2010 (5) TMI 690 - AT - Income Tax

Whether even if the assessment is made u/s 143(1), while reopening the assessment u/s 147 by issuing notice u/s 148, the assessing officer must have reason to believe that income chargeable to tax has escaped assessment and the reason to believe must have a live link with the formation of the belief that income chargeable to tax had escaped assessment

Issues Involved:
1. Whether proceedings initiated by the AO u/s 147 are valid without fresh material when the original assessment was completed u/s 143(1).
2. Whether the order of the AO is valid when the reasons for action u/s 147 were not provided to the assessee despite specific requests.

Issue-wise Detailed Analysis:

1. Validity of Proceedings Initiated by AO u/s 147 Without Fresh Material:

The primary question was whether the proceedings initiated by the Assessing Officer (AO) under section 147 of the Income Tax Act, 1961, are valid when there was no fresh material available and the original assessment was completed under section 143(1). Both Members agreed that no fresh material was present for reopening the assessment. The learned Accountant Member opined that fresh material is unnecessary since the return was only processed under section 143(1) and not assessed under section 143(3). The learned counsel for the assessee relied on the Supreme Court's judgment in CIT vs. Kelvinator of India Ltd. (2010) 320 ITR 561 (SC), which emphasized that the AO must have a "reason to believe" that income had escaped assessment, and this belief must be based on tangible material.

The learned Senior Departmental Representative (DR) argued that the case of CIT vs. Kelvinator of India Ltd. applies only when the original assessment was under section 143(3) and not under section 143(1). The DR cited the Supreme Court's earlier judgment in ACIT vs. Rajesh Jhaveri Stock Brokers (P) Ltd. (2007) 291 ITR 500 (SC), which held that processing a return under section 143(1) does not constitute an assessment, and thus reopening under section 147 without fresh material is permissible.

Upon careful consideration, it was concluded that the Supreme Court's judgment in Kelvinator of India Ltd. applies to both sections 143(1) and 143(3). The AO must have tangible material to justify the belief that income escaped assessment. The absence of such material renders the reopening invalid. Therefore, the proceedings initiated by the AO under section 147 were quashed due to the lack of tangible material, even though the original assessment was under section 143(1).

2. Validity of AO's Order Without Providing Reasons for Action u/s 147:

The second issue was whether the AO's order is valid when the reasons for action under section 147 were not provided to the assessee despite specific requests. It was undisputed that the reasons recorded for issuing notice under section 148 were not provided to the assessee. The learned Senior DR argued that non-furnishing of reasons does not invalidate the assessment, referencing several judgments where reassessment orders were set aside to be redone after supplying the reasons to the assessee.

The assessee's counsel relied on the Bombay High Court's judgment in CIT vs. Fomento Resorts and Hotels Ltd., which held that non-furnishing of reasons violates natural justice and invalidates the assessment. This judgment was confirmed by the Supreme Court. The Tribunal's order in Videsh Sanchar Nigam Ltd. vs. JCIT also supported this view, stating that non-furnishing of reasons renders the reassessment proceedings null and void.

The Tribunal concluded that the failure to provide reasons recorded for reopening the assessment invalidates the reassessment proceedings. The binding judgment of the Bombay High Court and the Tribunal's consistent view in similar cases supported this conclusion. Thus, the reassessment order was quashed as null and void due to the AO's failure to furnish the reasons for reopening the assessment.

Conclusion:

The Tribunal quashed the reassessment proceedings on both grounds:
1. The proceedings initiated under section 147 were invalid due to the absence of fresh tangible material.
2. The reassessment order was null and void because the AO did not provide the reasons for reopening the assessment to the assessee, violating principles of natural justice.

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