Direct Tax Alert - Completed assessment cannot be reopened to tax the income under another section as it amounts to change of opinion

BACKGROUND

Section 148 of the Income-tax Act, 1961 (IT Act) grants powers to the tax officer to reopen a concluded matter if there is an income which has escaped assessment. However, such power cannot be exercised if there is a change of opinion. An income is offered to tax by the taxpayer under a particular head of income/section. During the assessment, the tax officer accepts the computation of income. However, subsequently, he opines that the income should have been taxed under a different head of income/ section and decides to reopen the said assessment. In such instances, a question arises as to whether this is tantamount to a change of opinion or not. In this regard, recently, the Bombay High Court¹ had an occasion to delve into whether a completed assessment wherein the income is taxed under one particular section can be reopened where the tax officer is of the view that the income is taxable under another section.

We, at BDO in India, have summarised the ruling of the Bombay High Court and provided our comments on the impact of this decision hereunder:

FACTS OF THE CASE

Taxpayer, a Singapore-based Company, is an investment holding company. The taxpayer’s ultimate holding company filed a bankruptcy petition in the United States of America on 15 September 2008 and consequently, the taxpayer was placed into Creditors’ Voluntary Liquidation from 24 October 2008. The taxpayer did not conduct any business activity and laid off the entire staff. Hence, for fiscal year (FY) 2014-15, the taxpayer had no business transactions. The taxpayer held certain shares in its related Indian Company (ICO). The Bombay High Court order permitted a capital reduction of shares of ICO in FY 2014-15. The taxpayer offered the gains to tax under section 45 of the IT Act read with first proviso to section 48 of the IT Act after setting off a loss for FY 2013-14 and paid taxes on the balance amount under section 112(1)(i)(c)(ii) of the IT Act.

During assessment proceedings, the taxpayer submitted the following:

• Computation of income and Form 3CEB and
• Copy of High Court Order allowing capital reduction and financial statements highlighting the capital reduction in the balance sheet.

The matter was referred to the Transfer Pricing Officer who accepted the capital reduction transaction to be at arms’ length.

The tax officer passed the order under section 143(3) of the IT Act whereby it noted that the taxpayer has no business operations/permanent establishment in India. It also noted that there was a capital reduction and the capital gain/loss had been computed as per the provisions of the IT Act.

Thereafter, the tax officer received information from another tax officer and concluded that the capital gain has been computed incorrectly and there was an erroneous brought forward and set off of a capital loss. He observed that section 112(1)(c)(iii) of the IT Act is a special provision which will override the general provision provided under section 48 of the IT Act. Consequently, the capital gains will be chargeable at 10% of the unlisted equities with retrospective effect from FY 2012-13 without giving effect to the first and second proviso to section 48 of the IT Act. Hence, he issued a notice under section 148 of the IT Act to reopen the matter.

Aggrieved, the taxpayer filed a writ before the Bombay High Court.

BOMBAY HIGH COURT RULING

While holding that the reopening is bad and thereby setting aside the reopening notice, it made the following observations:

• The action of the tax officer constitutes a change of opinion, in as much as there is no new material which is discovered by him
• The application of another section of the IT Act on the facts and circumstances of a case would constitute a change of opinion and can by no stretch of the imagination be construed as new material by the Revenue Authority
• There is only one transaction which was under consideration for the tax officer. The entire transaction has been considered by the tax officer and has culminated in the order under section 143(3) of the IT Act
• There is no new tangible material in the hands of the tax officer. Once the assessment is concluded, it is deemed to have been concluded with the application of mind by the tax officer from all perspectives legal and factual²
• The reopening of assessment based on a different method of computation or application of the section is nothing but a change of opinion, which is impermissible in law³.

BDO COMMENTS

Bombay High Court has reaffirmed the position that a concluded assessment cannot be reopened for a mere change of mind. In this judgement, it has been observed that the taxpayer had clearly submitted all the information necessary for verifying capital gains with the tax officer. After perusing the details, the tax officer passed the order. Hence, it cannot be held that the tax officer had not applied his mind.

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