Object of re-assessment can’t be narrowed down to cripple powers of AO conferred under Income Tax Act by exercising judicial review: Madras HC

Read Judgement: CAIRN INDIA LTD vs. DEPUTY DIRECTOR OF INCOME TAX 

LE Correspondent

Chennai, August 26, 2021: While emphasizing on the scope of judicial review, the Madras High Court has ruled that the scope for reopening of assessment cannot be narrowed down by the Courts to cripple the powers of the Assessing Officer (AO) conferred under the Income Tax Act. 

The Single Judge Bench of Justice S M Subramaniam observed that if reopenings are made within the scope of Section 147 of the Income Tax Act, then the AO is allowed to continue the reopening proceedings and conclude the same by providing opportunity to the assessee to defend their case. 

The observation came pursuant to a petition questioning the legal validity of the reopening notice issued under section 148 and the consequential order passed by the AO, on the ground of ‘change of opinion’. 

Going by the background of the case, the assessee company had filed its return which came to be processed u/s 143(1) accepting the returned income. Later, the case was selected for scrutiny and the assessment was set aside with the direction to re-compute the total income of assessee in as much as the assessment order in which deduction u/s 80-IB was granted was erroneous. 

Also, opining that the payments made to non-residents were in the nature of royalty and the assessee had deducted lesser tax from the payment to the Non-Residents, the AO calculated proportional disallowance u/s 40(a)(i). 

The Department being of the opinion that expenses so claimed and allowed led to excess deduction which resulted in escapement of income chargeable to tax within the corners of section 147. This led to initiation of reopening of assessment. 

After considering the arguments, Justice Subramaniam found that the reasons for reopening reveals that assessee had deducted lesser tax from the payment made to the Non-Residents. Since the issue of TDS deduction at the lower rate was not adjudicated by the AO, he had ‘reason to believe’ for reopening of assessment. 

Since the said issue was not considered by the Original Assessing authority and subsequently, noticed by the competent authority, the reopening of assessment is made in accordance with the requirements as contemplated u/s 147, added Justice Subramaniam.

The High Court further went on to reiterate that the circumstances as contemplated, providing wider scope for reopening of assessment, at no circumstances be narrowed down by the Court to cripple the powers of the AO conferred under the Act.

“Undoubtedly, the business and trading activities are being carried out in a calculated manner by the traders. The intricacies involved may be traced out even at later point of time. Such being the possible circumstances, the very purpose and object of Section 147 for reopening of assessment, if the income chargeable to tax escaped assessment cannot be narrowed down, so as to dilute the very object of the Act,” opined the Court. 

The Single Judge found that in the present case, the assessee has submitted its objections elaborately and the said objections were rejected on the ground that for the A.Y 2003-04, ADIT, International Taxation, Chennai, issued a Notice u/s 148 on similar ground that claim of the assessee as regards payment made towards geological studies, seismic data acquiring and processing and chartered hire charges would not fall for consideration u/s 44BB to go for TDA at the rate of 4%. On the contrary, the services fell within the definition of “fee for technical services”. 

When the AO could be able to trace out the material from and out of the materials submitted by the assessee, such new information or materials undoubtedly would provide the AO for ‘reason to believe’ to reopen the assessment. This being the factum established, adjudication on merits need not be entertained by the High Court in writ proceedings under Article 226 of the Constitution of India, added the Single Judge. Lastly, the High Court dismissed the petition opining that the scope of judicial review under Article 226 of the Constitution of India is to scrutinize the processes through which a decision is taken by the competent authority in consonance with the provisions of the law, but not the decision itself.