Retrospective change in law cannot be basis for reopening of Assessment.

Facts of the Case:

• Lehman Brothers Investments Pte. Ltd. (hereinafter referred to as “the Assessee”) is a non-resident investment holding company incorporated in Singapore. The Assessee had no business operations since October 2008; however, the Assessee was holding the shares of Indian private limited company as on 31st March 2014.
• In F.Y. 2013-14, High Court of Mumbai allowed the capital reduction scheme of Indian company through which the Assessee received ₹1,00,00,00,000/- in F.Y. 2014-15. The Assessee computed capital gains under Section 45 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) read with the first proviso of Section 48 of the Act after setting off losses for previous AYs and paid taxes @ 20% u/s 112(1)(c)(ii) of the Act.
• The scrutiny was initiated for F.Y. 2014-15 and the Assessee filed its response in due course to the Assessing Officer (AO) in respect of the only transaction occured during the year. On 24th December 2018, AO passed the assessment order wherein the income was assessed while accepting the computation of capital gains as per provisions of Section 112(1)(c)(ii) of the Act read with first proviso to Section 48.
• Later on, the reassessment proceedings were initiated against the Assessee, reason being that the Assessee failed to disclose truly and fully all material facts necessary for the completion of assessment. The AO was of the view that capital gains had been computed incorrectly by claiming the benefit of first proviso of Section 48 of the Act, whereas in this case the provisions of Section 112(1)(c)(iii) of the Act was not considered at the time of assessment proceedings and therefore it was a case of escapement of income.
• However, the Assessee contended that it had disclosed all material facts however, as far as applicability of the provisions of section 112(1)(c)(iii) of the Act are concerned, the Assessee claimed that the expression ‘securities’ as arising in the section have the same meaning as assigned under Securities Contracts (Regulation) Act, 1956 (‘SCRA’) wherein securities includes “shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate”. To qualify as securities as defined above, it should be marketable and shares of the private companies are not per se marketable, hence shares of private companies do not qualify as ‘securities’ as defined above and consequently, does not get covered by Section 112(1)(c)(iii) of the Act. In this regard, reliance was placed on the decision of the Bombay High Court in the case of Dahiben Umedbhai Patel and others v/s. Norman James Hamilton and Ors.
• Further, the amendment made under the provisions of the Section 112(1)(c)(iii) though made applicable retrospectively from A.Y. 2013-14 cannot apply as reason for reopening by placing reliance on the decision in case of Godrej Industries Ltd. v/s. B. S. Singh, Deputy Commissioner of Income-tax, Range 10(2)7 which confirms that a retrospective amendment cannot be the basis for reopening of assessment.
• However, the AO disposed off the objections filed by the Assessee and opened the reassessment proceedings. It is against this Act of the AO, that Assessee filed a writ before the Hon’ble High Court questioning whether the reopening of the assessment in the instant case was permissible under the law?

Observation And Conclusion:

Hon’ble High Court held that:

• It is a clear-cut case of change of opinion inasmuch as there was no new material which was discovered by the concerned officer. The application of another section of the Act on the facts and circumstances of a case would only constitute a change of opinion. AO was supposed to conclude the assessment proceeding with full application of mind in both legal and factual perspective (reliance has been placed upon the Full Bench decision of the Delhi High Court in the case of CIT v/s. Kevinator of India Ltd.)
• The reopening of the assessment based on a different method of computation or application of the section was nothing else but a change of opinion, which was impermissible under the law, hence the order of opening the reassessment was set aside and decision was passed in the favour of the Assessee.

SW Point of View:

This decision fortifies the claim of the taxpayers that power to re-open is a limited power which an Assessing Officer is bound to use judiciously.  Once an opinion has been formed while completing the Assessment, retrospective amendment(s) to the provision of the Act will not be the basis for initiating re-opening of an assessment.

To this, Hon’ble High Court of Bombay decided by relying on the decision in case of Godrej Industries Ltd. v/s. B. S. Singh, Deputy Commissioner of Income-tax, Range 10(2)7 that retrospective amendment cannot be the basis for reopening of assessment and instant case was clear case of change of opinion.

Lakshay Prakash Jonwal, Direct Tax Associate, SW India