The Delhi High Court held that reassessment initiated solely on an audit objection, despite prior scrutiny, amounted to an impermissible review and clear change of opinion. It ruled the notice was time-barred under Section 149, as inapplicable facts existed.
NEW DELHI: The Delhi High Court determined that initiating a reassessment based solely on an audit objection, especially when the issue had already been scrutinized during the assessment, constituted an impermissible review and a change of opinion. Additionally, it ruled that the notice dated March 31, 2023, was barred by limitation according to the first proviso to Section 149, as the extended period could not be applied in the absence of undisclosed material facts.
The court granted the writ petition filed by Sapphire Foods India Ltd., effectively nullifying the order issued under Section 148A(d) and the notice under Section 148 of the Income Tax Act, 1961 for the Assessment Year 2016–17.
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Factual Backgrounds
The petitioner company filed its return for AY 2016–17, reporting a loss. The case was selected for scrutiny, culminating in an assessment completed under Section 143(3) on December 9, 2018. During the scrutiny process, the Assessing Officer raised specific questions regarding director remuneration and legal and professional expenses, including payments of ₹8.90 crore to the Managing Director and Rs 90.81 lakh to a shareholder-consultant.
The petitioner provided employment and consulting agreements, TDS details, financial statements, and other relevant disclosures. The assessment was finalized after considering these documents.
Subsequently, on March 22, 2023, a notice under Section 148A(b) was issued, citing audit objections regarding incorrect allowance of expenditures under Section 37. While the Assessing Officer dismissed one audit objection related to share premium, he upheld the objection concerning allegedly excessive expenses, leading to the issuance of a notice under Section 148.
Issues
The High Court explored whether reassessment proceedings could be initiated solely based on audit objections when the relevant issue had been thoroughly examined in the scrutiny assessment.
The Court also considered whether such a reopening constituted a “change of opinion” that is prohibited by law.
Furthermore, it evaluated whether the notice in question was barred by limitation under Section 149, in conjunction with the unamended Section 147 applicable to the assessment year.
Arguments of Parties:
- Petitioner’s Arguments:
The petitioner argued that all significant facts related to payments to the Managing Director and consultant were completely disclosed during the scrutiny assessment. Specific questions were raised under Section 142(1), and comprehensive responses were provided along with supporting documentation.
It was contended that reopening the matter based on identical material essentially constituted a review of the previous assessment, which is not permitted under established law. The petitioner cited precedents, including CIT v. Kelvinator of India Ltd. and Financial Software & Systems (P) Ltd.
Additionally, the petitioner maintained that since the original assessment was conducted under Section 143(3), any reopening beyond the four-year period necessitated evidence of failure to disclose material facts, which was not present in this case.
- Respondent’s Arguments:
The Revenue asserted that audit objections serve as “information” as defined in Explanation 1(ii) to Section 148 and thereby justified the initiation of reassessment proceedings.
They contended that the payments amounting to Rs 9.80 crore represented 93% of total expenses against minimal turnover and were not entirely for business purposes.
The Revenue further claimed that the escaped income exceeded Rs 50 lakh, placing it within the extended limitation period under Section 149(1)(b). They also mentioned that reassessment proceedings were conducted in compliance with the faceless scheme.
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Analysis of the Court
The Court scrutinized Explanation 1(ii) to Section 148, which classifies audit objections as “information.” However, it clarified that such information does not expand the power of reassessment into a power of review.
Relying on the Supreme Court’s ruling in Kelvinator of India Ltd., the Court reiterated that reassessment cannot be conducted based merely on a change of opinion. When the Assessing Officer has deliberated on an issue and accepted a claim after inquiry, any reopening would be an impermissible review.
The Court referenced an earlier ruling in Springer Healthcare Ltd., which indicated that audit objections could not necessitate the issuance of a notice if the issue was already thoroughly considered and resolved during assessment proceedings.
The Court differentiated the case from CIT v. PVS Beedies (P) Ltd., where audit objections highlighted factual omissions that had not been previously examined. In the present instance, the Assessing Officer had posed specific questions and received detailed replies related to the disputed payments.
The Court applied the principle established in Financial Software & Systems (P) Ltd., declaring the reopening invalid when the issue had already been specifically examined in the scrutiny assessment. Therefore, the Court concluded that the current case fell squarely within the doctrine prohibiting a change of opinion.
Court’s Reasoning:
The Court noted that the Assessing Officer had deliberately reviewed the questioned expenditures during scrutiny. Although the final assessment order lacked detail on the issue, the presence of specific queries and responses indicated thorough consideration.
The audit objection merely questioned the commercial reasoning and justification for the payments that had already been disclosed and examined. Such objections could not transform a reassessment into a review mechanism.
On the matter of limitation, the Court ruled that since the original assessment was finalized under Section 143(3), reopening beyond four years was permissible only if there was a failure to fully and accurately disclose all material facts. As no such failure was established, the extended period under Section 149 was deemed unavailable.
Consequently, the notice dated March 31, 2023, was determined to be time-barred.
The Delhi High Court quashed the order issued under Section 148A(d) and the notice under Section 148 for AY 2016–17. It asserted that reassessment based solely on audit objections, in the absence of new tangible evidence and failure to disclose, amounted to an impermissible review and was barred by limitation.
Case Title: SAPPHIRE FOODS INDIA LTD Vs ASSISTANT COMMISSIONER OF INCOME TAX (OSD) DELHI & ORS.
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