By TIOL News Service

NEW DELHI, NOV 06, 2017: THE ISSUE IS - Whether when AO erroneously accepted disallowance made by assessee u/s 14A, resulting into income escaped assessment, resorting to reassessment u/s 147 by triggering Rule 8D will be invalid on the ground of change of opinion. YES is the verdict.

Facts of the case:

The Assessee-company, engaged in the business of establishing subsidiaries, making majority or minority investments and/or to promote technical collaborations and to act as a holding company, filed its return for the AY's in question. The Assessee disclosed dividend income, which it claimed as exempt from tax u/s 10(34) and accordingly, disallowed some expenditure for earning the exempt income u/s 14A. The return was taken up for scrutiny assessment after issue of notice u/s 143(2). In terms of notice, the Assessee was required to furnish several details, including details of dividend income received, and details of expenses attributable for earning of that income. By another notice, the Assessee was asked to give a detailed calculation of the disallowance u/s 14A r/w Rule 8D. After examining the information provided by the Assessee, the assessment order for AY in question was passed u/s 143(3), accepting the returned income of Assessee.

Thereafter, the AO observed that the Assessee had not disclosed fully and truly all material facts before the him resulting in under assessment of income. Hence, the income had escaped assessment in the case of Assessee for the AY's in question.

High Court held that,

++ there could not be a more clear and obvious case of change of opinion. The AO doing the original assessment had focused himself and examined the question of appropriateness of the expenditure which was disallowed by the Assessee u/s 14A. The AO was aware of the difference between the disallowance of expenditure made by the Assessee in its computation u/s 14A, and disallowance if made by applying Rule 8D of the Rules. The AO not only raised a specific query but did so twice in respect of the disallowances for the AY 2010-11;

++ from the queries raised during the course of assessment proceedings and the replies thereto, there can be no doubt that the AO specifically examined and went into the question of disallowance of expenditure u/s 14A as the Assessee had declared substantial dividend income, which was exempt from tax. The AO was certainly conscious and aware of the nature of business activities undertaken by the assessee as a strategic investor in shares, making majority or minority investments;

++ the chronology of events leading up to the passing of the orders u/s 143(3), clearly shows that the AO was 'satisfied with the claim of the assessee' while passing the original orders. Rule 8D is triggered only in a case where the AO is not satisfied with the deduction made by the Assessee. The reasons to believe assume and are predicated on the belief that the AO should not have accepted the assessee's deduction as explained and justified, albeit should have applied Rule 8D. Thus, the view and opinion formed by the AO, while passing the original assessment orders is doubted as erroneous. This is obviously a case of change of opinion.

(See 2017-TIOL-2311-HC-DEL-IT)