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2017 (1) TMI 122 - HC - Income TaxValidity of reopening of assessment - Held that - Merely by virtue of the non-action on the part of the assessing officer in the case of the present assessee, i.e. by his failure to issue a notice under section 143 (2) of the Act, the Department gets the advantage of another four years from 31.3.2002 to initiate proceedings for re-assessment. This obviously can neither be the proper interpretation of section 147 nor the intention of Legislature. It is incorrect to state that the Assessing Officer had no opportunity as the statute grants him full opportunity to scrutinize the assessment if he felt it was necessary and expedient for him to do so. Having chosen not to, he cannot resort to the provisions of S.147 in the absence of any new or fresh material indicating escapement of income. - Decided in favour of assessee.
Issues Involved:
1. Entitlement to claim expenditure under Section 37 of the Income Tax Act. 2. Justification for reopening the assessment under Section 148 of the Income Tax Act. Issue-Wise Detailed Analysis: 1. Entitlement to Claim Expenditure under Section 37 of the Income Tax Act: The first issue revolves around whether the appellant is entitled to claim the expenditure of ?5,50,000/- paid to the retiring partner under Section 37 of the Income Tax Act as a business expenditure. The assessee, a partnership firm, paid this amount to a retiring partner as compensation for agreeing to retire from the firm. The assessee claimed this sum as a deduction for tax computation. However, the Assessing Officer disallowed the claim, categorizing the amount as capital in nature and contingent, as it was compensation for future profits forgone by the retiring partner. The Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal upheld this view, stating that the expenditure was not allowable as it was not incurred for business exigencies but for the retirement of a partner. 2. Justification for Reopening the Assessment under Section 148 of the Income Tax Act: The second issue concerns whether the Assessing Officer was justified in reopening the assessment by issuing a notice under Section 148 of the Income Tax Act without any new material justifying the reopening. The return of income for the Assessment Year 1998-99 was initially processed with an intimation under Section 143(1)(a), and no notice under Section 143(2) was issued within the stipulated time, allowing the matter to rest. Later, a notice under Section 148 was issued for reassessment based on the same material available initially. The court examined whether the Assessing Officer had a "reason to believe" that income chargeable to tax had escaped assessment, which is a prerequisite for initiating proceedings under Section 147. The court found that the reasons recorded for reopening the assessment were solely based on the original return and enclosures, which were already part of the record at the time of the initial intimation. The court noted that the Assessing Officer had the opportunity to scrutinize the return earlier but chose not to, and thus, could not arbitrarily change his opinion later without any new or tangible material. Judgment: The court concluded that the reopening of the assessment was not justified as it was based on a review of the same material already available with the Assessing Officer at the time of the initial intimation. The court emphasized that the power to reassess must be based on new or tangible material indicating escapement of income, and not merely a change of opinion. The court cited the Supreme Court's judgment in CIT Vs. Kelvinator of India, which states that reassessment must be based on tangible material and not on a mere change of opinion. The court also referred to the Delhi High Court's judgment in CIT Vs. Orient Craft Ltd, which held that the phrase "reason to believe" in Section 147 must be interpreted consistently, regardless of whether the initial assessment was under Section 143(1) or 143(3). The court answered the second question of law in favor of the assessee, ruling that the reopening of the assessment was an arbitrary exercise of power and a review of proceedings impermissible in law. Consequently, the court did not find it necessary to address the merits of the first issue regarding the entitlement to claim the expenditure under Section 37. The appeal was allowed, and no costs were awarded.
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