2011 (10) TMI 498 - AT - Income Tax

Re opening of assessment - sale of investments (total income) which is inclusive of dividend income; interest income and other income are to be classified under Income from other sources & treated separately for tax purpose - Non set-off of business loss against Capital Gain - reopening based on Objection raised by audit party - Held That - AO nowhere observed that the income of the assessee escaped assessment. It is not the case of the AO that the assessee had not fully disclosed all the material facts relating to the income. When the AO framed the original assessment vide order dated 30.12.2005 all the relevant documents relating to the income or losses of the assessee were available to the AO so it cannot be said that the AO had not applied his mind while framing the original assessment vide order dated 30.12.2005. It is also noticed from the computation of total income that the assessee clearly disclosed the capital gains of Rs. 49, 44, 07, 583/-and business loss of Rs. 73, 92, 785/-. The return of income filed by the assessee was earlier processed u/s. 143(1) on 8.3.2004 thereafter notice u/s. 143(2) was issued on 15.4.2004 and the AO mentioned that the assessee furnished the details called for and after examining the information filed and discussing the case assessment was completed. So it cannot be said that the AO did not apply his mind while framing the assessment u/s. 143(3). Thus as assuming there was some mistake in the assessment order dated 30.12.05 and income if any had been taken under a wrong head that mistake could have been rectified by issuing notice u/s. 154 however the reopening of the assessment by issuing the notice u/s. 148 could have been done only when there was escapement of income. Another objection taken by the AO that the assessee had not set off business loss against the capital gains which is contrary to the provisions of the Act is totally wrong because the assessee had set off the business loss against the income from capital gain and the provisions contained in section 71(2) which clearly stipulates that the loss must be set off against the income if any assessable for that assessment year under any head of income including the head capital gains whether short term capital gain or long term capital gain. The view in respect of dividend income and interest income which were treated as business income was in consonance with the view taken in the preceding as well as succeeding year wherein the assessment was also framed u/s. 143(3). Secondly the reopening was made on the basis of objection of the audit party and no independent application of mind was there by the AO. Thus notice issued u/s. 148 for reopening the assessment in the present case was not justified. A mere change of opinion is not sufficient to issue notice u/s. 148 for reassessing the income by invoking the provisions of section 147 - Decided against revenue.

Summary

Issues Involved:
1. Validity of reopening the assessment under section 147 of the Income Tax Act, 1961.
2. Classification of interest income as 'income from other sources' versus 'business income'.
3. Apportionment of interest and administrative expenditure.
4. Deduction of interest and administrative expenses under section 57(iii) if not allowed under 'business income'.
5. Adjustment of interest and administrative expenses against interest income under 'income from other sources'.

Issue-wise Detailed Analysis:

1. Validity of Reopening the Assessment under Section 147:
The primary issue was whether the reopening of the assessment under section 147 was valid. The assessee argued that the original assessment was completed under section 143(3) with full disclosure of all material facts, and there was no escapement of income. The reopening was based on an audit objection, which is not a valid ground for reopening. The CIT(A) upheld the reopening, stating that the amended section 147 allows reopening within four years even without new information. However, the tribunal found that the AO did not independently verify the audit objection and had not demonstrated that income had escaped assessment. The tribunal concluded that the reopening was merely a change of opinion, which is not permissible under section 147.

2. Classification of Interest Income:
The assessee contended that the interest income should be classified as 'business income' as it was in the original assessment and in preceding and succeeding years. The AO, in the reassessment, treated it as 'income from other sources'. The tribunal noted that the AO had consistently treated such income as 'business income' in other years and found no new reasons to change this classification. The tribunal held that changing the classification without new evidence constituted a change of opinion.

3. Apportionment of Interest and Administrative Expenditure:
The AO apportioned the interest and administrative expenses between 'income from other sources' and 'long term capital gains' on a proportionate basis. The assessee argued that this apportionment was inconsistent with the treatment in earlier years. The tribunal did not provide a detailed analysis on this issue as it set aside the reassessment on the grounds of invalid reopening.

4. Deduction under Section 57(iii):
The assessee's alternative plea was that if the interest and administrative expenses were not allowed under 'business income', they should be allowed under section 57(iii) under 'income from other sources'. The tribunal did not address this issue directly due to the decision on the invalidity of the reopening.

5. Adjustment of Expenses Against Interest Income:
The assessee argued that interest and administrative expenses should first be adjusted against interest income under 'income from other sources' before determining the total income. The tribunal did not provide a detailed analysis on this issue due to the decision on the invalidity of the reopening.

Conclusion:
The tribunal concluded that the reopening of the assessment under section 147 was not justified as it was based on a change of opinion and an audit objection without independent verification by the AO. The reassessment order was set aside, and no findings were given on the other grounds raised by the assessee. The appeal was allowed in favor of the assessee.