2014 (11) TMI 477 - AT - Income Tax

Validity of reopening of assessment u/s 147 - Reopening made in the absence of tangible material or fresh information - Held that - Initiation of proceedings u/s 147 of the Act is based on the scrutiny of accounts attached with the return of income - The contention of the assessee on the issue of validity of initiation of proceedings u/s 147 of the Act is that mere reappraisal of the return of income cannot confer jurisdiction to proceed u/s 147 of the Act following the decision in CIT vs. Orient Craft Ltd. 2013 (1) TMI 177 - DELHI HIGH COURT - the reasons disclosed that the AO reached the belief that there was escapement of income on going through the return of income filed by the assessee after he accepted the return u/s 143(1) were without scrutiny and nothing more - This was nothing but a review of the earlier proceedings and an abuse of power by the AO - there was nothing in the reasons recorded to show that any tangible material which came to the possession of the AO subsequent to the issue of the intimation - the notice reflected an arbitrary exercise of the power conferred u/s 147 of the Act thus, the reopening was bad in law in that case also where reopening was made in the absence of tangible material or fresh information Decided in favour of assessee.

Summary

Issues Involved:
1. Deletion of disallowance of Rs. 998580/- claimed on account of expenses of trading nature against the income from bank interest.
2. Setting off business loss of Rs. 998580/- against the interest income under section 71 of the Act.
3. Validity of initiation of proceedings under section 147 of the Act.
4. Sustenance of disallowance of expenditure.
5. Disallowance of claimed exemption under section 10B in respect of interest on FDR.
6. Disallowance of setting off loss against the interest income.

Issue-wise Detailed Analysis:

1. Validity of Initiation of Proceedings under Section 147 of the Act:
The assessee challenged the validity of the initiation of proceedings under section 147 of the Income Tax Act, arguing that no fresh material surfaced after the return of income was filed. The Assessing Officer (AO) initiated proceedings based on the scrutiny of accounts attached with the return of income, concluding that income chargeable to tax had escaped assessment. The assessee contended that mere reappraisal of the return of income cannot confer jurisdiction to initiate proceedings under section 147. The Tribunal referred to the Delhi High Court's decision in CIT vs. Orient Craft Ltd., which held that reopening based on the return of income without any tangible material is an abuse of power. The Tribunal concluded that the AO was not justified in invoking jurisdiction under section 147 in the absence of fresh material, thus deciding the issue in favor of the assessee.

2. Deletion of Disallowance of Rs. 998580/- Claimed on Account of Expenses of Trading Nature Against the Income from Bank Interest:
The AO had disallowed the expenses claimed by the assessee, arguing that the assessee was not engaged in any trading or business activity. The Tribunal noted that the AO's decision was based on the scrutiny of accounts attached with the return of income and not on any fresh material. Given that the initiation of proceedings under section 147 was held invalid, the disallowance of expenses also became infructuous.

3. Setting Off Business Loss of Rs. 998580/- Against the Interest Income Under Section 71 of the Act:
The AO had disallowed the setting off of business loss against the interest income, arguing that the interest income should be taxed under the head "Income from Other Sources." The Tribunal, however, noted that the AO's decision was based on the scrutiny of accounts attached with the return of income and not on any fresh material. Since the initiation of proceedings under section 147 was held invalid, the disallowance of setting off business loss also became infructuous.

4. Sustenance of Disallowance of Expenditure:
The assessee had objected to the disallowance of expenditure, arguing that there was no material to allege that the assessee was not engaged in any business activity. The Tribunal noted that the AO's decision was based on the scrutiny of accounts attached with the return of income and not on any fresh material. Given that the initiation of proceedings under section 147 was held invalid, the disallowance of expenditure also became infructuous.

5. Disallowance of Claimed Exemption Under Section 10B in Respect of Interest on FDR:
The AO had disallowed the claimed exemption under section 10B in respect of interest on FDR, arguing that the interest income was not eligible for deduction under section 10B. The Tribunal noted that the AO's decision was based on the scrutiny of accounts attached with the return of income and not on any fresh material. Since the initiation of proceedings under section 147 was held invalid, the disallowance of claimed exemption under section 10B also became infructuous.

6. Disallowance of Setting Off Loss Against the Interest Income:
The AO had disallowed the setting off of loss against the interest income, arguing that the interest income should be taxed under the head "Income from Other Sources." The Tribunal noted that the AO's decision was based on the scrutiny of accounts attached with the return of income and not on any fresh material. Given that the initiation of proceedings under section 147 was held invalid, the disallowance of setting off loss also became infructuous.

Conclusion:
The Tribunal held that the AO was not justified in invoking jurisdiction under section 147 of the Act in the absence of fresh material surfaced after the return of income was filed. Consequently, the assessment framed in furtherance to the invalid notice under section 148 was also held invalid and quashed. The appeal filed by the revenue was dismissed, and the cross-objection preferred by the assessee was allowed.