The Gujarat High Court has quashed a reassessment notice issued under Section 148 of the Income Tax Act, 1961, holding that reopening an assessment on an issue which had already been examined by the Assessing Officer during scrutiny proceedings amounted to a mere change of opinion.
The Bench of Justice A.S. Supehia and Justice Vaibhavi D. Nanavati has observed that the reassessment was based on the same material and the same issue that had already been considered during the original scrutiny assessment, making the subsequent reopening legally unsustainable.
The bench found that the reopening was liable to be quashed on merits in view of its earlier decision in Diamond Jubilee Cooperative Bank Limited v. Union of India, where it had held that deduction under Section 80P(2)(d) is available to a co-operative society on interest earned from investments made with a co-operative bank which itself is a co-operative society.
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The petitioner, a co-operative bank, had filed its income-tax return for AY 2014-15 on November 17, 2014, declaring total income at Nil after claiming exemption of approximately ₹28.91 crore under Section 80P of the Income Tax Act.
The return was selected for scrutiny. During the scrutiny proceedings, the Assessing Officer specifically examined the interest income claimed as exempt under Section 80P(2)(d), as well as other income claimed as exempt under Section 80P(2)(c).
By a show-cause notice dated November 21, 2016, the Assessing Officer asked the assessee to explain why the interest income claimed under Section 80P(2)(d) and miscellaneous and rental income claimed under Section 80P(2)(c) should not be disallowed.
The assessee responded by furnishing the required details, including particulars of interest earned from co-operative banks and nationalized banks, along with its justification for claiming the exemption.
After examining the material furnished by the assessee, the Assessing Officer passed an assessment order under Section 143(3) on December 2, 2016.
Significantly, the Assessing Officer did not disturb the assessee’s claim relating to interest income earned from co-operative banks under Section 80P(2)(d).
Instead, two additions were made in the scrutiny assessment: ₹11,28,91,418 under Section 80P(2)(d) concerning interest income earned from nationalized banks; and ₹32,61,000 under Section 80P(2)(c) concerning miscellaneous income and rental income.
The assessed income was consequently determined at ₹11,61,52,425.
The assessee challenged the assessment before the Commissioner of Income Tax (Appeals), but the appeal was dismissed on February 17, 2018. No further appeal was filed against that appellate order.
Despite the scrutiny assessment, the Income Tax Department subsequently issued a notice dated December 16, 2019 under Section 148, seeking to reopen the assessment for AY 2014-15.
The assessee filed its return in response to the notice on January 23, 2020 and sought a copy of the reasons recorded for reopening as well as the sanction obtained from the Principal Chief Commissioner of Income Tax.
The reasons supplied by the Department stated that the assessee had claimed exemption in respect of ₹5,93,32,466, representing interest earned from various co-operative banks.
According to the Department, such interest income was not arising from the business operations of the assessee and therefore was allegedly not eligible for exemption under Section 80P(2)(d). The Department accordingly formed the view that income of ₹5.93 crore chargeable to tax had escaped assessment.
The assessee objected to the reopening, raising both factual and legal objections. However, the Assessing Officer rejected those objections by an order dated March 4, 2020 and held that the reopening was legally justified.
The assessee thereafter approached the Gujarat High Court.
Before the High Court, the assessee argued that the reassessment proceedings could not be sustained because the issue had already been examined during the original scrutiny assessment.
The assessee pointed out that the Assessing Officer had specifically called for details concerning interest income claimed under Section 80P(2)(d). The assessee had furnished those details and explanations during the scrutiny proceedings.
According to the assessee, after examining the material, the Assessing Officer consciously chose not to make any addition concerning interest received from co-operative banks.
Therefore, reopening the assessment years later on the very same issue and on the same material amounted to nothing more than a change of opinion.
The assessee also relied upon the Gujarat High Court’s earlier decision in Diamond Jubilee Cooperative Bank Limited, contending that Section 80P(2)(d) benefit was available in respect of interest earned from investments made with a co-operative bank which was itself a co-operative society.
The department defended the reopening by relying upon the reassessment powers under Section 147 of the Income Tax Act.
It was argued that the interest income of ₹5,93,32,466 earned from various co-operative banks could not be regarded as income arising from the business operations of the assessee and, consequently, the assessee was not entitled to the deduction under Section 80P(2)(d).
The department therefore urged the Court not to interfere with the reopening proceedings at the writ stage.
The Division Bench rejected the Revenue’s stand and held that the reassessment notice and the consequent reopening had to be set aside because the reopening constituted a change of opinion.
The Court emphasized that the original return had been subjected to scrutiny and that the Assessing Officer had examined the assessee’s explanation concerning the exempt interest income under Section 80P(2)(d).
The scrutiny assessment was thereafter completed under Section 143(3) on December 2, 2016.
The Court found that the subsequent reopening was based on the same material and the same issue that had already been examined by the Assessing Officer during the original scrutiny assessment.
Thus, the Court concluded that the reassessment proceedings did not represent the discovery of some new material or tangible information warranting reopening. Instead, the Assessing Officer was seeking to revisit an issue that had already been considered while framing the original assessment.
During the original scrutiny proceedings, the assessee had supplied details concerning both interest earned from co-operative banks and interest earned from nationalized banks. The Assessing Officer had specifically considered the exemption claims.
The Court therefore found that the reassessment was not founded on some fresh material coming into the possession of the Department after completion of the original assessment.
The fact that the Assessing Officer subsequently took a different view on the same material could not, by itself, justify reopening the completed scrutiny assessment.
This finding reinforces the distinction between a legitimate reassessment based on subsequently available information and an impermissible attempt to reconsider an issue merely because the Assessing Officer has changed his view.
The High Court did not stop at the change-of-opinion issue. It also held that the reopening was required to be quashed on merits.
The Court relied upon its earlier decision in Diamond Jubilee Cooperative Bank Limited, which had considered the scope of Section 80P and the entitlement of co-operative societies to deduction in respect of interest earned on investments with co-operative banks.
The Court referred to the legal position emerging from the Supreme Court’s decision in Apex Cooperative Bank of Urban Bank of Maharashtra & Goa Ltd. v. Maharashtra State Co-operative Bank Ltd. and the Supreme Court decision concerning the Kerala State Co-operative Agricultural & Rural Development Bank.
According to the legal position recorded by the Gujarat High Court, Section 80P(2)(d) provides deduction to a co-operative society in respect of income earned as interest on investments made with a co-operative bank which is itself a co-operative society.
The High Court observed that the contrary reasoning adopted by the Revenue was incorrect and inconsistent with the settled judicial position.
The Gujarat High Court allowed the writ petition.
The Court specifically quashed and set aside the Section 148 notice dated December 16, 2019, as well as the consequential action reopening the assessment for AY 2014-15.
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