2024 (9) TMI 1572 - HC - Income Tax

Validity of reassessment proceedings - change of opinion - addition u/s 56 - Assessee had acquired and subscribed the equity shares of a closely held company at below fair market value under the Right Issue - PCIT had dropped the proceedings u/s 263 after considering the petitioner's submissions - HELD THAT - The use of words reasons to believe in Section 147 has to be interpreted schematically as any other interpretation would lead to the consequence of conferring arbitrary powers on the AO, who may even initiate such reassessment proceedings merely on a change of opinion on the basis of same facts and circumstances already considered during the original assessment proceedings. The provision for reassessment was brought into the statute book to empower the AO to reassess any income only on the ground which was not brought on record during the original proceedings and escaped its knowledge. Admittedly, after considering the reply of the assessee, PCIT had dropped the proceedings initiated u/s 263 of the Act. Thus, it is evident that at the time of initial assessment, as also while conducting proceedings under Section 263, the authorities were aware of shares held by the assessee for a consideration which was considered to be less than fair market value. However, Revenue still proceeded further to purpose initiation of reassessment proceedings by issuing notice under Section 148A(b). It is clear that the reasons for issuing notice under Section 148A (b) were exactly similar to the reasons on which the PCIT invoked Section 263 of the Act. Once the PCIT decided in favour of the petitioner after having considered its reply, AO had no authority to reassess and reopen the assessment under Section 148 of the IT Act. It is a clear case of change of opinion and the reassessment proceedings are in the nature of review of the previous assessment. Grant of approval by the senior authority i.e. PCCIT would not confer legitimacy to the initiation of the reassessment action as the point on which the reassessment was initiated, had already been considered in the previous proceedings. The higher authority cannot grant approval which is in violation of the settled principles on the basis of which reassessment action can be initiated. We are unable to sustain the impugned action for reassessment. The writ petition is accordingly allowed. The impugned notice u/s 148A (b), order passed under Section 148A (d) and notice under Section 148 as also the consequential proceedings emanating there under are set aside.

Summary

Issues Involved:
1. Validity of the notice under Section 148A(b) and consequent reassessment proceedings.
2. Applicability of Section 56(2)(viia) of the Income Tax Act, 1961.
3. Alleged "change of opinion" by the Assessing Officer (AO).

Detailed Analysis:

Issue 1: Validity of the notice under Section 148A(b) and consequent reassessment proceedings

The petitioner sought directions to quash the notice dated 27.05.2022 issued under Section 148A(b), the order under Section 148A(d), and the consequent notice under Section 148, both dated 30.07.2022, for the Assessment Year (AY) 2014-15. The petitioner argued that the reassessment proceedings were initiated based on a "change of opinion," which is impermissible. The original assessment order dated 21.12.2016 had assessed the petitioner's income as 'Nil' after considering the shareholding pattern and other relevant details. Later, the Principal Commissioner of Income Tax-II (PCIT) issued a notice under Section 263, which was subsequently dropped after considering the petitioner's reply. Despite this, a notice under Section 148 was issued on 28.06.2021, followed by a notice under Section 148A(b) on 27.05.2022, leading to the reassessment proceedings.

The court referred to Section 147 and 148 of the Income Tax Act, emphasizing that the AO must have "reasons to believe" that income has escaped assessment, and this belief must be based on tangible material, not merely a change of opinion. The court cited the Supreme Court's decision in Commissioner of Income Tax, Delhi vs. Kelvinator of India Limited, which held that the AO's power to reassess cannot be used as a power to review.

Issue 2: Applicability of Section 56(2)(viia) of the Income Tax Act, 1961

The PCIT had initially invoked Section 263, alleging that the petitioner purchased shares at less than their fair market value, resulting in a loss of Rs. 6,00,00,000/- to the revenue. The petitioner contended that the shares were acquired through a "Right Issue," making Section 56(2)(viia) inapplicable. The court noted that the PCIT had dropped the proceedings under Section 263 after considering the petitioner's submissions. Despite this, the AO initiated reassessment proceedings on the same grounds, which the court found to be a "change of opinion."

Issue 3: Alleged "change of opinion" by the Assessing Officer (AO)

The petitioner argued that the reassessment proceedings were a clear case of "change of opinion," as the same issue had been examined during the original assessment and the subsequent Section 263 proceedings. The court agreed, stating that the AO had no authority to reassess based on the same facts and circumstances already considered. The court emphasized that the higher authority's approval (PCCIT) does not legitimize the reassessment if it violates the settled principles governing such actions.

Conclusion:

The court found that the reassessment proceedings were initiated based on a "change of opinion," which is not permissible. The impugned notice under Section 148A(b) dated 27.05.2022, the order under Section 148A(d), and the notice under Section 148 of the Income Tax Act, both dated 30.07.2022, along with the consequential proceedings, were set aside. The writ petition was allowed, and the reassessment proceedings were quashed.