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Siemens Information ... v. Assistant Commission...
Summary of Oral Judgment (Per Dr. D.Y. Chandrachud, J.)
Factual and Procedural Background
The Petitioner filed its income tax return for Assessment Year (AY) 2004-05 declaring nil income after claiming a deduction of Rs. 23.93 crores under Section 10A of the Income Tax Act, 1961. An assessment under Section 143(3) was passed on 29 December 2006 in which the Assessing Officer allowed the deduction of Rs. 23.93 crores. The Assessing Officer did not specifically address the Petitioner’s eligibility for the Section 10A deduction in that assessment order.
On 9 August 2010 the Assessing Officer issued a notice under Section 148 proposing to reopen the AY 2004-05 assessment. The reasons recorded for reopening relied on material said to have emerged during assessment proceedings for AY 2006-07 and alleged failures such as: units not being independent, lack of independent accounts for units, overlapping use of resources, incorrect audit reports or misallocation of expenses/depreciation, non-10A activities carried out from 10A units (as reflected in service tax returns), and the assessee's refusal to reconcile Service Tax/VAT returns with IT returns.
The Petitioner’s objections were rejected by an order dated 14 November 2011, and a reassessment order under Section 143(3) read with Section 147 disallowing the Section 10A exemption was passed on 21 November 2011. The Petitioner challenged (i) the Section 148 notice dated 9 August 2010, (ii) the order rejecting objections dated 14 November 2011, and (iii) the reassessment order dated 21 November 2011. The Court dismissed the petition but extended an interim stay for four weeks from the date of the judgment to enable the Petitioner to file an appeal. There was no order as to costs.
Legal Issues Presented
- Whether a reopening of assessment beyond four years under Section 147/148 is valid when it is initiated on the basis of material that emerged during assessment proceedings for a subsequent assessment year (here, AY 2006-07).
- Whether the jurisdictional condition for reopening after four years — that the assessee failed to disclose truly and fully all material facts necessary for assessment of the relevant year — is satisfied on the facts of this case.
- Whether the Assessing Officer's action amounts to a permissible exercise of power based on fresh/tangible material or impermissible reopening based on a mere change of opinion.
Arguments of the Parties
Petitioner’s Arguments
- Reopening beyond four years requires a finding that the assessee failed to disclose truly and fully all material facts for that assessment year.
- The reopening was based on material that emerged in assessment proceedings for AY 2006-07; an assessment concluded under Section 143(3) cannot be reopened on the basis of a later year's assessment (relying on Siemens Information System Ltd. v. ACIT).
- The Assessing Officer had made enquiries during the AY 2004-05 proceedings and the Petitioner submitted relevant information regarding eligibility for Section 10A; therefore there was no failure to disclose that would permit reopening beyond four years.
Revenue’s Arguments
- An Assessing Officer may reopen an earlier assessment on the basis of material which emerges in the course of assessment proceedings for a subsequent assessment year, as held by the Supreme Court in Sri Krishna (P.) Ltd. and Ess Ess Kay Engineering Co. (P.) Ltd., and as followed by Division Bench decisions including Multiscreen Media (P.) Ltd.
- The reassessment is supported by tangible material (drawn from disclosures and the AY 2006-07 assessment) showing units were not independent, no independent accounts were maintained, there was overlapping of work and resources, non-10A activities were carried on from 10A units, and the assessee declined reconciliation of Service Tax/VAT with IT returns. Thus the reopening is not a mere change of opinion.
- The material that emerged in AY 2006-07 proceedings resulted from disclosures made by the assessee during those proceedings and such disclosures were not made in AY 2004-05; therefore the jurisdictional condition of failure to disclose fully and truly is satisfied.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Siemens Information System Ltd. v. Assistant Commissioner of Income Tax (2007 295 ITR 333 Bom) | The Division Bench had held that an assessment concluded under Section 143(3) cannot be reopened merely on the basis of an order of assessment passed for a subsequent year (presented by the Petitioner as supporting non-reopenability). | The Court distinguished Siemens: it observed that Siemens involved a case where recourse to reopening was taken in the absence of any additional material. Siemens was not accepted as laying down an absolute principle inconsistent with Supreme Court authority allowing reopening where fresh/tangible material exists. |
| Sri Krishna (P.) Ltd. v. ITO (1996 221 ITR 538 SC) | Supreme Court authority for the proposition that reopening on the basis of material emerging in a subsequent year's assessment can be permissible (i.e., reopening is not barred per se). | The Court relied on Sri Krishna as supporting the proposition that reopening is permissible where fresh material emerges; it formed part of the line of Supreme Court authority the Court followed in rejecting the Petitioner’s absolute reliance on Siemens. |
| Ess Ess Kay Engineering Co. (P.) Ltd. v. CIT (2001 247 ITR 818) | Holds that reopening is permissible where there is material available on which the Assessing Officer can act; a reopening based on fresh material is not merely a change of opinion. | The Court applied Ess Ess Kay to conclude that if fresh/tangible material disclosed during AY 2006-07 assessment supports reopening of AY 2004-05, reopening would not be barred as a mere change of opinion. |
| Multiscreen Media (P.) Ltd. v. Union of India (2010 324 ITR 54 Bom.) | A Division Bench decision of this Court following the Supreme Court line that permitted reopening on the basis of subsequent-year material and considering Siemens in context. | The Court treated Multiscreen Media as a precedent that analyzed Siemens and upheld the principle that reopening may be valid where additional/tangible material exists; Multiscreen supported the Court’s approach in the present case. |
| Anusandhan Investments Limited v. M.R. Singh, Deputy CIT (2006 287 ITR 482 Bom 1 / 2007 295 ITR 333 Bom) | The Division Bench noted it is well established that an assessment can be reopened on the basis of information contained in an assessment of a subsequent year. | The Court relied on Anusandhan as an example of this Court’s prior recognition that subsequent-year information may justify reopening, using it to support the proposition that reopening on such basis is permissible where material exists. |
| Commissioner Of Income Tax, Delhi v. Kelvinator Of India Limited (2010 320 ITR 561 SC) | Supreme Court authority that a mere change of opinion is not enough to reopen an assessment; there must be additional or tangible material to warrant reopening. | The Court invoked Kelvinator to emphasize the legal boundary: reopening beyond four years requires additional/tangible material and cannot be based on mere reappreciation or change of opinion. |
Court's Reasoning and Analysis
The Court first identified the statutory and jurisprudential constraints on reopening an assessment beyond four years. Where reopening is sought beyond four years, the Assessing Officer must show that there was a failure on the part of the assessee to disclose truly and fully all material facts necessary for assessment in that year. The Court reiterated two key limitations: (i) reopening cannot be founded on a mere change of opinion; and (ii) there must be tangible/additional material before the Assessing Officer to justify reopening.
Turning to the contested principle whether reopening can be based on material emerging in a subsequent assessment year, the Court rejected the Petitioner's contention that reopening is per se barred if based on a subsequent year's assessment. The Court explained that the Division Bench decision in Siemens could not be read as an absolute rule inconsistent with Supreme Court decisions (Sri Krishna and Ess Ess Kay) that permit reopening where fresh material exists. The Court therefore adopted the line of authority which allows reopening upon fresh/tangible material discovered in later assessments, while stressing the prohibition against mere change of opinion (as reiterated in Kelvinator).
The Court examined the facts. It noted the Assessing Officer had not addressed eligibility for Section 10A in the AY 2004-05 assessment order. In the subsequent AY 2006-07 assessment proceedings, disclosures were made by the assessee and material was placed on record which led the Assessing Officer to conclude inter alia that the units were not independent, independent accounts were not maintained, there was overlapping use of resources, non-10A activities were operated from 10A units, and that the assessee had declined reconciliation of Service Tax/VAT with IT returns. The AY 2006-07 assessment order explicitly recorded these conclusions.
Because the relevant disclosures and material underpinning those conclusions were produced in the course of AY 2006-07 proceedings and were not shown to have been made during AY 2004-05 proceedings, the Court concluded that the jurisdictional condition for reopening beyond four years — namely, failure to disclose truly and fully all material facts for AY 2004-05 — had been satisfied on the record before it. Consequently, reopening was not a mere change of opinion but was founded on tangible additional material (as per the authorities the Court reviewed).
The Court therefore found the Assessing Officer was within jurisdiction to reopen AY 2004-05 and to pass a reassessment order under Section 143(3) read with Section 147. The Court expressly refrained from expressing any opinion on the merits of the reassessment findings and observed that the assessee remained free to pursue available remedies against the reassessment order.
Holding and Implications
Holding: The petition challenging the reopening and reassessment was dismissed. The Court held that the reopening of the AY 2004-05 assessment (by notice under Section 148 and reassessment under Section 143(3) read with Section 147) was within the Assessing Officer’s jurisdiction because there was tangible material emerging from AY 2006-07 proceedings and the assessee had not truly and fully disclosed material facts for AY 2004-05.
Implications:
- The direct effect on the parties is that the reassessment stands and the Petitioner may pursue available appellate or other remedies against the reassessment order; the Court extended an interim stay for an additional four weeks to permit the filing of an appeal.
- The Court did not decide the merits of the reassessment findings — it declined to express any opinion on the substantive correctness of the reassessment and explicitly left merits to be contested in appropriate proceedings.
- The judgment applies established principles (as summarized above) and does not purport to lay down a novel rule of law beyond those principles; no new precedent distinct from the existing line of authority was created by this opinion.
No order as to costs.
ORAL JUDGMENT (Per. DR.D.Y CHANDRACHUD, J.):
1. The challenge in these proceedings is to (i) a notice issued by - the Assessing Officer on 9 August 2010 under Section 148 of the Income Tax Act 1961 seeking to reopen the assessment for Assessment Year 2004-05; (ii) an order dated 14 November 2011 rejecting the objections of the Petitioner; and (iii) an order of reassessment dated 21 November 2011 disallowing the exemption under Section 10-A for Assessment Year 2004-05. The Petitioner filed its return of income for Assessment Year 2004-05 declaring a nil income after claiming a deduction of Rs. 23.93 Crores under Section 10-A of the Income Tax Act 1961. An order of assessment was passed under Section 143(3) on 29 December 2006. The Assessing Officer allowed a deduction under Section 10-A in the amount of Rs. 23.93 Crores. The Assessing Officer did not specifically deal with the eligibility of the Petitioner to claim a deduction under Section 10-A in the course of the assessment year. On 9 August 2010 a notice was issued to the Petitioner under Section 148. The following reasons have been disclosed for reopening the assessment for Assessment Year 2004-05:
“During the course of the assessment proceedings for A.Y 2006-07, it has been established on the basis of the details filed by the assessee that the assessee is not entitled to deduction u/s. 10A for the following reasons:
1) Units are not independent units and constitute one integrated unit.
2) No independent accounts of units are maintained.
3) There is complete overlapping of work and use of resources amongst units through leased lines.
4) The Tax Audit Report and Audit report u/s. 10A is not correct or assessee is claiming expenses/depreciation of 10A units in non 10A units.
5) Several non 10A activities are being carried on from 10A units which is evident from service tax returns.
6) The assessee has declined to file a reconciliation of Service Tax/VAT returns with IT returns. Since both these taxes are location wise, the reconciliation would have shown the overlapping of receipts/expenses.
As the assessee has claimed deduction of Rs. 23,93,12,934/- u/s. 10A in its return filed for A.Y 2004-05 and the material facts brought out during the course of assessment proceedings for A.Y 2006-07, remain the same in the A.Y 2004-05, I have reason to believe that there is an under assessment of Rs. 23,93,12,934/- in A.Y 2004-05.
Further the facts brought out during the course of assessment proceedings of A.Y 2006-07 have not been truly and fully disclosed by the assessee in A.Y 2004-05. Therefore it cannot be said that the assessee had disclosed fully and truly all the material facts in respect of the units on which 10A deduction is claimed.”
2. Counsel appearing on behalf of the Petitioner submits that-
(i) The reopening of the assessment has taken place beyond a period of four years of the end of the relevant assessment year and hence, the jurisdictional condition is that there must be a failure on the part of the assessee to disclose truly and fully all material facts necessary for assessment for that assessment year;
(ii) The assessment is sought to be reopened on the basis of the material which emerged before the Assessing Officer during the course of the assessment proceedings for Assessment Year 2006-07. An assessment which has been concluded under Section 143(3) cannot be reopened in exercise of powers conferred by Section 148 on the basis of an order of assessment which has been passed for a subsequent assessment year as held by a Division Bench of this Court in Siemens Information System Ltd. v. Assistant Commissioner of Income Tax 2007 295 ITR 333 Bom;
(iii) The Assessing Officer had made an enquiry during the course of the assessment proceedings for Assessment Year 2004-05 in response to which the Petitioner had submitted relevant information in regard to the eligibility of the petitioner to claim a deduction under Section 10-A. Hence, the assessment cannot be reopened beyond a period of four years.
3. On the other hand, it has been urged on behalf of the Revenue that-
(i) As a matter of law, it is open to an Assessing Officer to reopen an assessment on the basis of material which emerges in the course of the assessment proceedings for a subsequent assessment year. This has been held to be permissible in the judgments of the Supreme Court in Sri Krishna (P.) Ltd. v. ITO 1996 221 ITR 538 SC. and Ess Ess Kay Eigineering Co. (P.) Ltd. v. CIT 2001 247 ITR 818. which were followed in a judgment of a Division Bench of this Court in Multiscreen Media (P.) Ltd. v. Union of India 2010 324 ITR 54 Bom.. The judgment in Siemens Information System (supra) was also considered in the subsequent judgment of the Division Bench of this Court in Multiscreen Media;
(ii) During the course of the assessment proceedings for Assessment Year 2004-05 a bare reading of the assessment order would reveal that the Assessing Officer did not consider the eligibility of the Petitioner to claim a deduction under Section 10-A. This issue was considered in the course of the assessment proceedings for Assessment Year 2006-07. The material which has come on the record in the course of those assessment proceedings has revealed that the units of the Petitioner are not independent units; no independent accounts are maintained; there is an overlapping of work and use of resources amongst units and several non Section 10-A activities are being carried on from Section 10-A units. Hence, it was submitted that the reopening of the assessment is not based on a mere change of opinion and the Assessing Officer has tangible material on the record to reopen the assessment on the basis of the order of assessment for Assessment Year 2006-07. The jurisdictional condition has also been fulfilled. The material which came on the record during Assessment Year 2006-07 was as a result of the disclosures made by the assessee before the Assessing Officer. Those disclosures ought to have been made, but were not made during the course of the assessment proceedings for Assessment Year 2004-05. In these circumstances, the Assessing Officer was within his jurisdiction in reopening the assessment even beyond the period of four years.
4. The reopening of the assessment in the present case under Section 148 has taken place beyond a period of four years of the end of the relevant assessment year. The jurisdictional requirement that must be fulfilled in such a case is that there must be a failure on the part of the assessee to disclose truly and fully all material facts necessary for assessment for that assessment year. It is also trite law that an assessment cannot be reopened on the basis of a mere change of opinion and there must be some tangible material before the Assessing Officer, before he proceeds to reopen an assessment. Beyond the period of four years, it must also be demonstrated that there was a failure on the part of the assessee to make a true and full disclosure of material facts necessary for the assessment. Bearing in mind this requirement, and as a matter of first principle, the contention of the assessee that an assessment cannot be reopened on the basis of an order of assessment for a subsequent assessment year cannot be accepted. In Ess Ess Kay Engineering, the Supreme Court held in a civil appeal arising out of the judgment of the Punjab and Haryana High Court in an income tax reference, that there was material on the basis of which the Assessing Officer could proceed to reopen the case and it was not a case of a mere change of opinion. Merely because the case of the assessee was accepted as correct, in the original assessment for the assessment year in question, that would not preclude the income tax officer to reopen the assessment for the earlier year on the basis of a finding of fact made on the basis of fresh material in the course of an assessment for the next assessment year. A similar principle of law was enunciated in a judgment of a Division Bench of this Court in Anusandhan Investments Limited v. M.R Singh, Deputy CIT 2006 287 ITR 482 Bom 1 2007 295 ITR 333 Bom where the Court noted that it is a well established position in law that an assessment can be reopened on the basis of information contained in an assessment of a subsequent year. These decisions were followed by another Division Bench of this Court in Multiscreen Media (supra). In its judgment in Multiscreen Media, the Division Bench after considering the judgment of this Court in Siemens Information System, held that, that judgment does not state as an absolute principle of law that an Assessing Officer would not be entitled to seek recourse to the power to reopen an assessment under Section 147 on the basis of an assessment made for a subsequent assessment year. As the Division Bench of this Court noted, the judgment in Siemens Information System (supra) cannot be construed to lay down a proposition of law inconsistent with the law laid down by the Supreme Court in Sri Krishna (P.) Ltd. (supra) and Ess Ess Kay Engineeing Co. (P.) Limited (supra). As this Court noted the judgment of the Division Bench in Siemens Information System properly considered involved a case where recourse to the provision for reopening an assessment was taken in the absence of any additional material. As the Supreme Court has held in Commissioner Of Income Tax, Delhi v. Kelvinator Of India Limited 2010 320 ITR 561 SC., a mere change of opinion is not enough and there must be additional or tangible material to warrant the reopening of an assessment in the absence of which the exercise of the power would be only akin to a review or reappreciation.
5. In the present case, during the course of the order of assessment for Assessment Year 2004-05 the Assessing Officer has not dealt with the eligibility of the assessee to claim a deduction under Section 10-A. Subsequently, during the course of the Assessment Year 2006-07 disclosures were made by the assessee before the Assessing Officer in the course of the assessment proceedings. In the order of assessment for Assessment Year 2006-07, the Assessing Officer after having regard to the material on the record which was produced by the assessee came to the following conclusion:
“Therefore assessee is not entitled to deduction u/s 10A for the following reasons.
(1) Units are not independent units and constitute one integrated unit.
(2) No independent accounts of units are maintained.
(3) There is complete overlapping of work and use of resources amongst units through leased lines.
(4) The Tax Audit Report and audit report u/s. 10A is not correct or assessee is claiming expenses/depreciation of 10A units in non 10A units.
(5) Several non 10A activities are being carried on from 10A units which is evident from service tax returns.
(6) The assessee has declined to file a reconciliation of Service Tax/VAT returns with IT return. It claims in letter dated 04/09/09 that Revenue recognition is different and reconciliation cannot be made. Again it says in letter dated 12/11/09 that, any attempt to reconcile will lead to misleading results and says that it will take time of eight weeks i.e beyond the limitation date. Interestingly more than 8 weeks had passed by that time since the submission letter dated 04/09/09. Since both these taxes are location wise, the reconciliation would have shown the overlapping of receipts/expenses.
For Delhi Unit III (Gurgaon) it is the first year of claim of deduction, and it is held that it is only an expansion of existing units. Further the facts discussed in this order were also not disclosed by the assessee in earlier years. Therefore it cannot be said that the assessee had disclosed fully and truly all material facts in those years in respect of units which started in earlier years. Therefore those units are also not eligible for 10A deduction.”
6. Now it is on the basis of the material which has come on the record in the course of the assessment proceedings for Assessment Year 2006-07, based on the disclosures of the assessee and the order of assessment for that year, that the Assessing Officer has purported to reopen the assessment for Assessment Year 2004-05. Beyond a period of four years, the reopening of an assessment is conditioned by the requirement that there was a failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for that Assessment Year. A full disclosure and a true disclosure are what the statute mandates. A full disclosure is a disclosure which provides a complete statement of all material facts. A true disclosure is a disclosure which does not suppress material facts from the Assessing Officer and does not contain any taint of falsehood. In the present case, during the course of the assessment proceedings for Assessment Year 2004-05 the assessee made a claim for deduction under Section 10A. The assessee by its letter dated 10 October 2006 disclosed unit wise statements as regards the computation of profit and loss. The Assessing Officer had addressed a notice to the assessee on 29 November 2006 in response to which the assessee by its reply dated 6 December 2006 submitted (i) - details of the unrealized export turnover upto 30 September 2004; (ii) consolidated figures for the year ending 31 March 2003 in respect of the non STP/EOU units. By a further letter dated 14 December 2006 the assessee furnished an allocation of expenses as between the eligible and non-eligible units. The Assessing Officer has, however, come to the conclusion that it was during the course of the assessment proceedings for Assessment Year 2006-07 that facts were brought out which were not truly and fully disclosed by the assessee in Assessment Year 2004-05. The order for Assessment Year 2006-07 is based on disclosures made by the assessee during the course of assessment proceedings for that year and it is not the submission of the assessee before this Court that the same disclosures were also made during the course of Assessment Year 2004-05. In the circumstances, we are of the view that though the reopening of the assessment in the present case has taken place beyond a period of four years, the jurisdictional condition for reopening the assessment under Section 147 has been fulfilled.
7. Following the order of reopening the Assessing Officer has passed an order of reassessment. The Assessing Officer passed an order of reassessment under Section 143(3) read with Section 147 on 21 November 2011. The assessee would be at liberty to espouse the remedies available against the order of reassessment and nothing contained in this judgment shall amount to an expression of any opinion on merits. Since there was an ad interim order passed in these proceedings on 14 December 2011 in terms of prayer clause (c), the stay shall be extended for a further period of four weeks from today to enable the assessee to file an appeal within the aforesaid period.
The Petition is for these reasons dismissed. There shall be no order as to costs.
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