2022 (3) TMI 163 - HC - Income Tax

Reopening of assessment u/s 147 - whether the jurisdictional conditions to reopen the assessment were fulfilled? - Whether the assessee had incorrectly claimed the deduction under section 36(1)(viia)? - HELD THAT - It would be inconceivable to assert that the assessee had not made a full disclosure of all the material facts, so far as the claim for deduction under section 36(1)(viia) of the Act, 1961. Through this prism, the reasonability of the belief formed by the AO is required to be appreciated. The trigger for entertaining the belief about the escapement of income is apparently withdrawal by the assessee of the claim for deduction under section 36(1)(viia) for the assessment year 2010-11. This stand of the assessee, it seems, made the revenue to entertain doubt as regards the classification of the branches by the assessee as rural branches for the purpose of deduction under section 36(1)(viia) for the preceding years as well. When the revenue voiced its concern, the petitioner, as the record indicates, revived the claim for deduction under section 36(1)(viia). We have delved into the matter in a greater detail to satisfy ourselves that the assessee has not had unjustified deduction. In the affidavit-in-reply, an endeavour was made to demonstrate that the random verification of the branches revealed that the assessee had incorrectly claimed as many as eight non-rural branches as rural branches (Paragraph No. 16 of the affidavit-in-reply). We have compared the said information with the list of branches furnished by the assessee along with the letter dated 26th November 2007, during the course of the original assessment. Except the branch at Palakkad, District Palakkad, Kerala, none of the rest seven branches was claimed by the assessee as rural branch for the assessment year 2006-07. We also notice that along with the annexure to the said letter, the assessee had furnished copies of the license issued by the RBI to open a branch at the rural centre, Chandranagar, in Palakkad District, Kerala. It seems that the respondents have considered the branch at the Palakkad District Headquarters in support of their claim that there was misclassification of the branch though, in fact, a rural branch was opened at Chandranagar in Palakkad District, Kerala. The last submission on behalf of the revenue that the petitioner had not assailed the reopening of the assessment for the assessment years 2007-08, 2008-09 and 2009-10 on the same ground and, eventually, orders were by the ITAT in the context of the final assessment orders post reopening of the assessment in respect of those assessment years, though appears alluring at the first blush, yet does not advance the cause of the revenue. Once, it is held that the jurisdictional condition for invoking the power under section 147 is not satisfied for a particular assessment year, the notice for reopening cannot be sustained. Then, it does not matter that the assessee did not assailed the notice for reopening in respect of preceding or succeeding years. The conspectus of the aforesaid consideration is that the impugned notice of reopening and the order on objections deserve to be quashed and set aside. - Decided in favour of assessee.

Summary

Issues Involved:
1. Legality of the notice dated 26th March 2013 under section 148 of the Income Tax Act, 1961.
2. Validity of the reopening of assessment for the assessment year 2006-07.
3. Compliance with the jurisdictional conditions under section 147 of the Income Tax Act, 1961.
4. Adequacy and truthfulness of the disclosure of material facts by the petitioner.
5. Justification for the belief that income had escaped assessment.

Issue-wise Detailed Analysis:

1. Legality of the Notice Dated 26th March 2013 under Section 148 of the Income Tax Act, 1961:
The petitioner challenged the notice dated 26th March 2013, issued under section 148 of the Income Tax Act, 1961, proposing to reopen the assessment for the assessment year 2006-07. The petitioner contended that the notice was issued beyond four years from the end of the assessment year and that the jurisdictional conditions to invoke section 147 were not satisfied. The court examined whether the reasons for reopening were based on a tangible material and whether there was a failure to disclose fully and truly all material facts necessary for assessment.

2. Validity of the Reopening of Assessment for the Assessment Year 2006-07:
The court scrutinized the reasons recorded by the Assessing Officer (AO) for reopening the assessment. The AO's justification was based on the withdrawal of the claim for deduction under section 36(1)(viia) for the assessment year 2010-11 and the belief that the petitioner might have claimed incorrect deductions by misclassifying non-rural branches as rural branches. The court found that the AO's reasons were speculative and lacked tangible material evidence. The court emphasized that the reopening of assessment should be based on concrete reasons and not mere suspicion or guesswork.

3. Compliance with the Jurisdictional Conditions under Section 147 of the Income Tax Act, 1961:
The court reiterated the legal position that the existence of a "reason to believe" that income had escaped assessment is a jurisdictional condition for invoking section 147. The AO is required to record reasons and obtain approval from the Competent Authority before issuing a notice under section 148. Additionally, if the reopening is beyond four years, the AO must demonstrate that the escapement of income was due to the failure of the assessee to disclose fully and truly all material facts. The court found that the AO failed to satisfy these jurisdictional conditions, rendering the reopening invalid.

4. Adequacy and Truthfulness of the Disclosure of Material Facts by the Petitioner:
The petitioner had disclosed all primary facts regarding the deduction claimed under section 36(1)(viia), including the list of rural branches and supporting documents from the Reserve Bank of India (RBI). The court noted that the AO had the opportunity to examine these facts during the original assessment and the subsequent reassessment under section 143(3) read with section 147. The court held that the petitioner had made a full and true disclosure of all material facts, and the AO's failure to draw the correct inferences did not constitute non-disclosure by the petitioner.

5. Justification for the Belief that Income had Escaped Assessment:
The court emphasized that the belief that income had escaped assessment must be based on reasonable grounds and tangible material. The AO's reasons for reopening the assessment were found to be speculative and not based on any concrete evidence. The court held that the mere withdrawal of the claim for deduction in a subsequent year did not justify reopening the assessment for an earlier year. The court concluded that the reopening was based on a mere change of opinion, which is not permissible under the law.

Conclusion:
The court quashed the notice dated 26th March 2013 and the order dated 19th August 2013, disposing of the petitioner's objections. The court held that the reopening of the assessment was invalid as the jurisdictional conditions under section 147 were not satisfied, and the petitioner had made a full and true disclosure of all material facts. The court emphasized that reopening of assessment must be based on tangible material and not on mere suspicion or change of opinion. The petition was allowed, and the rule was made absolute with no costs.