2020 (5) TMI 567 - AT - Income Tax

Reopening of assessment u/s 147 - addition received by the Assessee as non-refundable grant under section 28(iv) - application of section 44AB - HELD THAT - Income billed by the Firm to its clients towards rendering of professional services is taxable under the head Profits gains of business or profession . Another grievance of the AO was that assessee did not get his accounts audited u/s 44AB - in case of an assessee carrying on profession (for A.Y. 2009-10) is required to get his accounts audited in terms of section 44AB if his gross receipts in profession exceeds ten lakh rupees in any previous year. In the assessee s case under consideration the gross receipts therefore assessee is not required to get his accounts audited u/s 44AB. Interest income does not fall under the head income from business or profession therefore it does not come under the ambit of tax audit. Assessee which is carrying on profession had gross receipts in profession only as stated above which is less than the threshold of Rupees ten lakhs for application of section 44AB of the Act for the year under consideration. Therefore tax audit provisions are not applicable to the assessee. Expenditure on bank charges and printing stationery are routine expenditure the expenditure debited under the account-head legal expenses have been incurred by the Firm for the purpose of representation inter alia before the ICAI New Delhi in the matter of audit carried out by the Firm of erstwhile Global Trust Bank for the financial year 2002-03. The expenses debited under the account head External Consultants Professional fees have been incurred for drafting and amending legal agreements including non-compete agreements etc. AO was of the view that assessee made provisions - We note that none of the expenditure aggregating are in the nature of provision as alleged. These expenses have been disclosed in the return of income filed by the assessee u/s 139 therefore it is not a new tangible material to reopen the assessment u/s 147. So far this issue/ item is concerned there is no tangible material before the AO to frame reason to believe that income has escaped assessment hence reassessment proceedings are not valid. Capital reserve - We note that in assessee s case no assessment was carried out by AO u/s 143(3) of the Act and only intimation has been issued under section 143(1) of the Act. However we note that assessing officer has every power to issue notice under section 143(2) of the Act to do the scrutiny assessment u/s 143(3) of the Act which he has failed to do so in the assessee s case and for that assessee should not be penalized. The assessee has disclosed every item/issue in the return of income filed by the assessee u/s 139 of the Act and AO failed to point out any new tangible material to reopen the assessment u/s 147 of the Act. Assessee has disclosed every item/issue in the return of income filed by it u/s 139 of the Act and AO failed to point out any new tangible material to reopen the assessment u/s 147. Initiate reopening of the assessment the AO must have reason to believe that income chargeable to tax has escaped assessment. Such reason to believe must be based on some material coming to the possession of the AO which may trigger reason to suspect Reason to believe must have a rational connection with or relevant bearing on the formation of the belief i.e there must be the direct nexus or link between the material and the formation of such belief. Since in the instant case the issues/items for which the AO has reopened the assessment had already been disclosed by the assessee in the return of income filed by him u/s 139(1) - AO having not carried out the scrutiny assessment within the prescribed statutory limit cannot be given another innings for no fault of the assessee and therefore in the facts and circumstances of the case we are of the considered opinion that reason to believe which is the jurisdictional precondition to reopen the assessment as required by the law has not been met in the reasons recorded in the instant case and therefore the action of the AO to reopen the assessment is null in the eyes of law and hence we are inclined to quash the initiation of reassessment proceedings being ab-initio void. - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of reopening the assessment under section 148 of the Income Tax Act.
2. Treatment of non-refundable grant received as revenue receipt taxable under section 28(iv).
3. Computation of interest under sections 234B, 234D, and 244A.

Detailed Analysis:

1. Validity of Reopening the Assessment under Section 148 of the Income Tax Act:

The primary issue was whether the reopening of the assessment for the Assessment Year 2009-10 under section 148 was valid. The assessee contended that the reasons recorded by the Assessing Officer (AO) were not valid and were merely "reason to suspect" rather than "reason to believe." The AO had reopened the assessment based on the following grounds:
- The professional receipt of Rs. 10,60,834 was not assessable under the head "profits and gains of business or profession" but under "income from other sources."
- The expenditure of Rs. 1,06,96,210 was contingent and not allowable.
- The capital reserve of Rs. 31,12,50,000 was undisclosed income.

The Tribunal noted that the assessee had disclosed all these items in the return filed under section 139. The AO had not pointed out any new tangible material to justify reopening. The Tribunal relied on the Supreme Court's judgment in CIT vs. Kelvinator of India Ltd., which held that "reason to believe" must be based on tangible material and not merely a change of opinion. The Tribunal concluded that the reopening was not valid as there was no new tangible material, and the AO had failed to exercise the power to scrutinize the return under section 143(3) within the statutory limit.

2. Treatment of Non-Refundable Grant Received as Revenue Receipt Taxable under Section 28(iv):

The assessee received a non-refundable grant of Rs. 31,12,50,000 from PricewaterhouseCoopers Services BV, Netherlands, for maintaining and enhancing the resources and capabilities of the firm. The AO treated this amount as taxable under section 28(iv) of the Income Tax Act. The Tribunal examined the nature of the grant and the agreement between the assessee and PricewaterhouseCoopers Services BV. It was noted that the grant was mentioned in the return of income and was not a new tangible material for reopening the assessment. The Tribunal found that the grant was not taxable as income since it was a non-refundable amount received for specific purposes and was not a casual or non-recurring receipt.

3. Computation of Interest under Sections 234B, 234D, and 244A:

The assessee raised a ground regarding the computation of interest under sections 234B, 234D, and 244A, contingent upon the outcome of the primary issues. Since the Tribunal quashed the reopening of the assessment and the addition of the non-refundable grant, the computation of interest would be consequentially adjusted as per the relevant provisions of the Income Tax Act.

Conclusion:

The Tribunal allowed the appeal filed by the assessee, quashing the reopening of the assessment under section 147/148 as invalid due to the absence of new tangible material. The addition of Rs. 31,12,50,000 as taxable income under section 28(iv) was also quashed. Consequently, the computation of interest under sections 234B, 234D, and 244A would be adjusted based on the revised assessment.