2014 (1) TMI 1719 - AT - Income Tax

Reopening of assessment - disallowance u/s 40A(3) - Held that - CIT(A) has rightly quashed the reopening of assessment made by the Assessing Officer u/s 147 of the Act by observing that there was absolutely no fresh information provided or collected and the initiation of proceedings u/s 147 after a period of four years for effecting disallowance u/s 40A(3) of the Act is not valid. Accordingly, we uphold the order of the CIT(A) and dismiss the grounds raised by the revenue on this issue. - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of initiation of proceedings under Section 147 after a period of four years.
2. Applicability of Section 40A(3) regarding disallowance of cash payments for land purchase.

Issue-wise Detailed Analysis:

1. Validity of Initiation of Proceedings under Section 147 After a Period of Four Years:

The Revenue challenged the CIT(A)'s decision that the initiation of proceedings under Section 147 of the Income Tax Act after a period of four years was invalid. The CIT(A) observed that the regular assessment was completed under Section 143(3) and the notice under Section 148 was issued after four years without any fresh information or reasons communicated to the assessee. The CIT(A) held that the assessee had disclosed all relevant factors fully, thus the initiation of proceedings under Section 147 was not valid.

The Tribunal referred to the judgment in CIT Vs. Usha International Ltd. by the Delhi High Court, which laid down conditions for reopening an assessment under Section 143(3):
- The Assessing Officer must form a tentative or prima facie opinion based on material indicating under-assessment or escapement of income.
- This opinion must be recorded in writing and should not be based on mere suspicion.
- There should be a nexus between the recorded reasons and the opinion formed.
- In cases where the first proviso applies, there must be a failure or omission by the assessee to disclose full and true material facts.

The Tribunal also noted that the principle of "change of opinion" applies when the Assessing Officer had formed an opinion during the original assessment, and now proposes to take a different view without new factual information. The Tribunal emphasized that reassessment proceedings are invalid if based on a mere change of opinion without new material facts.

The Tribunal concluded that the CIT(A) rightly quashed the reopening of assessment under Section 147 as there was no fresh information provided or collected, and the initiation of proceedings after four years was not valid.

2. Applicability of Section 40A(3) Regarding Disallowance of Cash Payments for Land Purchase:

The Assessing Officer disallowed 20% of the expenditure incurred for the purchase of land held as stock-in-trade by way of cash payments, under Section 40A(3) of the Act. The CIT(A) held that the provisions of Section 40A(3) were not applicable as the amount did not represent expenditure and was not paid by the appellant firm. The CIT(A) found that the land was not debited to the profit and loss account and no income was derived from trading in the said land, thus Section 40A(3) had no application.

The Tribunal upheld the CIT(A)'s decision, agreeing that the provisions of Section 40A(3) were not applicable in this case.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s order that the initiation of proceedings under Section 147 after four years was invalid, and the disallowance under Section 40A(3) was not applicable. The Tribunal emphasized the importance of new material facts for reopening assessments and the inapplicability of Section 40A(3) in the given circumstances.

Judgment:
The appeal of the Revenue was dismissed, and the order of the CIT(A) was upheld. The judgment was pronounced in the open court on 08/01/2014.