2016 (7) TMI 1592 - HC - Income Tax

Validity of reopening of assessment - assessment was sought to be made after the expiry of four years - search and seizure operation u/s 132 leading to the proceedings being initiated under Section 153A - HELD THAT - The original assessment was completed under Section 143(1) after the assessee filed a return of income on 29.10.2014. There was a search and seizure operation u/s 132 leading to the proceedings being initiated under Section 153A. Thereafter the assessment was again completed under Section 143(3). This is not a case of normal assessment which has gone on in a routine manner without any suspicion in the eyes of the AO. This is a case where a scrutiny assessment was made after which a search and seizure operation was conducted and thereafter the assessment was again completed under Section 143(3) r/w Section 153A. In a third round of attack AO claimed that as per the annual report of the Directors for the previous year 2003-2004 an amount was identified to the assets acquired from out of the total interest paid to another Company. The Directors report forms part and parcel of the records available for scrutiny. The Department could have taken refuge under Explanation-I if there had been a processing of the return only once. But in this case there had been a processing of return twice over. On the second occasion the processing of the return took place pursuant to a search and seizure operation. Therefore this is a case where in our considered opinion the Tribunal was right in holding that the case would not fall within the purview of the proviso to Section 147 and that even Explanation-I will not go to the rescue of the Revenue. Therefore we find no justification to entertain the appeal and hence it is dismissed.

Summary

Issues:
1. Validity of reopening assessment under Section 147 of the Income Tax Act, 1961.
2. Consideration of relevant legal precedents in determining the validity of reassessment proceedings.
3. Treatment of interest capitalized against assets as revenue expenditure.

Issue 1: Validity of Reopening Assessment under Section 147:
The case involved a super speciality hospital that filed a return of income for the assessment year 2004-2005, showing a loss. Subsequently, the assessment was reopened by the Assessing Officer under Section 147 based on certain identified assets and interest payments. The Tribunal dismissed the Revenue's appeal challenging the reopening, stating that the rationale behind the notice under Section 148 was not tenable. The Court analyzed the provisions of Section 147 and Explanation-I, emphasizing that the failure to disclose must be substantial and not merely a lack of comprehension by the Assessing Officer. The Court held that the case did not fall under the proviso to Section 147 and Explanation-I could not rescue the Revenue, ultimately dismissing the appeal.

Issue 2: Consideration of Legal Precedents in Reassessment Proceedings:
The Revenue raised questions regarding the Tribunal's decision not to consider the precedent set by the Supreme Court in the case of Raymond Woolen Mills Ltd. vs. ITO, emphasizing the need for prima facie material to justify reassessment. The Court, however, focused on the specific facts of the case at hand, highlighting the multiple assessments conducted after a search and seizure operation, which indicated a lack of failure to disclose material facts by the assessee. Citing cases such as Fenner (India) Limited vs. DCIT and Commissioner of Income Tax vs. Elgi Finance Limited, the Court reiterated that when all material facts are disclosed truly and fully, reassessment cannot be based on disagreements over interpretation or rates of allowances.

Issue 3: Treatment of Interest Capitalized Against Assets:
The third question raised by the Revenue concerned the treatment of interest capitalized against assets as revenue expenditure. The Court noted that this question was intertwined with the validity of the reopening of assessment. Since the Court found no justification for entertaining the appeal due to the lack of failure to disclose material facts, the issue of revenue expenditure was not delved into deeply. The Court's decision to dismiss the appeal rendered further discussion on this issue unnecessary.

In conclusion, the High Court of Andhra Pradesh dismissed the Revenue's appeal challenging the reopening of assessment under Section 147 of the Income Tax Act, 1961. The Court emphasized the importance of substantial failure to disclose material facts and highlighted legal precedents supporting the assessee's position when all relevant details are disclosed. The decision serves as a reminder of the stringent requirements for reassessment and the need for clear justifications based on the law and facts of each case.