2022 (9) TMI 660 - HC - Income Tax

Validity of reopening of assessment u/s 147 - reopening the assessment on other grounds not mentioned in the reasons for reopening - different items of income not connected or related with the reasons to believe - whether any other income chargeable to tax which has escaped assessment and which has come to the notice of the AO in the course of the proceedings, can also be taxed and that there are two parts to the Section and they which had been joined by the words and also , cannot be treated as conjunctive but has to be disjunctive? - HELD THAT - Even if the reasons recorded do not refer to a particular issue, the assessing officer would be entitled to assess the income or reassess the computation of income with regard thereto, if the same comes to his notice during the course of the proceedings for reassessment, however this can be done provided there is a valid notice u/s 148 that the assessing officer the jurisdiction to adopt proceedings u/s 147 of the Act and if the notice is illegal, the reassessment proceedings are invalid. We should bear in mind the decision in the case of GKN Driveshafts (India) Limited 2002 (11) TMI 7 - SUPREME COURT wherein it was held that the assessing officer is bound to furnish reasons within a reasonable time and the noticee is entitled to file their objection to such notice and the assessing officer is bound to dispose of the same by passing a speaking order. Though the Explanation 3 inserted by the amendment empowers the assessing officer to assess the income in respect of any issue which has escaped assessment when such issue comes to his notice subsequently in the course of the proceedings under Section 147 notwithstanding that the reasons for such issue have not been included in the reasons recorded under Sub-Section 2 of Section 148, the prerequisite is there should be a valid notice. Admittedly, in the case on hand, the notice was held to be not sustainable. If that be so, AO cannot be stated to be empowered to make a roving enquiry into other issues which according to him came to his notice during the reassessment proceedings. The foundation of a reassessment proceeding is a valid notice and if this notice is held to be invalid the entire edifice sought to be raised on such foundation has to collapse. We are of the considered view that the tribunal was right in granting relief to the assessee.

Summary

Issues Involved:
1. Validity of additions made under Section 147/143(3) of the Income Tax Act, 1961.
2. Interpretation of decisions in Jet Airways (1) Limited and Ranbaxy Laboratories Ltd. in the context of the case.

Detailed Analysis:

Issue 1: Validity of Additions Made Under Section 147/143(3)
The core issue was whether the Income Tax Appellate Tribunal (ITAT) was correct in holding that additions made under Section 147/143(3) were unsustainable if they were not part of the reasons recorded for reopening the assessment. The Tribunal's decision was based on the interpretation of Explanation 3 to Section 147 of the Income Tax Act, 1961, and relevant case law.

The assessee had filed a return for AY 2009-10 declaring NIL income, which was processed under Section 143(1). A survey revealed deposits with specified persons, leading the Assessing Officer (AO) to reopen the assessment under Section 147 by issuing a notice under Section 148. The AO added Rs. 4,24,39,709 to the income, invoking Sections 13(1)(b) and 11(5) of the Act, and questioned the genuineness of the assessee's activities, adding donations received under Section 69A.

The assessee appealed, arguing that the reopening was illegal, as there was no failure to disclose material facts. The CIT(A) partially upheld the AO's order. On further appeal, the ITAT noted that the addition of Rs. 59,42,709 was deleted by the CIT(A), and thus, the reassessment on other heads not part of the reopening reasons was unsustainable. The Tribunal relied on the decisions in Jet Airways and Ranbaxy Laboratories.

Issue 2: Interpretation of Jet Airways and Ranbaxy Laboratories
The revenue argued that after the insertion of Explanation 3 to Section 147, the AO could assess escaped income on issues not initially recorded for reopening if they came to notice during proceedings. They cited the Karnataka High Court decision in Sri. N. Govindaraju, which interpreted the two parts of Section 147 as disjunctive, allowing the AO to assess other income independently.

The assessee countered with decisions consistently following Jet Airways, which held that the AO must have a valid reason to believe income escaped assessment before assessing other issues. If the initial reason for reopening is invalid, the AO cannot assess other income without a fresh notice under Section 148.

The court analyzed the precedents and legislative intent behind Explanation 3, concluding that while the AO can assess other income noticed during proceedings, this is contingent on a valid initial notice. If the initial reason for reopening is invalid, the entire reassessment collapses. The court affirmed the Tribunal's decision, emphasizing that a valid notice is foundational for reassessment.

Conclusion:
The appeal by the revenue was dismissed, affirming the Tribunal's decision. The court held that the Tribunal was correct in granting relief to the assessee, as the reassessment on heads not part of the reopening reasons was unsustainable without a valid initial notice. The substantial questions of law were answered against the revenue, and no costs were awarded.