2024 (5) TMI 706 - HC - Income Tax

Reopening of assessment u/s 147 - reason to believe - taxation the interest receipt - assessee submits that the Assessing Officer while quashing the original assessment order has consciously applied his mind on all facts relating to interest paid and interest received, which were claimed by the assessee as revenue expenditure and revenue receipt but he treated it as capital expenditure and capital receipt - revenue submits that although the facts and figures relating to interest was well before the assessing officer but, he did not add it in the income of the assessee while passing the original assessment order due to non application of mind, thus AO was justified to initiate proceedings u/s 147 HELD THAT - Since there was full disclosure of interest by the assessee and the Assessing Officer while passing the original assessment order, after discussion, had formed opinion that the interest paid and interest received are not revenue items but capital item, therefore, the subsequent attempt of the Assessing Officer to tax the interest receipt as revenue receipt is clearly based on change of opinion. Since proceedings under Section 147 initiated by the AO against the respondent/assessee is based on change of opinion, therefore, the tribunal has not committed any manifest error of law to set aside the re-assessment proceedings. Thus, we find that once the AO has consciously applied his mind for not treating the interest paid and the interest received as revenue item and instead he treated it as capital item, subsequent proceedings under Section 147 was clearly based on change of opinion. Decided in favour of the assessee.

Summary

Issues Involved:
1. Whether the Income Tax Appellate Tribunal (ITAT) erred in setting aside the order u/s 147 of the Income Tax Act, 1961.

Summary:

Issue 1: Setting Aside the Order u/s 147 of the Income Tax Act, 1961

Facts: The respondent assessee, engaged in the manufacture and sale of various goods, showed "capital work in progress" related to a thermal power plant and cement section expansion. The assessee claimed interest paid/payable as revenue expenditure and added interest received as revenue receipt. The assessing officer initially treated the interest paid as capital expenditure and the interest received as revenue receipt. The CIT(A) later held the interest paid as revenue expenditure, which was reversed by ITAT, treating it as capital expenditure. The High Court, in ITA No. 322 of 2007, ruled in favor of the assessee, accepting the interest paid as revenue expenditure. Subsequent proceedings u/s 147 sought to tax the interest receipt, which was dismissed by CIT(A) and later by ITAT on jurisdictional grounds, stating the absence of tangible material for invoking u/s 147.

Submissions: The appellant argued that the assessing officer's non-application of mind justified initiating proceedings u/s 147. The respondent countered that the original assessment involved conscious application of mind, and subsequent proceedings were void ab initio, relying on the Supreme Court judgment in Commissioner of Income Tax Vs. Kelvinator of India Ltd.

Discussion & Findings: The court examined the original assessment order, the High Court judgment in ITA No. 322 of 2007, and relevant documents. It was found that the assessing officer, during the original assessment, had consciously treated the interest paid and received as capital items. The Tribunal held that the reassessment proceedings were based on a "change of opinion," which is not permissible under the law. The court cited several Supreme Court judgments emphasizing that "reason to believe" must be based on tangible material and not on mere change of opinion. Since the original assessment involved conscious application of mind, the subsequent proceedings u/s 147 were deemed invalid.

Conclusion: The court found no manifest error in the ITAT's order setting aside the reassessment proceedings. The appeal (ITA/1/2014) was dismissed, and the substantial question of law was answered in favor of the assessee.