2018 (3) TMI 1587 - HC - Income Tax

Reopening of assessment - validity of reasons to believe - previous assessment order was passed ignoring the existing judgments or materials - Held that - When it is not the case of the Assessing Officer that the reassessment was necessitated on account of a fresh information, either with regard to the facts or law received by him, he is denuded of the jurisdiction to initiate reassessment proceedings merely because the previous assessment order was passed ignoring the existing judgments or materials. Non-noticing of the existing judgments squarely falls under the categories of oversight, inadvertence or mistake committed by the ITO and those reasons do not constitute a justifiable ground under Section 147(b) of the Act for initiating reassessment proceedings. Reassessment was made based on the judgments which admittedly existed when the original assessment order was passed. The Commissioner (Appeals) and also the Income Tax Appellate Tribunal have mechanically upheld the order of the Assessing Officer without proper appreciation of true scope and purport of Sections 147 and 148 of the Act with reference to the relevant case law. On the analysis as above, we hold that the impugned reassessment, on the facts of the case, was without jurisdiction and accordingly we hold substantial questions of law Nos.1 and 2 in favour of the assessee

Summary

Issues Involved:
1. Legality of the reassessment order under Section 143(3) of the Income Tax Act, 1961.
2. Whether there was a change of opinion by the Assessing Officer.
3. Nature of the expenditure incurred by the appellant (capital or revenue).

Detailed Analysis:

1. Legality of the Reassessment Order:
The primary issue was whether the Income Tax Appellate Tribunal was correct in upholding the reassessment order under Section 143(3) of the Income Tax Act, 1961. The appellant argued that the reassessment was initiated without any new material and was based on a mere change of opinion. The court noted that Section 147 of the Act, as it stood at the relevant time, allowed reopening of assessment only if the Assessing Officer had "reason to believe" that income had escaped assessment. This provision was interpreted in multiple judgments, including the Supreme Court’s decision in Kelvinator of India Limited, which emphasized that reassessment must be based on "tangible material" and not merely a change of opinion. The court concluded that the reassessment in this case was invalid as it was not based on any new material but on a mere change of opinion, thereby lacking the jurisdictional basis under Section 147.

2. Change of Opinion:
The appellant contended that the reassessment was initiated on a mere change of opinion, which is not permissible under the law. The court referred to the judgment in Kelvinator of India Limited, which clarified that the Assessing Officer does not have the power to review but only to reassess based on new tangible material. The court reiterated that a mere change of opinion on the same set of facts does not justify reassessment. The court found that the Assessing Officer had originally allowed the expenditure after considering all relevant materials and the judgment of the jurisdictional High Court. The reassessment was initiated based on an audit objection without any new material, thus constituting a mere change of opinion. Consequently, the court held that the reassessment was invalid on this ground as well.

3. Nature of the Expenditure:
The third issue was whether the expenditure incurred by the appellant was capital in nature and thus not deductible as revenue expenditure. The court did not delve into this issue in detail, as it had already found the reassessment to be invalid on the first two grounds. The appellant had argued that the expenditure was directly connected with the public issue and should be set off against the interest earned on short-term deposits. However, since the reassessment itself was held to be without jurisdiction, the court did not find it necessary to address this issue.

Conclusion:
The court allowed the appeal, setting aside the impugned reassessment order. It held that the reassessment was without jurisdiction as it was based on a mere change of opinion without any new material, thereby violating the principles laid down under Section 147 of the Income Tax Act, 1961. The court did not address the third issue regarding the nature of the expenditure due to the invalidation of the reassessment on the first two grounds.