2016 (7) TMI 190 - AT - Income Tax

Reopening of assessment - reasons to believe - Held that - AO had issued a detailed questionnaire which was duly replied by the assessee. It has furnished statutory audit accounts under the Companies Act as well as audit report in Form No.3CA and 3CD along with return. The assessee has submitted all other details called for by the AO. In the reasons recorded by the AO to reopen the assessment, nowhere it has been alleged that the assessee has failed to disclose any particular item fully and truly. The proviso appended to section 147 puts fetter on the power of the AO to reopen the assessment in the case where originally the assessment was passed under section 143(3) and four years have expired. In such cases no notice under section 148 can be issued unless it is established that income chargeable to tax has escaped assessment on account of failure of the assessee to disclose all material facts fully and truly. No such allegation has been leveled by the AO. Therefore, the ld.CIT(A) has rightly quashed the re-assessment order. - Decided against revenue

Summary

Issues Involved:
1. Validity of reassessment order under Section 143(3) read with Section 147 of the Income Tax Act.
2. Justification for reopening the assessment based on alleged non-deduction of TDS on interest payments to a non-resident.

Issue-wise Detailed Analysis:

1. Validity of Reassessment Order:

The primary issue in this case is whether the reassessment order passed under Section 143(3) read with Section 147 of the Income Tax Act was valid. The Revenue appealed against the order of the CIT(A) which quashed the reassessment order on the grounds that the Assessing Officer (AO) was not justified in reopening the assessment.

The assessee filed its return of income on 29.11.2003, declaring a total loss of ?1,03,97,752/-. The AO initially passed an assessment order under Section 143(3) on 8.3.2006, determining the taxable income at ?1,85,44,720/-. The AO disallowed the assessee's claim for exemption under Section 10A, amounting to ?2,89,42,468/-, which was subsequently deleted by the CIT(A). The AO then issued a notice under Section 148 on 22.3.2010, believing that the assessee had made interest payments to a non-resident without deducting TDS, thus making the interest expenditure ineligible.

The Tribunal examined the facts and noted that the AO had issued a detailed questionnaire which the assessee duly replied to, providing statutory audit accounts and other details. The reasons recorded by the AO for reopening the assessment did not allege that the assessee failed to disclose any particular item fully and truly. The Tribunal emphasized that the proviso to Section 147 restricts the AO's power to reopen an assessment after four years unless it is established that the income chargeable to tax escaped assessment due to the assessee's failure to disclose all material facts fully and truly. No such allegation was made by the AO, leading the Tribunal to uphold the CIT(A)'s decision to quash the reassessment order.

2. Justification for Reopening the Assessment:

The AO's justification for reopening the assessment was based on the belief that the assessee had made interest payments to Landesbank Baden Wurttemberg (LBBW), a German company, without deducting TDS, thus making the interest expenditure ineligible under Section 195 of the Income Tax Act. The AO recorded reasons for reopening the assessment, stating that the interest expenses claimed by the assessee included ?63,58,012/- paid to LBBW without TDS, leading to an under-assessment of income.

The Tribunal referred to authoritative pronouncements from the High Courts and the Supreme Court, emphasizing that the reopening of an assessment is valid only if the AO has "reason to believe" that income chargeable to tax has escaped assessment. The reasons must show a live link between the material and the belief, and there must be a rational connection or relevant bearing on the formation of the belief. The Tribunal highlighted that the mere change of opinion does not justify reopening an assessment, and there must be tangible material fact to reopen the assessment.

In this case, the Tribunal found that the AO's reasons for reopening the assessment did not reflect any failure on the part of the assessee to disclose material facts fully and truly. The Tribunal concluded that the reopening was merely a change of opinion, as the AO had initially accepted the interest expenditure as allowable in the original assessment. Therefore, the Tribunal upheld the CIT(A)'s decision to quash the reassessment order, finding no merit in the Revenue's appeal.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to quash the reassessment order. The Tribunal found that the AO's reasons for reopening the assessment did not establish any failure on the part of the assessee to disclose material facts fully and truly, and the reopening was merely a change of opinion. The reassessment order was deemed invalid and was rightly quashed by the CIT(A).