2017 (10) TMI 103 - HC - Income Tax

Reopening of assessment - reasons to believe - depreciation under section 32(iia) - written off inventory treating them as non moving and absolute in nature - Held that - The Revenue s contention that the Assessing Officer had not made specific mention of these issues in the assessment order also did not find favour of the Tribunal observing that the assessee would have no control over the manner in which the Assessing Officer would treat such issues in the order of assessment after full scrutiny. With respect to written off inventory there was no dispute that such issue did not come up for consideration before the AO in the original assessment. However, on this ground the Tribunal entered into the merits and held that the same could not have formed the basis for making any additions. Without so elaborating, the Tribunal examined the question whether on the third ground, the Assessing Officer could have formed a belief that income chargeable to tax had escaped the assessment. The Tribunal ultimately held it against the Revenue. If we peruse the order in this respect more minutely, the issue pertains to offering certain interest income to tax. The assessee had given a loan to one GSIL but had not received interest on such loan for a long time, perhaps on the ground that there was no interest stipulation in the loan document. In the past, the assessee would offer notional interest on accrual basis. However during the period relevant to the assessment year in question, the issue came to be referred for arbitration. The Board of Directors of the assessee company therefore, passed a resolution not to offer the interest income to tax in view of such uncertainty in its receipt itself. The Tribunal noted that much later the arbitral award was available holding the assessee entitled to interest at the rate of 11.5%. The Tribunal therefore, found that the assessee was justified in not accounting for such interest in the return when there was no stipulation for interest in the agreement between the parties. - Decided in favour of assessee.

Summary

Issues:
1. Validity of reopening of assessment.
2. Whether the Assessing Officer erred in quashing the reopening of assessment.
3. Whether the Assessing Officer had validly reopened assessment in accordance with the provisions of the Income Tax Act.

Issue 1: Validity of reopening of assessment:
The case involved the validity of reopening an assessment for the respondent assessee for the assessment year 2003-2004. The Assessing Officer had reasons for issuing the notice, primarily concerning depreciation claims and treatment of inventory losses. The Tribunal noted three separate grounds for the reopening. The Tribunal found that for the first two grounds, which were previously examined during the original scrutiny assessment without any additions made, reopening based on these grounds would amount to a change of opinion, not permissible. The Tribunal also rejected the Revenue's argument that the Assessing Officer's non-specific mention of these issues in the assessment order was a valid reason for reopening. Regarding the third ground, which was not considered in the original assessment, the Tribunal delved into the merits and concluded that it could not have formed the basis for additional assessments, ultimately ruling against the Revenue.

Issue 2: Assessing Officer's Error in Quashing Reopening:
Both the Assessing Officer and the CIT(Appeals) upheld the validity of the reopening and made certain additions despite objections from the assessee. However, the Tribunal disagreed, stating that the issues raised for reopening had already been scrutinized during the original assessment without any additions made. The Tribunal emphasized that the assessee could not control how the Assessing Officer treated these issues post-scrutiny. The Tribunal's decision highlighted that the Assessing Officer's failure to specifically address these issues in the original assessment did not justify reopening based on the same grounds.

Issue 3: Valid Reopening in Accordance with the Law:
The Tribunal examined whether the Assessing Officer had validly reopened the assessment in accordance with the provisions of the Income Tax Act. It specifically analyzed the third ground for reopening, which involved interest income on a loan given to GSIL. The Tribunal found that the assessee's decision not to account for interest income due to arbitration uncertainty was justified. The resolution passed by the company's Board of Directors not to offer interest income to tax was deemed reasonable, especially considering the subsequent arbitral award confirming the interest entitlement. The Tribunal's detailed analysis concluded that the Assessing Officer could not have reasonably believed that taxable income had escaped assessment in this context.

In conclusion, the Tribunal dismissed the Tax Appeal, affirming its decision against the Revenue's contentions and upholding the validity of the original assessment without any additional tax liabilities imposed on the assessee.