2016 (2) TMI 1372 - AT - Income Tax

Validity of reopenIng of assessment - Notice after a period of four years - reasons to believe - HELD THAT - We are of the opinion that if the AO wants to invoke the provisions of section 147 after a period of four years, he has to compulsorily elaborate that there was failure on part of the assessee to disclose truly and fully the relevant facts to decide the taxability of that particular year. The courts are of the view that not only the fact of failure of the assessee has to be mentioned it has to be explained as to how assessee had failed and his failure ended in under assessment/escapement of income. Where the provisions of section 147 are being invoked after the period of four years from the end of the relevant assessment year, in addition to the AO having reason to believe that any income chargeable to tax had escaped assessment, it must also be established as a fact that such escapement of assessment had been occasioned by either the assessee failing to make a return under section 139 either, etc. , or by reason of failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for that assessment year. Undisputed facts of the present cases are that the assessee original assessment was completed u/s. 143(3) of the Act, that the AO had not mentioned, in the reasons recorded for reopening of the assessments, that because of the failure of the assessee to disclose the material facts truly and fully income had escaped assessment. As the basic and first pre-requisite for issuing the notice is not fulfilled, so, the assessment orders passed in pursuance of such notices have to held to be invalid. Considering the facts and circumstances of both the cases, we are of the opinion that the orders of the FAA does not suffer from any legal or factual infirmity. So, upholding his orders for both the years i. e. 1997-98 and 1998-99, we decide the effective ground of appeal against the AO. Reopening of assessment - whether assessee was entitled for deduction of the whole lease rent ? - HELD THAT - No new material had come in possession of the AO to disturb the completed assessment. He had changed his opinion about the treatment to be given rental income. In our opinion, in absence of some cogent material AO cannot initiate proceedings u/s. 147 of the Act. We also find that if the order of the FAA was to be implemented there would not be any escapement of income for any of the years. In both the years the depreciation and interest would be more than the rental income, if the transaction with regard to leased assets was to be treated financial transaction. With regard to the argument that the AO had not formed any opinion, as he had not discussed anything in the assessment order, we would like to mention that in the matter of Prima Paper and Engineering Industry 2015 (2) TMI 803 - BOMBAY HIGH COURT as well settled that the power to reopen an assessment is not a power of review and mere change of opinion would not justify reopening of an assessment. This would apply even when assessment sought to be reopened is within four years from the end of the assessment year. Revenue does not dispute the fact that the issue with regard to which the reopening is sought to be done was the subject matter of discussion and deliberation before the AO during the original proceedings leading to the order - Also it is an undisputed position that the Assessing Officer did have occasion to apply his mind to the deduction claimed by the respondent-Assessee before allowing the same. The objection of the revenue that there was no opinion formed during the original assessment proceeding as the order did not deal with the same is unsustainable. The mere fact that the assessment order does not discuss the issue of deduction would not lead to the conclusion that the Assessing officer had made no opinion with regard to the issue. Thus we are of the opinion that the re-opening was not based on valid reasons and there was no escapement of income for both the years. Assessee appeal allowed.

Summary

Issues Involved:
1. Validity of reopening assessments under Section 148 of the Income Tax Act.
2. Allowability of lease rental deductions claimed by the assessee.

Detailed Analysis:

1. Validity of Reopening Assessments under Section 148 of the Income Tax Act:

The primary issue revolves around the reopening of assessments by the Assessing Officers (AOs) under Section 148 for the Assessment Years (AYs) 1997-98 to 2000-01. The AO issued notices under Section 148, claiming that the assessee had claimed excessive deductions on account of lease rentals, which were essentially financing transactions rather than genuine lease agreements.

The assessee challenged the reopening, arguing that the notices were issued beyond the four-year limit without any indication of the assessee's failure to disclose material facts fully and truly. The First Appellate Authority (FAA) agreed with the assessee for AYs 1997-98 and 1998-99, holding that the AO had not justified the reopening as required by the proviso to Section 147.

The Tribunal upheld the FAA's decision, citing precedents such as Hindustan Lever Ltd. and German Remedies Ltd., which mandate that for reopening after four years, the AO must explicitly state how the assessee's failure to disclose material facts led to income escapement. The Tribunal found that the AO did not fulfill this requirement, rendering the reopening invalid for AYs 1997-98 and 1998-99.

For AYs 1999-00 and 2000-01, the FAA upheld the reopening as it was within four years. However, the Tribunal found that the AO had merely changed his opinion without any new material evidence, which is not permissible for reopening an assessment. The Tribunal referenced Prima Paper and Engineering Industry, emphasizing that reopening based on a mere change of opinion is invalid, even within the four-year period.

2. Allowability of Lease Rental Deductions Claimed by the Assessee:

The second issue pertains to the deductions claimed by the assessee for lease rentals. The AO contended that the lease transactions were not genuine and were, in fact, financing transactions. Consequently, only the interest component of the lease rentals should be allowed as a deduction, not the principal component.

The FAA, for AYs 1997-98 and 1998-99, ruled in favor of the assessee, stating that the AO's orders were contrary to the provisions of the Act. The Tribunal upheld this decision, noting that the AO had not provided sufficient grounds for reopening the assessments.

For AYs 1999-00 and 2000-01, the FAA allowed the entire lease rent as a deductible expense. The Tribunal agreed, pointing out that the assessee had disclosed all relevant details during the original assessments, and there was no new material to justify the AO's change of opinion.

Conclusion:

The Tribunal dismissed the appeals filed by the Department for AYs 1997-98 and 1998-99, upholding the FAA's decision that the reopening was invalid. For AYs 1999-00 and 2000-01, the Tribunal allowed the assessee's appeals, ruling that the reopening was based on a mere change of opinion without any new evidence. Consequently, the reassessments for these years were also deemed invalid. The Tribunal's order was pronounced on 12th February 2016.