Case Note & Summary
The petitioner, a scheduled bank, challenged a notice issued under Section 148 of the Income Tax Act, 1961 seeking to reopen the assessment for Assessment Year 2010-11 and an order rejecting its objections. The petitioner had filed its original return of income on 8 October 2010 declaring total income of Rs.790,10,18,157 and a revised return on 30 March 2012. It had added back Rs.121,64,09,590 as provision for non-performing advances and claimed deduction of Rs.65,37,16,370 under Section 36(1)(viia) being 7.5% of profit. The case was selected for scrutiny and a show cause notice under Section 142(1) was issued on 12 August 2010, calling for details of outstanding balance in provision for bad and doubtful debts and working of creation of provision for bad and doubtful debts for the past three years, including proof of rural branches. The petitioner responded on 23 January 2013 providing details, including a statement that it did not claim any deduction for rural advances as on 31 March 2010. The Assessing Officer passed the assessment order on 29 January 2013 under Section 143(3) without discussing the issue of Section 36(1)(viia). Subsequently, the Revenue issued the impugned notice dated 31 March 2015 under Section 148 on the ground that income had escaped assessment because the deduction was claimed on non-rural advances, contrary to the Supreme Court decision in Catholic Syrian Bank Ltd. v. CIT, which held that clause (viia) applies only to rural advances. The petitioner filed objections on 16 November 2015, which were rejected by order dated 29 February 2016 on the ground that the assessment order did not mention the deduction and no specific query was raised. The petitioner argued before the High Court that it was a clear case of change of opinion because the Assessing Officer had raised a specific query and accepted the explanation, that the Supreme Court decision in Catholic Syrian Bank was pronounced on 17 February 2012, before the assessment order dated 29 January 2013, and that there was no new tangible material. The Revenue contended that Catholic Syrian Bank categorically held clause (viia) applies only to rural advances, that non-consideration of a Supreme Court decision is a mistake apparent on record, and that under Kalyanji Mavji & Co. v. CIT, reopening is permissible where information is as to the correct state of law from judicial decisions. The High Court found that Catholic Syrian Bank was the law when the assessment order was passed, that the issue of deduction under Section 36(1)(viia) was under active consideration of the Assessing Officer, who had called for details and specifically asked for proof of rural branches, and that there was no denial that the petitioner was called upon to make submissions. The court held that the reopening was based on a change of opinion and no new tangible material, and therefore the notice under Section 148 and the order rejecting objections were liable to be quashed.
Headnote
A) Income Tax - Reopening of Assessment - Change of Opinion - Income Tax Act, 1961, Sections 147, 148 - The Assessing Officer had during original assessment called for details of provision for bad and doubtful debts under Section 36(1)(viia) and specifically asked for proof of rural branches; after receiving the explanation, the assessment order was passed without any addition. The reopening based on the same facts amounted to a change of opinion and was impermissible. Held: Reopening cannot be sustained (Paras 4-7, 13). B) Income Tax - Deduction under Section 36(1)(viia) - Rural Advances - Income Tax Act, 1961, Section 36(1)(viia) - The provision in clause (viia) is available only in respect of rural advances as held in Catholic Syrian Bank Ltd. v. CIT. The assessee had not claimed any deduction for rural advances, and the AO was aware of this. The reopening was based on incorrect premise that non-rural advances were claimed. Held: The notice was invalid (Paras 2, 6, 9, 13). C) Income Tax - Reopening - Effect of Judicial Precedent Existing Before Assessment - Income Tax Act, 1961, Sections 147, 148 - The Supreme Court decision in Catholic Syrian Bank was pronounced before the assessment order, so the AO could have applied it. Non-consideration of a binding precedent cannot be treated as new tangible material for reopening. Held: Reopening not permitted (Paras 10, 12-13). D) Income Tax - Objections to Reopening - Failure to Deal with Submissions - Income Tax Act, 1961, Sections 147, 148 - The rejection order incorrectly stated that no specific query was raised during assessment and ignored the assessee's factual statement that no deduction for rural advances was claimed. Held: Rejection of objections not sustainable (Paras 11, 13). E) Income Tax - Reopening - Absence of Discussion in Assessment Order - Whether Opinion Formed - Income Tax Act, 1961, Sections 147, 148 - The absence of discussion in assessment order does not imply no opinion was formed when a specific query was raised and replied, and the claim was accepted. Held: AO had formed opinion (Paras 7, 11, 13).
Issue of Consideration
Whether the notice under Section 148 of the Income Tax Act, 1961 and the subsequent rejection of objections were valid when they sought to reopen assessment for AY 2010-11 on the ground that deduction under Section 36(1)(viia) was wrongly claimed on non-rural advances, despite the Assessing Officer having considered the issue during original assessment and the Supreme Court decision in Catholic Syrian Bank Ltd. having been available before the original assessment order.
Final Decision
The High Court found in favour of the petitioner and held that the reopening of assessment was based on a change of opinion. The Assessing Officer had specifically called for details and proof of rural branches during original assessment, the Supreme Court decision in Catholic Syrian Bank Ltd. was available before the assessment order, and there was no new tangible material. Therefore, the notice under Section 148 and the order rejecting objections were liable to be quashed.
Law Points
- Reopening of assessment under Section 147 cannot be based on a mere change of opinion
- where Assessing Officer raised specific queries during original assessment and did not make addition
- it implies acceptance of claim
- non-consideration of binding Supreme Court precedent existing before assessment order does not constitute new tangible material for reopening
- absence of discussion in assessment order does not mean no opinion was formed if issue was actively considered
- deduction under Section 36(1)(viia) is available only for provisions for bad and doubtful debts relating to rural advances.
