Change Of Opinion Of AO Is No Reason To Believe That Income Chargeable To Tax Has Escaped Assessment: Bombay HC Reiterates

While considering a petition assailing a notice issued under Section 148 of the Income Tax Act, 1961 issued by the second respondent relating to AY-2003-2004 and the order on objections, the Bombay High Court quashed reassessment initiated on the issue of disallowance of interest expenditure as capital expenditure over change of opinion, after finding that all material in respect of the said revenue expenditures was before the Revenue during regular assessment wherein after detailed examination the said expenditures were allowed.

The Division Bench comprising of Justice K.R. Shriram and Justice Firdosh P. Pooniwalla observed that “the notice to reopen dated 28th March 2008 is merely based on change of opinion of the AO from that held earlier during assessment proceedings leading to the assessment order dated 6th March 2006. This change of opinion, in our view, does not constitute justification and/or reasons to believe that income chargeable to tax has escaped assessment”.

Advocate Fereshte Sethna appeared for the Assessee, whereas Revenue was represented by Advocate Suresh Kumar.

The brief facts of the case were that the Assessee company entered a scheme of amalgamation with Sterline Opportunities and Ventures (a non-existent company), an investment company which was approved by the Madras High Court on Mar 29, 2012. The Assessee in the name of a non-existing entity filed a return for AY 2003-04 declaring a total loss of Rs.13.52 Cr and claimed interest expenditure as well as finance charges on (i) inter-corporate deposits of Rs.17.20 Cr, (ii) guarantee commission of Rs.3.54 Cr, (iii) loan arrangement fees of Rs.1.60 Cr. and (iv) trustee fees of Rs.7.45 Lacs were claimed as revenue expenditure. The AO after detailed enquiry passed an assessment order under Section 143(3) and allowed the claim of interest expenditure as well as finance charges. However, subsequently, reassessment proceedings under Section 148 were initiated on the premise that payment of interest of Rs.22.43 Cr on various loans taken by the Assessee was wrongly claimed as revenue expenditure instead of capital expenditure during the assessment proceedings which is also evident from the fact that the Assessee itself has disallowed the expenditure on account of interest income in the subsequent AY 2005-06 by way of revised return.

The Assessee challenged the reopening by relying on the Apex Court ruling in Commissioner of Income Tax Vs. Core Health Care Ltd [(2008) 167 Taxman 206 (SC)] and contended that the reassessment notice was issued mechanically without any application of mind as the reasons recorded stipulates that Rs.22.43 Cr was claimed as interest on various loans but the audited financial statement of the non-existing investment company stipulates that the amount of Rs.22.43 Cr was not only on account of interest but other finance charges as well.

After considering the submission, the Bench observes that issue of expenditure of Rs.22.43 Cr. claimed on interest income was the subject matter of a query by the AO which was explained by the Assessee and consequently allowed in the assessment order under Section 143(3).

While rejecting the Revenue’s contention that no discussion on interest expenditure was made in the assessment order, the Bench relies on co-ordinate bench ruling in Aroni Commercials Ltd. Vs. Deputy Commissioner of Income Tax [(2014) 44 taxmann.com 304 (Bombay)], to reiterate that it is not necessary that an assessment order should contain reference and discussion to disclose its satisfaction in respect of the query raised and if the assessing officer has to record the consideration bestowed by him on all issues raised by him during the assessment proceedings even where he is satisfied, it would be impossible for the Revenue to complete all the assessments which are required to be scrutinized under Section 143(3).

Finally, highlighting that the reassessment notice under Section 148 is merely a change of opinion of the AO from that held earlier during assessment proceedings leading to an assessment order under Section 143(3), the Bench concluded that the said change of opinion does not constitute justification and/or reasons to believe that income chargeable to tax has escaped assessment.

Cause Title: Vedanta Limited v. DCIT and Ors. [Neutral Citation: 2023: BHC-OS:6069-DB]

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