2016 (9) TMI 200 - AT - Income Tax

Reopening of assessment - addition u/s 41 - Held that - From the copy of notice u/s 154 of the Act available it is amply clear that the A.O on 31.3.2010, issued notice to the assessee showing his intention to convert head of income from business income to income from other sources pertaining to impugned amount of ₹ 15 lakhs comprising loans written off of Pearl Global Limited and the assessee had also filed reply on 20.4.2010 explaining that the loan was given for business consideration and the amount written off was treated as profit u/s 41(1) of the Act. Therefore, in the original assessment order, the A.O rightly treated the same as business income and consequently it was adjusted against brought forward business losses. In view of the above, we are satisfied that the A.O initiated reassessment proceedings beyond four years passed on erroneous facts that the impugned amount had already been offered for tax by the assessee as business income whereas the A.O noted that income to the tune of ₹ 50 lakhs has escaped assessment. We may also point out that the main dispute was regarding charging of the said amount as in the original assessment proceedings the A.O taxed the same as business income whereas in the reassessment proceedings the A.O has shown his intention to tax the same as income from other sources and we may also point out that the rectification proceedings u/s 154 of the Act initiated by the A.O earlier were dropped after considering the reply of the assessee. Therefore, we decline to accept the allegation of the A.O that there was failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. Therefore, initiation of reassessment proceedings and issuance of notice u/s 147/148 of the Act cannot be held as sustainable and valid and we have not hesitation to hold that the same was not a valid assessment of jurisdiction and it was bad in law and not sustainable and consequently, legal Ground is allowed in favour of assessee.

Summary

Issues involved:
1. Validity of reassessment proceedings under section 147/148 of the Income Tax Act, 1961 beyond the four-year limit.

Comprehensive Analysis:
The appeal was filed by the assessee against the order of the ld. CIT(A)- XVII, Delhi dated 21.10.2013 in first appeal No. 355/11-12 pertaining to A.Y 2004-05. The assessee raised six grounds of appeal, challenging the order under section 147/143(3) of the Income Tax Act, 1961, the treatment of loan write-offs as business income, and the assessment of loans written off by creditors as "Income from other sources." Ground No. 1 focused on the initiation of reassessment proceedings beyond the four-year limit. The assessee argued that no action under section 147 of the Act could be taken after the expiry of four years unless there was a failure to disclose all material facts. The assessee contended that the original return was filed in 2004, and the reassessment proceedings initiated in 2011 were beyond the statutory limit.

The ld. CIT-DR supported the action of the Assessing Officer (A.O) in initiating reassessment proceedings, stating that loans written off by Pearl Global Ltd constituted income from other sources. However, the tribunal observed that the original assessment was completed under section 143(3) of the Act after detailed scrutiny, where the loans written off were treated as business income and allowed for set-off against brought forward losses. The tribunal noted that the A.O had previously considered changing the head of income from business to other sources but dropped the rectification proceedings. The tribunal found that the A.O's initiation of reassessment proceedings beyond the four-year limit, based on the alleged failure to disclose material facts, was erroneous. The tribunal held that the reassessment proceedings and notice issued under section 147/148 of the Act were not valid, quashing the assessment order and notice.

As the assessment order and notice were quashed, the tribunal deemed the grounds of the assessee on merits as academic and infructuous, dismissing them accordingly. The appeal of the assessee was allowed on legal grounds, with the order pronounced on 29.07.2016.