TECHSPAN INDIA PRIVATE LTD. & ANR. on 24 April 2018

328

SUPREME COURT REPORTS

[2018] 4 S.C.R.

A

INCOME TAX OFFICER WARD NO. 16 (2)

v.

M/S TECHSPAN INDIA PRIVATE LTD. & ANR.

(Civil Appeal No. 2732 of 2007)

BAPRIL 24, 2018

[R. K. AGRAWAL AND

MOHAN M. SHANTANAGOUDAR, JJ.]

Income Tax Act, 1961 – s.147 – Scope of – Held: s.147empowers the Assessing authority to re-assess any income on theCground which was not brought on record during the originalproceedings and escaped his knowledge; and the said fact wouldhave material bearing on the outcome of the relevant assessmentorder – In the instant case, assessee declared its income from twosources, namely software development and human resourceDdevelopment but claimed expenses commonly for both – Notice wasissued to show cause as to why the expenses claimed with regard tothe allocation of common expenses between the two heads did notreveal any basis of such allocation – The notice which was issuedin the original assessment proceedings under s.143 show that thepoint on which the re-assessment proceedings were initiated, wasEwell considered in the original proceedings – In fact, the very basisof issuing the show cause notice was that the assessee was notmaintaining any separate books of account for the said twocategories and the details filed did not reveal proportional allocationof common expenses be made to these categories – Even the saidFshow cause notice suggested how proportional allocation shouldbe done – All these things led to an unavoidable conclusion thatthe question as to how and to what extent deduction should beallowed under s.10A was well considered in the original assessmentproceedings itself – Hence, initiation of the re-assessmentproceedings under s.147 by issuing a notice under s.148 merelyGbecause of the fact that now the Assessing Officer is of the viewthat the deduction under s.10A was allowed in excess, was basedon nothing but a change of opinion on the same facts andcircumstances which were already in his knowledge even duringthe original assessment proceedings – High Court was right in settingHaside the show cause notice as well as the re-assessment order.

Income Tax Act, 1961 – s.147 – Reassessment proceedings –Held: The use of the words ‘reason to believe’ in s.147 has to beinterpreted schematically as the liberal interpretation of the wordwould have the consequence of conferring arbitrary powers on theassessing officer who may even initiate such re-assessmentproceedings merely on his change of opinion on the basis of samefacts and circumstances which has already been considered by himduring the original assessment proceedings.

Words and Phrases – ‘change of opinion’ – Meaning of –Held: The word change of opinion implies formulation of opinionand then a change thereof – In terms of assessment proceedings, itmeans formulation of belief by an assessing officer resulting fromwhat he thinks on a particular question – It is a result ofunderstanding, experience and reflection.

Dismissing the appeal, the Court

Conclusion

HELD: 1. The language of Section 147 makes it clear thatthe assessing officer certainly has the power to re-assess anyincome which escaped assessment for any assessment yearsubject to the provisions of Sections 148 to 153. However, theuse of this power is conditional upon the fact that the assessingofficer has some reason to believe that the income has escapedassessment. The said provision was incorporated in the schemeof the IT Act so as to empower the Assessing Authorities to re-assess any income on the ground which was not brought on recordduring the original proceedings and escaped his knowledge; andthe said fact would have material bearing on the outcome of therelevant assessment order. Section 147 of the IT Act does notallow the re-assessment of an income merely because of the factthat the assessing officer has a change of opinion with regard tothe interpretation of law differently on the facts that were wellwithin his knowledge even at the time of assessment. Doing sowould have the effect of giving the assessing officer the power ofreview and Section 147 confers the power to re-assess and notthe power to review. [Paras 8, 9][334-F-H; 335-A-C]

2. Before interfering with the proposed re-opening of theassessment on the ground that the same is based only on a changein opinion, the court ought to verify whether the assessment A

B

C

DE

F

G

H

Aearlier made has either expressly or by necessary implicationexpressed an opinion on a matter which is the basis of the allegedescapement of income that was taxable. If the assessment orderis non-speaking, cryptic or perfunctory in nature, it may be difficultto attribute to the assessing officer any opinion on the questionsthat are raised in the proposed re-assessment proceedings. EveryBattempt to bring to tax, income that has escaped assessment,cannot be absorbed by judicial intervention on an assumed changeof opinion even in cases where the order of assessment does notaddress itself to a given aspect sought to be examined in the re-assessment proceedings. [Para 12][336-B-D]

C3. The fact in controversy in this case is with regard to thededuction under Section 10A of the IT Act which was allegedlyallowed in excess. The show cause notice reflects the ground forre-assessment in the instant case, that is, the deduction allowedin excess under Section 10A and, therefore, the income has Descaped assessment to the tune of Rs. 57,36,811. In the impugnedorder, the reason purportedly given for rejecting the objectionswas that the assessee was not maintaining any separate books ofaccounts for the two categories, i.e., software development andhuman resource development, on which it has declared incomeseparately. However, a bare perusal of notice which was issuedEin the original assessment proceedings under Section 143 makesit clear that the point on which the re-assessment proceedingswere initiated, was well considered in the original proceedings.[Para 13][336-E-G]

Commissioner of Income Tax, Delhi v. Kelvinator ofFIndia Ltd. (2010) 320 ITR 561(SC) – referred to.

Case Law Reference

(2010) 320 ITR 561 (SC) referred toPara 11

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2732Gof 2007.

From the Judgment and Order dated 24.02.2006 of the High Courtof Delhi at New Delhi in Writ Petition (C) No. 14376 of 2005.

Rajesh Ranjan, Hemant Arya, Shashank Dewan, Ms. Vimla Sinha(for Mrs. Anil Katiyar), Advs. for the Appellant.H

C. S. Agarwal, Sr. Adv, Bhargava V. Desai, Ms. Pushpa Sharma,Uma Shankar, Ms. Saumya Mehrotra, Advs. for the Respondents.

The Judgment of the Court was delivered by

R. K. AGRAWAL, J. 1.The present appeal has been preferredagainst the impugned final judgment and order dated 24.02.2006 passedby the High Court of Delhi in W.P.(C) No 14376 of 2005 whereby aDivision Bench of the High Court, while allowing the petition filed by theRespondent herein, quashed the notice dated 10.02.2005 issued underSection 148 of the Income Tax Act, 1961 (hereinafter referred to as ‘theIT Act’) and the order dated 17.08.2005 passed by the Income TaxOfficer.

2. Brief facts:-

(a) M/s TechSpan India Private Ltd.-the Respondent is a privatelimited company incorporated under the Companies Act, 1956 and isengaged in the business of development and export of computer softwaresand human resource services. It is also relevant to mention here thatthe Respondent-Company is also eligible for deduction under Section10A of the IT Act.

(b) On 25.10.2001, the Respondent filed its return of income forthe 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 developmentand human resource development but claimed expenses commonly forboth. It also claimed deduction under Section 10 A of the IT Act for theincome from the software development. The said return was acceptedand accordingly intimated to the Respondent.

(c) The return was selected for regular assessment under Section143(3) of the IT Act and a show cause notice dated 09.03.2004 wasissued to the Respondent to show cause as to why the expenses claimedwith regard to the allocation of common expenses between the twoheads, viz., software development and human resource development donot reveal any basis for such allocation. The issue was duly contestedand decided vide order dated 29.11.2004 and the proceedings endedwith a rectification of the Assessment Order under Section 154 of theIT Act while arriving at an income of Rs. 31,63,570/- which was fullyset-off against the loss brought forward and the income was assessedas ‘Nil’ for the AY 2001-2002.

A

B

C

D

E

F

G

H

A

A(d) Further, on 10.02.2005, a Notice was served upon theRespondent by the Revenue for re-opening the assessment under Section148 on the ground that the deduction under Section 10A of the IT Acthas been allowed in excess and the income escaped assessment worksout to Rs. 57,36,811/- in the original assessment. The Respondent filed adetailed reply objecting to the re-assessment. However, by order datedB17.08.2005, the objections were rejected and reassessment was approvedby the Revenue.

(e) Being aggrieved, the Respondent challenged the above saidshow cause notice dated 10.02.2005 as well as the order dated 17.08.2005Cbefore the High Court by filing a Writ Petition (C) No. 14376 of 2005.Vide judgment and order dated 24.02.2006, the High Court set aside theshow cause notice dated 10.02.2005 as well as the re-assessment orderdated 17.08.2005.

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

3. Heard Mr. Rajesh Ranjan, learned counsel for the Appellantand Mr. C.S. Agarwal, learned counsel for the Respondents and perusedthe records.

EPoint(s) for consideration:-

4. The only point for consideration before this Court is whetherthe re-opening of the completed assessment is justified in the presentfacts and circumstances of the case?

FRival contentions:-

5. Learned counsel for the Appellant contended that the AssessingOfficer (AO) was well within his powers to issue the show cause noticeunder Section 148 as the deduction that was allowed under Section 10Awas in excess and had escaped assessment for which re-assessmentGproceedings can be issued under Section 147. He further contendedthat the High Court has erroneously held that the re-assessmentproceedings initiated under Section 147 of the Act are illegal and notsustainable in the eyes of law. Learned counsel finally contended thatthe impugned judgment of the High Court is erroneous in the eyes of lawand is liable to be set aside.

H

6. Learned counsel appearing on behalf of the Respondentsubmitted that the ground for re-assessment proceedings under Section147 in the present case is nothing but merely a change of opinion on thesame material facts of the case and no new fact has come to theknowledge of the Appellant enabling the said authority to initiate re-assessment proceedings under the IT Act, and therefore, the High Courtwas right in allowing the writ petition in light of the fact that mere changeof opinion cannot be a ground for re-assessment.

7. He further submitted that the ground on which the re-assessmentproceedings were initiated was well considered by the competent authorityduring the time of original assessment proceedings. He further contendedthat the order dated 17.08.2005 was not a speaking order and was rightlyset aside by the High Court. Learned counsel finally submitted that theHigh Court has rightly set aside the show cause notice dated 10.02.2005and the order dated 17.08.2005 and no interference is called for by thisCourt in the matter.

Discussion:-

8. To appreciate the present controversy between the parties, itwould be appropriate to refer to Sections 147 and 148 of the IT Act. Forready reference, relevant portion of Sections 147 and 148 of the Act arereproduced below:- “147.Income escaping assessment:— If the AssessingOfficer has reason to believe that any income chargeable to taxhas escaped assessment for any assessment year, he may, subjectto the provisions of sections 148 to 153, assess or reassess suchincome and also any other income chargeable to tax which hasescaped assessment and which comes to his notice subsequentlyin the course of the proceedings under this section, or recomputethe loss or the depreciation allowance or any other allowance, asthe case may be, for the assessment year concerned (hereafterin this section and in sections 148 to 153 referred to as the relevantassessment year):

Provided that where an assessment under sub- section (3) ofsection 143 or this section has been made for the relevantassessment year, no action shall be taken under this section afterthe expiry of four years from the end of relevant assessmentyear, unless any income chargeable to tax has escaped assessment A

B

C

D

E

F

G

H

A

for such assessment year by reason of the failure on the part ofthe assessee to make a return under section 139 or in response toa notice issued under sub- section (1) of section 142 or section148 or to disclose fully and truly all material facts necessary forhis assessment for that assessment year:

Bx x x

x x x”

“148. Issue of notice where income has escapedassessment.-(1) Before making the assessment, reassessmentor recomputation under section 147, the Assessing Officer shallserve on the assessee a notice requiring him to furnish withinsuch period, as may be specified in the notice, a return of hisincome or the income of any other person in respect of which heis assessable under this Act during the previous year correspondingto the relevant assessment year, in the prescribed form and verifiedin the prescribed manner and setting forth such other particularsas may be prescribed, and the provisions of this Act shall, so faras may be, apply accordingly as if such return were a returnrequired to be furnished under Section 139:

C

D

x x x

Ex x x

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

The language of Section 147 makes it clear that the assessingofficer certainly has the power to re-assess any income which escapedFassessment for any assessment year subject to the provisions of Sections148 to 153. However, the use of this power is conditional upon the factthat the assessing officer has some reason to believe that the incomehas escaped assessment. The use of the words ‘reason to believe’ inSection 147 has to be interpreted schematically as the liberal interpretationGof the word would have the consequence of conferring arbitrary powerson the assessing officer who may even initiate such re-assessmentproceedings merely on his change of opinion on the basis of same factsand circumstances which has already been considered by him duringthe original assessment proceedings. Such could not be the intention ofthe legislature. The said provision was incorporated in the scheme of theH

IT Act so as to empower the Assessing Authorities to re-assess anyincome on the ground which was not brought on record during the originalproceedings and escaped his knowledge; and the said fact would havematerial bearing on the outcome of the relevant assessment order.

9. Section 147 of the IT Act does not allow the re-assessment ofan income merely because of the fact that the assessing officer has achange of opinion with regard to the interpretation of law differently onthe facts that were well within his knowledge even at the time ofassessment. Doing so would have the effect of giving the assessingofficer 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 onehas to see its meaning in literal as well as legal terms. The word changeof opinion implies formulation of opinion and then a change thereof. Interms of assessment proceedings, it means formulation of belief by anassessing 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 judgmentsand it would be sufficient to refer Commissioner of Income Tax, Delhivs. Kelvinator of India Ltd. (2010) 320 ITR 561(SC) wherein this Courthas held as under:- “5….where the Assessing Officer has reason to believe that incomehas escaped assessment, confers jurisdiction to re- open theassessment. Therefore, post-1st April, 1989, power to re-open ismuch wider. However, one needs to give a schematic interpretationto the words “reason to believe”…..

Section 147 would give arbitrary powers to the Assessing Officerto 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 betweenpower to review and power to re-assess. The Assessing Officerhas no power to review; he has the power to re-assess. But re-assessment has to be based on fulfillment of certain pre-conditionand if the concept of “change of opinion” is removed, as contendedon behalf of the Department, then, in the garb of re-opening theassessment, review would take place.

A

B

C

D

E

F

G

H

A

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 conclusionthat there is escapement of income from assessment. Reasonsmust have a live link with the formation of the belief.”

B

12. Before interfering with the proposed re-opening of theassessment on the ground that the same is based only on a change inopinion, the court ought to verify whether the assessment earlier madehas either expressly or by necessary implication expressed an opinionon a matter which is the basis of the alleged escapement of income thatCwas taxable. If the assessment order is non-speaking, cryptic orperfunctory in nature, it may be difficult to attribute to the assessingofficer any opinion on the questions that are raised in the proposed re-assessment proceedings. Every attempt to bring to tax, income that hasescaped assessment, cannot be absorbed by judicial intervention on anDassumed change of opinion even in cases where the order of assessmentdoes 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 thededuction under Section 10A of the IT Act which was allegedly allowedEin excess. The show cause notice dated 10.02.2005 reflects the groundfor re-assessment in the present case, that is, the deduction allowed inexcess under Section 10A and, therefore, the income has escapedassessment to the tune of Rs. 57,36,811. In the order in question dated17.08.2005, the reason purportedly given for rejecting the objections wasthat the assessee was not maintaining any separate books of accountsFfor the two categories, i.e., software development and human resourcedevelopment, on which it has declared income separately. However, abare perusal of notice dated 09.03.2004 which was issued in the originalassessment proceedings under Section 143 makes it clear that the pointon which the re-assessment proceedings were initiated, was wellGconsidered in the original proceedings. In fact, the very basis of issuingthe show cause notice dated 09.03.2004 was that the assessee was notmaintaining any separate books of account for the said two categoriesand the details filed do not reveal proportional allocation of commonexpenses be made to these categories. Even the said show cause noticesuggested how proportional allocation should be done. All these thingsH

INCOME TAX OFFICER WARD NO. 16(2) v. M/S TECHSPANINDIA PRIVATE LTD. & ANR. [R. K. AGRAWAL, J.]

leads to an unavoidable conclusion that the question as to how and towhat extent deduction should be allowed under Section 10A of the ITAct was well considered in the original assessment proceedings itself.Hence, initiation of the re-assessment proceedings under Section 147 byissuing a notice under Section 148 merely because of the fact that nowthe Assessing Officer is of the view that the deduction under Section10A was allowed in excess, was based on nothing but a change of opinionon the same facts and circumstances which were already in hisknowledge even during the original assessment proceedings.

14. In light of the forgoing discussion, we are of the view thatimpugned judgment and order of the High Court dated 24.02.2006 doesnot call for any interference. The appeal is accordingly dismissed withno order as to costs.

Devika Gujral

Appeal dismissed.

A

B

C

D

E

F

G

H