Reopening Based On Entirely New Material Deprives Taxpayer's Right To Object To Re-Assessment: Delhi High Court

The Delhi High Court held that a decision to reopen or reassess cannot be based or sought to be justified either on additional reasons or those which may be supplied subsequently while disposing of objections preferred by an assessee.

At the same time, the High Court clarified that the statutory scheme of reassessment neither sanctions vacillation nor can a decision to trigger reassessment be sustained based upon an attempted supplementation aimed at bolstering or buttressing the original opinion.

As per Section 148(d) of the Income tax Act, the Assessing Officer may, based on material available to him, 'decide' whether it is a “fit case” to issue notice u/s 148 of the Act and thus reassess an assessee for income that may have escaped assessment.

The Division Bench of Justice Yashwant Varma and Justice Ravinder Dudeja observed that “If the ultimate decision to justify initiation of reassessment be based on entirely new or previously undisclosed material or reasoning, it would clearly result in deprivation of a right to effectively object to the proposed action”. (Para 29)

Facts of the case:

The petitioner/ assessee, a non-resident real estate company, filed its return and the assessment was completed. Subsequently, a reassessment notice was sent for non-filing of income tax return which was based on remittances been purported by a foreign company and a payment of Rs 1,00,000/- for acquisition of shares. In response to the said notice, the petitioner furnished details regarding sale of shares of Landmark Hi Tech Development and Safari Retreats leading to capital gains and claimed exemption from taxation under Article 13(4) of the India-Mauritius Double Taxation Avoidance Agreement which had grandfathered all transactions in respect of shares acquired prior to 01 April 2017. Further, the assessee disclosed that it had originally purchased 1,41,47,150 equity shares of Treasured Developers which was followed by a further allotment of 70,73,575 bonus shares. The assessee was also allotted 1,01,85,948 shares of Sun City Dhoot Colonizers in the exchange ratio of 4800 shares of that entity for every 10,000 shares held in Treasured Developers. The assessee claimed that since the shares were received pursuant to a Scheme of Arrangement, the same would not constitute a transfer as per Section 47(vii) of the Act. The AO however passed an order u/s 148A(d) thereby concluding the transactions made as an escapement of income, and the sale of shares which had given rise to capital gains was denied treaty benefits.

Observations of the High Court:

Before proceeding on to the issue of reopening and denial of treaty benefits, the Bench pointed that the reasons based on which a reassessment is proposed to be initiated is not a field of shifting sand and which authorises the AO to continually alter the basis on which the action is sought to be initiated.

The Bench explained prior to the assessee submitting its reply to the show cause notice (SCN), the AO was not only totally oblivious of a return having been submitted, it had not even examined the same in order to form an opinion that income liable to tax had escaped assessment.

Merely because the assessee had taken the position that the income was not taxable under the Income tax Act, would not constitute a basis for the Revenue forming the opinion that income had escaped assessment, added the Bench.

In order to sustain a proposed reopening, the Bench explained that it was incumbent upon the Revenue to have formed an opinion that the financial transaction was in fact liable to be taxed under the Act and thus, resulting in income having escaped assessment.

Further, the Bench noted that the original notice u/s 148A(b) was not even founded on the allegation that the petitioner was not entitled to claim the treaty benefit, and only during framing of final order u/s 148A(d), the AO ultimately sought to draw sustenance from a separate order of assessment.

The material on the record further establishes beyond a measure of doubt that not only did the respondents fail to base the original show cause notice on a purported ineligibility of the petitioner to treaty benefits, even the order challenged in the petition is not based on any independent evaluation of whether the petitioner could be said to be disentitled to claim the exemptions contemplated under Article 13(4) of the DTAA, added the Bench.

The Bench observed that while the original SCN had proceeded on the basis that the petitioner was a non-filer and the subject income constituting remittances made to a foreign entity, it was clearly established that a return had in fact been filed and duly acknowledged.

Once petitioner had not made any remittances to third parties and it had earned revenue from the sale of shares which were claimed exempt from taxation by virtue of Article 13(4) of the DTAA, the Bench pointed that the AO cannot hold that the petitioner was not entitled to treaty benefits, a charge which was not even laid in the original SCN or which could be said to have constituted the basis for the formation of opinion that reassessment was warranted.

Therefore, the High Court allowed Assessee's appeal and quashed the order passed by AO u/s 148A(d) as well as consequential notice u/s 148.

Counsel for Appellant/ Assessee:Mr. Shyam Gopal , Balbir Singh, Karan Sachdev and Pragya Kaushik

Counsel for Respondent/ Revenue: Puneet Rai, Ashvini Kumar and Rishabh Nangia

Case Title: Banyan Real Estate Fund Mauritius Verses Assistant Commissioner Of Income Tax Circle International Tax

Citation: 2024 LiveLaw (Del) 884

Case Number: W.P (C) 10485/2023

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