2014 (6) TMI 188 - HC - Income Tax

Validity of notice for reopening of assessment Reason to believe - Held that - Relying upon Gujarat Fluorochemicals Ltd. v. Asst. CIT 2013 (8) TMI 287 - GUJARAT HIGH COURT the noting made by the AO that the AO did not hold any belief that income had escaped assessment Examination of noting clearly and unequivocally reveals that the AO had not only not accepted the objections raised by the audit party but after deliberating over the issue raised, preferred to adhere to her earlier version that the income which never materialised cannot be taxed. Remedial actions indicated could not be said to be satisfying the requirement of having held the belief - while issuing notice for reopening, the AO had not formed any independent belief that the income had escaped assessment - the AO has issued notice not on forming her own belief, but on compulsion asserted thus, the assumption of jurisdiction on the part of the AO itself is not sustainable - any action of reopening solely at the behest of objection raised by audit party without any independent belief while recording the reasons would surely make the very assumption of jurisdiction vulnerable - the petitions is to be allowed on the ground of assumption of jurisdiction for issuance of notice of reassessment being contrary to law and unsustainable - Decided in favour of Assessee.

Issues Involved:
1. Reopening of assessment under section 148 of the Income-tax Act, 1961.
2. Assumption of jurisdiction by the Assessing Officer based on audit party's objections.
3. Change of opinion by the Assessing Officer.

Issue-wise Detailed Analysis:

1. Reopening of assessment under section 148 of the Income-tax Act, 1961:
The petitioner filed its return of income for the assessment year 2001-02, which was finalized on scrutiny assessment. The respondent-Revenue issued a notice for reopening under section 148 on January 16, 2006, citing that the income of the petitioner had escaped assessment. The petitioner filed a return on February 27, 2006, and requested the reasons for reopening, which were provided. The reasons included the audit party's observation that the company had not provided for interest on advances and loans given to related parties, resulting in underassessment. The petitioner raised objections against the reopening, stating that the advances were interest-free from inception and that no interest was charged on the borrowings. The objections were rejected by a detailed order, leading to the challenge of the reopening on jurisdictional grounds.

2. Assumption of jurisdiction by the Assessing Officer based on audit party's objections:
The primary issue was whether the notice for reopening was issued by the Assessing Officer based on the audit party's objections without forming an independent belief. The court relied on the decision in Gujarat Fluorochemicals Ltd. v. Asst. CIT [2013] 353 ITR 398 (Guj), which held that the Assessing Officer must form an independent opinion on an issue brought to their notice by the audit party. The court examined the original file and noted that the Assessing Officer, in her notings dated July 25, 2005, explicitly stated that the objections raised by the audit were not acceptable, citing Supreme Court decisions in CIT v. Shoorji Vallabhdas and Co. [1962] 46 ITR 144 (SC) and Godhra Electricity Co. Ltd. v. CIT [1997] 225 ITR 746 (SC) which held that hypothetical income cannot be taxed unless it is accrued. The Assessing Officer did not hold any belief that income had escaped assessment and suggested remedial actions under section 263 or reopening under section 147(c) only under higher authority's guidance.

3. Change of opinion by the Assessing Officer:
The petitioner argued that the reopening was merely a change of opinion since the issue of non-charging of interest on advances was already discussed in the original assessment. The court observed that the Assessing Officer consistently maintained that the income, which never materialized, could not be taxed, and this position was supported by apex court decisions. The court concluded that the reopening was not based on an independent belief of the Assessing Officer but was compelled by the audit party's objections.

Conclusion:
The court held that the assumption of jurisdiction by the Assessing Officer for reopening the assessment was not sustainable as it was solely based on the audit party's objections without any independent belief. The petitions were allowed, and the impugned notices and all consequential proceedings were quashed. The rule was made absolute with no order as to costs.

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