2015 (6) TMI 1019 - AT - Income Tax

Reopening of assessment - assessee had claimed depreciation in respect of tenancy rights, whereas according to the provisions of section 32 depreciation is allowable only on tangible assets and the amended provisions for depreciation pertaining to intangible assets also does not include within its fold, tenancy rights and that so, due to the wrong claim of depreciation made by the assessee, income had escaped assessment - Held that - There was no tangible material available with the A.O. at the time of recording of reasons for initiating reassessment proceeding so as to enable such reassessment proceedings to be initiated, the return of income filed by the assessee was processed u/s 143(1) of the Act on 26-10- 2005. At that time, the tax audit report filed by the assessee was before the A.O. and it was this very tax audit report, and nothing else, or further, which had come to the notice of the A.O., on the basis of which, the reasons for reopening the completed assessment of the assessee were recorded. The reasons recorded, as reproduced above, do not talk of any independent tangible material having come to the notice of the A.O. In CIT vs. Orient Craft Ltd. (2013 (1) TMI 177 - DELHI HIGH COURT ), it has been held, inter alia, that the expression reason to believe cannot have two different standards and sets of meaning one applicable where the assessment order earlier made u/s 143(3) of the Act, and another applicable where the intimation was issued u/s 143(1);that as such, where the reasons disclosed that the A.O. reached the belief of escapement of income on going through the return of income filed by the assessee after he accepted the return u/s 143(1) without scrutiny and nothing more, this was nothing but a review of the earlier proceedings and an abuse of power by the A.O. This is exactly what has happened in the present case, as discussed. The reasons recorded by the A.O. do not show that any tangible material come in the possession of the A.O. subsequent to the issue of the intimation u/s 143(1) of the Act, as such, and therefore, the notice reflected an arbitrary exercise of the power conferred u/s 147 of the Act. It is held that in the absence of any tangible material before the A.O., the A.O. was not entitled to invoke the reassessment jurisdiction and to proceed to reopen the completed assessment of the assessee. Accordingly, the reassessment proceedings are found to be void ab initio, and as such, they were cancelled. - Decided in favour of assessee

Summary

Issues:
1. Disallowance of depreciation on tenancy rights
2. Addition of payment to retired partner
3. Reopening of assessment under section 147

Issue 1: Disallowance of depreciation on tenancy rights
The appellant contested the disallowance of depreciation on tenancy rights for Assessment Year 2005-06. The Commissioner (Appeals) confirmed the Assessing Officer's action, stating that tenancy rights did not fall within the block of Intangible Assets. The appellant argued that tenancy rights were a form of license and should be depreciable. The appellant sought modification of the order to allow depreciation on tenancy rights. The tribunal noted that the asset represented tenancy rights in a building used as office premises, which did not qualify for depreciation under section 32 of the Income Tax Act. The tribunal upheld the disallowance, stating that depreciation is allowable only on tangible assets, not on tenancy rights.

Issue 2: Addition of payment to retired partner
The Commissioner (Appeals) confirmed the addition of a payment made to a retired partner as per the partnership deed. The appellant contended that the payment was diverted by overriding title and not a gratuitous one. The tribunal considered the nature of the payment and the partnership agreement. It was held that the payment to the retired partner was a self-imposed obligation and not allowable as a deduction. The tribunal upheld the addition of the payment to the retired partner.

Issue 3: Reopening of assessment under section 147
The Assessing Officer reopened the assessment under section 147 based on the wrong claim of depreciation on tenancy rights, leading to alleged income escapement. The appellant challenged the reopening, arguing that there was no tangible material to support the reassessment. The tribunal analyzed the reasons recorded by the Assessing Officer and found no independent tangible material to justify the reassessment. Citing previous judgments, the tribunal held that the reassessment proceedings were void ab initio and canceled them. Consequently, the grounds related to the addition made and confirmed were not adjudicated. The appeal by the appellant was allowed.

In conclusion, the tribunal ruled in favor of the appellant, disallowing depreciation on tenancy rights and confirming the addition of payment to the retired partner. The reassessment proceedings under section 147 were deemed void and canceled due to lack of tangible material, resulting in the appeal being allowed.