Case: Director of Income Tax (International Taxation) Vs. May & Baker Limited

J.P. Devadhar, J.Whether the Income Tax Appellate Tribunal was justified in holding that the re-opening of the assessment in the case of the assessee for assessment year 2001-02 was invalid is the question raised in this appeal.2. The assessee who is a non-resident, had filed its return of income on 22nd October 2001 declaring income of Rs.138.96 crores. The assessment order under Section 143(3) of the Income Tax Act, 1961 (Act for short) was passed on 25th March 2004, assessing the income at Rs.142.85 crores.3. Thereafter, by a notice dated 29th March 2006 the said assessment was sought to be re-opened on the ground that the rate of tax on the long term capital gain of Rs.142.85 crores was erroneously taxed at ten per cent under Section 112(1) of the Act, whereas it should have been taxed at the rate of twenty per cent. The assessee objected to the re-opening of the assessment. However, the assessing officer rejected the contention of the assessee and held that the capital gains were liable to be taxed at the rate of twenty per cent. The appeal filed by the assessee against the reassessment order was also dismissed by the Commissioner of Income Tax (Appeals). On further appeal, the Income Tax Appellate Tribunal by the impugned order dated 24th June 2009 held that the reopening of the assessment was bad in law. Challenging the aforesaid order, the present appeal is filed by the Revenue.4. The reasons recorded by the Assessing Officer for reopening of the assessment reads thus :-"In this case, the assessment under Section 143(3) was completed on 25-03-2004 assessing the total income at Rs.1,42,85,91,610/- as against returned income of Rs.1,38,96,03,850/- which represents Long Term Capital Gain. The A.O. during the course of assessment proceedings, noticed that assessees working of taxable capital gains is incorrect and accordingly worked out the taxable long term capital gains u/s.48(1)(1). The Ld. CIT (A) upheld the view taken by the Assessing Officer by holding that in the present case, cost of acquisition will be the cost at which the assets were required and no indexation is to be allowed separately.""2. The said long term capital gain of Rs.1,42,85,91,065/was taxed@ 10% as per provisions to section 112(1). However, as per the provisions of section 112(1)(c)(ii), the amount of income-tax calculated on such long term capital gains should be at the rate of twenty percent, except as provided in the proviso below section 112. The provisions of section 112(1)(c)(ii) are reproduced herein under for reference :-"Tax on long-term capital gains :-112(1) Where the total income of an assessee includes any income arising from the transfer of a long-term capital asset, which is chargeable under the head "Capital Gains", the tax payable by the assessee on the total income shall be the aggregate of -(a) ...........(b) ..........(c) in the case of a nonresident (not being a company), or a foreign company,(i) .............(ii) the amount of income-tax calculated on such long-term capital gains at the rate of twenty percent;""3. Therefore, I have reason to believe that the incorrect application of rate of tax has resulted in short levy of tax of Rs.20,05,42,421/including interest of Rs.5,76,83,260/- under Section 234B. In other words, the income is escaped chargeable to tax to that extent. Accordingly, the assessment for A.Y. 2001-02 is being reopened and notice u/s.148 of the I.T. Act, is being issued."5. From the aforesaid reasons, it is clear that the only reason for reopening the assessment was that under Section 112(1)(c)(ii) of the Act, the long term capital gains are liable to be taxed at twenty percent, where as, in the present case, the tax has been levied under Section 112 at ten per cent.6. Section 112, to the extent relevant, reads thus :-"Tax on long-term capital gains.112. (1) Where the total income of an assessee includes any income, arising from the transfer of a long-term capital asset, which is chargeable under the head "Capital gains", the tax payable by the assessee on the total income shall be the aggregate of, -(a) ................(b) ...............(c) in the case of a nonresident (not being a company) or a foreign company,(i) the amount of income-tax payable on the total income as reduced by the amount of such long-term capital gains, had the total income as so reduced been its total income; and(ii) the amount of income-tax calculated on such long-term capital gains at the rate of twenty per cent ;(d) ................Provided, that where the tax payable in respect of any income arising from the transfer of a long-term capital asset, being listed securities or unit or zero coupon bond, exceeds ten per cent of the amount of capital gains before giving effect to the provisions of the second proviso to section 48, then, such excess shall be ignored for the purpose of computing the tax payable by the assessee."7. Thus, under Section 112 of the Act the tax payable by a non-resident on long-term capital gains is twenty per cent. However, the proviso to Section 112(1) provides that in cases specified therein the long-term capital gains in excess of ten per cent shall be ignored. In the present case, the assessing officer in the original assessment order, after considering the second proviso to Section 48 of the Act has held that on the long term capital gains income, the assessee is liable to pay tax at ten per cent. Obviously, the long-term capital gains were taxed by the assessing officer at ten per cent by invoking the proviso to Section 112 of the Act.8. The reasons recorded for re-opening of the assessment, neither records that the proviso to Section 112 is not applicable to the case of the assessee nor does it record that the long term capital gains earned by the assessee do not fall in any of the categories specified in the proviso to Section 112 of the Act. Thus, the reasons recorded for re-opening of the assessment merely states that under Section 112(1)(c)(ii), the long term capital gains tax payable by a non-resident is twenty per cent and does not find fault with the original assessment order, wherein ten per cent tax has been levied by invoking the proviso to Section 112 of the Act. Therefore, in the absence of any reasons recorded to the effect that the proviso to Section 112 is not applicable to the case of the assessee or that the income of the assessee does not fall in any of the categories specified in the proviso to Section 112, the reopening of the assessment cannot be said to be valid in law.9. The argument of the learned counsel for the Revenue was that the proviso to Section 112(1) refers to the second proviso to Section 48 and the second proviso to Section 48 is not applicable to a non-resident and, therefore, in the original assessment the proviso to Section 112(1) could not be invoked in the case of the assessee. We see no merit in the above contention, because, that was not the ground on which the assessment was sought to be re-opened. The validity of the re-opening of the assessment has to be judged on the basis of the reasons recorded for re-opening of the assessment. If the reasons recorded do not even remotely suggest that the assessing officer was not justified in invoking the proviso to Section 112 of the Act, it would not be open to the Revenue to justify re-opening of the assessment on the grounds which are not recorded in the reasons for reopening the assessment. In the present case, it is relevant to note that in the original assessment order, the assessing officer has specifically referred to the second proviso to Section 48 and thereafter applied the proviso to Section 112 of the Act. Assuming that the assessing officer was wrong in invoking the proviso to Section 112, in the absence of any reason recorded to the effect that the proviso to Section 112 has been wrongly invoked by the assessing officer, it cannot be said that the assessment has been validly re-opened.

Decision:
0[ds]5. From the aforesaid reasons, it is clear that the only reason for reopening the assessment was that under Section 112(1)(c)(ii) of the Act, the longare liable to be taxed at twenty percent, where as, in the present case, the tax has been levied under Section 112 at ten per cent.Thus, under Section 112 of the Act the tax payable by arm capital gainsis twenty per cent. However, the proviso to Section 112(1) provides that in cases specified therein thein excess of ten per cent shall be ignored. In the present case, the assessing officer in the original assessment order, after considering the second proviso to Section 48 of the Act has held that on the longme, the assessee is liable to pay tax at ten per cent. Obviously, thecapital gains weretaxed by the assessing officer at ten per cent by invoking the proviso to Section 112 of the Act.The argument of the learned counsel for the Revenue was that the proviso to Section 112(1) refers to the second proviso to Section 48 and the second proviso to Section 48 is not applicable to aand, therefore, in the original assessment the proviso to Section 112(1) could not be invoked in the case of the assessee. We see no merit in the above contention, because, that was not the ground on which the assessment was sought to beThe validity of thereopening of theassessment has to be judged on the basis of the reasons recorded forreopening of theassessment. If the reasons recorded do not even remotely suggest that the assessing officer was not justified in invoking the proviso to Section 112 of the Act, it would not be open to the Revenue to justifyreopening of theassessment on the grounds which are not recorded in the reasons for reopening the assessment. In the present case, it is relevant to note that in the original assessment order, the assessing officer has specifically referred to the second proviso to Section 48 and thereafter applied the proviso to Section 112 of the Act. Assuming that the assessing officer was wrong in invoking the proviso to Section 112, in the absence of any reason recorded to the effect that the proviso to Section 112 has been wrongly invoked by the assessing officer, it cannot be said that the assessment has been validly