2011 (2) TMI 1595 - AT - Income Tax

Summary

Issues Involved:
1. Validity of reassessment proceedings u/s 147.
2. Treatment of Lease Equalization Reserve (LER) in computation of taxable income.

Summary:

Issue 1: Validity of reassessment proceedings u/s 147

Ground No.1 raised by the assessee in ITA No.3633/M/08 and ITA No.3634/M/08 contends that the CIT(A) erred in confirming the reassessment proceedings without appreciating that reopening of assessment based on change of opinion and unintelligible reasons are void and invalid. The assessee argued that the AO failed to establish a 'nexus' between the capitalization of LER and the addition of LER to the Assessee's income, and that the AO's reasons were not intelligible. The Tribunal noted that the AO had already dropped proceedings u/s 154 on the same issue, indicating awareness that LER was not considered for determining income under the Act. The Tribunal held that there was no "reason to believe" that income chargeable to tax had escaped assessment, making the initiation of reassessment proceedings invalid. Consequently, the order u/s 147 was annulled.

Issue 2: Treatment of Lease Equalization Reserve (LER)

The assessee, engaged in acting as advertising agents and providing equipment on lease, created a LER in compliance with the Guidance Note on Accounting for Leases issued by the ICAI. The Tribunal observed that LER was an item of debit or credit in the P&L Account prepared under the Companies Act, 1956, and was not considered by the assessee for determining its income under the Income Tax Act. The Tribunal emphasized that the LER was purely an accounting entry and did not represent real income. The Tribunal concluded that the AO's belief that LER should have been capitalized was based on a misunderstanding of the concept of LER, and thus, there was no rational and intelligible nexus between the reasons recorded by the AO and the belief that income had escaped assessment.

Conclusion:

The Tribunal allowed the appeals by the assessee and dismissed the appeals by the revenue, annulling the reassessment orders for both assessment years 2000-01 and 2001-02 on the grounds of invalid initiation of reassessment proceedings.

Order pronounced in the open court on the 9th day of February 2011.