2014 (2) TMI 301 - AT - Income Tax

Re-opening of assessment u/s 147 - Held that - The AO allowed the expenditure considering the exlanation offered by the assessee during the regular assessment proceedings - Rule was not applicable to the concerned assessment year - It is for the AO to record his findings that the expenditure recorded in the books of account gives rise to a doubt that the correct expenditure in relation to the income, which does not form part of the total income, was not recorded properly - AO failed to give such finding - The AO was not in possession of any tangible material on the basis of which the AO can form his belief - If an AO has already verified the facts of the case while accepting the claim of exemption and had made no disallowance under section 14A in the past, on the same set of facts he cannot opt to reopen the assessment by issuance of notice under section 148 of the Act since it amounts to change of opinion - Decided in favour of assessee.

Issues Involved:
1. Reopening of assessment under section 148 of the Income Tax Act.
2. Applicability of section 14A and Rule 8D for disallowance of expenditure related to exempt income.

Detailed Analysis:

1. Reopening of Assessment under Section 148:

The primary issue in this case is whether the reopening of the assessment by the Assessing Officer (AO) under section 148 of the Income Tax Act was justified. The assessee contended that the reopening was based on a mere change of opinion on the same set of facts already available with the AO during the original assessment proceedings. The original assessment was completed under section 143(3) on 08.12.2009, where the AO had raised a query regarding the applicability of section 14A. The assessee had responded that the expenditures were not related to the exempt dividend income, and the AO did not make any disallowance under section 14A.

The AO later issued a notice under section 148 on 19.03.2012, intending to reopen the assessment based on the same facts, asserting that some expenditure should be attributable to the exempt income as per section 14A and Rule 8D. The Tribunal noted that there was no fresh material available to justify the reopening and that the AO's action was based on a change of opinion, which is not permissible in law. The Tribunal cited the Bombay High Court's decision in Cartini India Ltd. vs. ACIT, which held that reassessment based on material considered during the original assessment proceedings amounts to a mere change of opinion and is invalid.

The Tribunal concluded that the reopening of the assessment was bad in law, as it was based on the same facts and no new material was found by the AO. The decision was further supported by the Bombay High Court's ruling in Godrej & Boyce Mfg. Co. Ltd. vs. DCIT, which stated that Rule 8D is not applicable for assessment years prior to A.Y. 2008-09. The Tribunal held that the AO's assumption that Rule 8D was applicable was incorrect, and the reopening of the assessment was quashed.

2. Applicability of Section 14A and Rule 8D:

The second issue was whether the AO was correct in disallowing expenditure under section 14A by applying Rule 8D. The assessee argued that no expenditure was incurred to earn the exempt income and that the interest income earned was more than the interest paid, indicating that no borrowed funds were used for earning the exempt income. The CIT(A) had observed that Rule 8D was not applicable for the year under consideration but still made an ad hoc disallowance of Rs. 1,00,000, stating that some disallowance was reasonable under section 14A.

The Tribunal noted that the AO did not record any satisfaction that the expenditure claimed by the assessee was related to the exempt income, which is a prerequisite for invoking section 14A. The AO's reliance on Rule 8D was misplaced, as it was not applicable for the assessment year in question. The Tribunal emphasized that the AO must demonstrate a connection between the expenditure and the exempt income, which was not done in this case.

Given that the reassessment proceedings were quashed, the Tribunal found it unnecessary to address the merits of the disallowance under section 14A. The Tribunal allowed the appeal filed by the assessee, concluding that the reopening of the assessment was invalid and the disallowance of expenditure under section 14A was not justified.

Conclusion:

The Tribunal quashed the reopening of the assessment under section 148, deeming it to be based on a mere change of opinion without any new material. Consequently, the disallowance of expenditure under section 14A was also invalidated. The appeal filed by the assessee was allowed in full.

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