Omission in Sec.14A Disclosure Enables Reopening Beyond 4 Years: Madras HC Restores Proceedings Against City Union Bank [Read Order]

The Madras High Court has allowed the Income Tax Department’s writ appeal against City Union Bank, reversing a single judge’s order that had quashed reassessment proceedings for AY 2011-12.The Division Bench held that reopening beyond four years is valid where the assessee fails to fully and truly disclose material facts, even if the Assessing Officer could have discovered them by diligence.

City Union Bank filed its return of income for AY 2011-12 admitting ₹190.30 crore. The return was processed under Section 143(1) and later scrutinized under Section 143(3), resulting in an assessment order dated 14 March 2014 determining income at ₹268.45 crore.

In 2015, reassessment proceedings were initiated under Section 148, and again in 2018, when a fresh notice was issued alleging improper computation of disallowance under Section 14A read with Rule 8D of the Income Tax Rules.

The bank objected, arguing that the issue had already been examined and that the notice was issued beyond four years from the end of the relevant assessment year, barred by the proviso to Section 147.

A single judge accepted this contention and quashed the notice, holding that the lapse was on the Assessing Officer’s part, not the assessee’s. It was ruled that the AO should have applied Rule 8D of the Income Tax Rules, 1962 and determined the amount of expenditure filed for the purpose of disallowance. It had been held that there cannot be reopening of a concluded assessment.

It was also held that there was no failure on the part of the Writ Petitioner/assessee, but rather a failure on the part of the AO to make appropriate determination of the amount of expenditure in terms of Section 14A of the Act.

The Department contended that sanction under Section 151 had been duly obtained before issuing the notice. The assessee had filed return in response, sought reasons, and filed objections, which were rejected by a speaking order.

Relying on GKN Driveshafts (India) Ltd. v. ITO (2003) , counsel argued that the proper course was to allow proceedings to continue rather than challenge the notice prematurely. They further submitted that omission in disclosure of Sec.14A‑related expenses justified reopening beyond four years.

Mr.T.Suryanarayanan, learned Senior Counsel for the respondents stated that there was no justifiable reason given for issuance of notice under Section 148 of the Act. He

City Union Bank argued that all material facts had been disclosed during the original assessment. The reopening was based on the AO’s failure to apply Rule 8D correctly, which cannot be a ground to reopen. Reliance was placed on Calcutta Discount Co. Ltd. v. ITO [1961] , Fenner (India) Ltd. [2000] , and Sri Krishna Mahal v. ACIT [2001] , to argue that absence of recorded reasons and bar of limitation made the notice invalid.

The Division Bench of Justice CV Karthikeyan and Justice R.Vijayakumar examined the scope of Section 147 and its proviso. Citing Honda Siel Power Products Ltd. v. DCIT (2012) it reiterated that “failure to fully and truly disclose material facts” extends beyond the return stage to the assessment proceedings.

Mere production of books does not discharge the duty; the assessee must highlight relevant facts. The Court noted that omission may be deliberate or inadvertent, but either way it confers jurisdiction to reopen.

Applying this principle, the Bench found that City Union Bank had failed to point out expenses relatable to tax‑free income under Section 14A, which were prima facie claimed as deductions.

This omission amounted to failure to disclose material facts, satisfying the jurisdictional threshold for reopening beyond four years. The Court stressed that “proceedings cannot be curtailed by re‑appreciation of facts or sitting in review over the subjective satisfaction of the Assessment Officer.”

The Court highlighted that the duty of disclosure is stringent and continuous. It concluded that once the assessee had filed return, sought reasons, and filed objections which were overruled, challenging the notice itself was not maintainable. The Division Bench therefore set aside the single judge’s order, allowed the writ appeal, and restored reassessment proceedings against City Union Bank.

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