The Bombay High Court in a judgment[1] delivered on 09.06.2023, quashed a reassessment notice issued to the assessee. The High Court inter alia observed that the notice had been issued without any justification and the assessing officer lacked any reason to believe that any income chargeable to tax had escaped assessment. Instead, the reassessment notice was based on the change of opinion of the assessing officer.
Introduction
In January 1993, the petitioner filed its return of income for the Assessment Year 1992-1993. During the assessment proceedings, the petitioner responded to queries by the assessing officer. The latter also obtained information from third parties and conducted a special audit of the petitioner to conclude the assessment in September 1995. The assessment order of the petitioner was further revised, which it appealed before the Commissioner of Income Tax in January 1998. While the appeal was pending, the Finance Act, 1998 introduced the Kar Vivad Samadhan Scheme (‘KVSS’) to declog the litigation and give assesses an opportunity to pay certain amounts and settle all their tax issues.
The petitioner took advantage of the KVSS to settle all tax disputes and issues and paid amounts in full and final settlement of its arrears under the relevant provisions of the Finance Act, 1998. And the petitioner was accordingly issued a certificate.
On 15.01.2000, the petitioner was issued another notice alleging that certain income for the Assessment Year 1992-93, has escaped assessment. The petitioner was accordingly asked to file a return for the said Assessment Year within a period of 30 days. The petitioner that the notice issued on 15.01.2000 should be quashed.
Petitioner Challenges Reassessment Notice
The petitioner assailed the validity of the reassessment notice on various grounds. The petitioner argued that the order under KVSS was passed after considering all the facts, was final for all heads of income, and also provided petitioner immunity from prosecution and imposition of penalty. The petitioner argued that the Revenue could not used the reassessment notice to ‘turn back the clock’. It is important to note that under Section 93(1), Finance Act, 1998 the designated authority was empowered to issue an order determining the tax arrears and sum payable by the taxpayer. And Section 93(3), Finance Act, 1998 stated that:
Every order passed under sub-section (1), determining the sum payable under this Scheme, shall be conclusive as to the matters stated therein and no matter covered by such order shall be reopened in any other proceeding under the direct tax enactment or indirect tax enactment or under any other law for the time being in force.
The petitioner had a justifiable and legally sound reason to resist the issuance of reassessment order if the rationale of KVSS and its underlying statutory provisions were reasonably interpreted. To further reinforce their case, the petitioner made an alternate argument, i.e., during the assessment proceedings the assessing officer made certain queries from the petitioner which were answered by it. Therefore, it follows that the reply was subject of consideration while finalizing the assessment order and thus re-opening assessment on same subject matter cannot constitute a reason to believe that income has escaped assessment.
The Revenue defended the issuance of notice by arguing that there was misdeclaration by the petitioner. And that Section 93(1), Finance Act, 1998 permitted revival of proceedings in case the declaration by the petitioner under KVSS was found to be false.
Bombay High Court Quashes Reassessment Notice
The Bombay High Court rejected the Revenue’s argument and quashed the reassessment notice issued against the petitioner. The High Court cited various reasons for its conclusion.
First, the High Court noted that it was never the State’s case that the petitioner had mis-declared income and the certificate/form issued to the petitioner under KVSS was never withdrawn.
Second, the High Court relied on Killick Nixon case[2], where the Supreme Court adjudicated on a similar set of facts and engaged with similar arguments. The Supreme Court in Killick Nixon case had held that the determination by designated authority under Section 90, Finance Act, 1998 was conclusive in respect of tax arrears and sums payable after such determination which shall be considered as full and final settlement of tax arrears. In the said case, the Supreme Court held that the assessing officer had no jurisdiction to reopen the assessment and issue a notice under Section 148, IT Act, 1961 unless it was found that the information furnished by the assessee was false. The High Court held that only on the strength of the Supreme Court’s observations, the petitioner deserved to succeed.
Third, the High Court also accepted the petitioner’s alternate argument and held that once the petitioner had furnished a detailed reply during the assessment proceedings and same had been considered during the assessment order; the reopening of assessment was based on a mere change of opinion by the assessing officer and not because there was any justification/reason to believe for issuance of the reassessment notice.
Conclusion
While the impugned case was squarely covered by the Supreme Court’s decision in Killick Nixon case and was sufficient for the petitioner to succeed. The High Court, nonetheless, went a step ahead to engage with the petitioner’s alternative argument to clarify that mere change of opinion cannot constitute a reason to believe. Section 148, IT Act, 1961 empowers an assessing officer to issue a reassessment notice on if there is a reason to believe that income of the assessee has escaped assessment. Courts have in various decisions opined that mere change of opinion cannot amount to a reason to believe, but the Revenue needs frequent reminders of the threshold prescribed. Lastly, the High Court also observed that since the Revenue issued a notice under Section 148, IT Act, 1961 after expiry of four years from end of relevant assessment year:
… the onus is on the Assessing Officer to show that income chargeable to tax has escaped assessment by reason of the failure on the part of assessee to disclose fully and truly all material facts necessary for its assessment for that assessment year. There is not even a whisper in the reasons to believe that there was any such failure on the part of petitioner to disclose fully and truly all material facts necessary for its assessment.(para 17) (emphasis added)
Accordingly, the Bombay High Court correctly quashed the reassessment notice.
[1] Citibank N.A. v S.K. Ojha [2023] 151 taxmann.com 234.
[2] Killick Nixon Ltd v Deputy Commissioner of Income Tax, Mumbai and Ors (2003) 1 SCC 145.