Excess S.80HHC Deduction can be Reopened Even if Original Order was Silent: Madras HC holds Reliance on Expl 2 to S. 142 Valid [Read Order]

The Madras High Court has held that reopening of assessment is valid where excess deduction under Section 80HHC has been granted, even if the original scrutiny assessment order was completely silent on the issue.

The Court ruled that the Revenue was justified in invoking Explanation 2 to Section147 of the Income Tax Act, 1961, which treats excessive relief as a case of income escaping assessment.

In the matter of Jasmine Towels (P) Ltd, relating to Assessment Year 2004-05, where the assessee had claimed deduction under Section 80HHC in its return of income. Although the return was selected for scrutiny and an assessment was completed under Section 143(3), the assessment order did not contain any discussion, computation, or reference to the Section 80HHC deduction.

Subsequently, the Assessing Officer issued a notice under Section 148 of Income Tax Act, stating that the assessee had claimed excess deduction under Section 80HHC by incorrectly computing the export profits, resulting in escapement of income. The reassessment was challenged by the assessee on the ground that it amounted to a mere change of opinion, which is impermissible in law.

However, the court, rejecting the assessee’s contention, observed that the original assessment order was wholly non-speaking on the issue of Section 80HHC. There was no indication of any application of mind, no reference to queries raised, nor any discussion under Sections 143(2) or 142(1) regarding the deduction. In such circumstances, the Court held that no opinion could be said to have been formed at the original stage, and therefore the doctrine of “change of opinion” did not apply.

The Court noted the submission of the respondent's counsel which submitted that “there has been absolutely no consideration of the claim under Section 80HHC by the Assessing Officer at the original instance. He relies on Explanation (2) to Section 147, as it stood then, as per which, the grant of excessive relief was a situation which enabled the Assessing Authority to issue a notice under Section 148 for re-assessment.”

Following that, the Explanation 2(c)(iii) to Section 147, which expressly deems a case of “excessive relief” as income escaping assessment. It held that where an excessive deduction has been granted, even during a completed scrutiny assessment, the Assessing Officer is empowered to reopen the assessment, provided statutory conditions are met.

The Explanation 2 of S. 142 states that:

“Explanation 2.—For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely :—

..............

(c) where an assessment has been made, but—

(i) income chargeable to tax has been under-assessed ;

or

(ii) such income has been assessed at too low a rate ; or

(iii) such income has been made the subject of excessive

relief under this Act ; or

(iv) excessive loss or depreciation allowance or any other

allowance under this Act has been computed;

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Justice Dr. Anita Sumanth and Mummieni Sudheer Kumar, while distinguishing the judgments submitted by the assessee, including TechSpan India Pvt. Ltd., noted that in those cases, the original assessments were preceded by detailed correspondence and examination of the relevant claims. In contrast, in the present case, there was no material to show that the Section 80HHC claim was ever examined during the original assessment.

Accordingly, the High Court answered the question of law in favour of the Revenue, upheld the assumption of jurisdiction under Section 147, and dismissed the assessee’s appeal, holding that reassessment proceedings were legally valid despite the original order being silent on the deduction. It ruled that there was no ‘Change of Opinion’.

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