2024 (10) TMI 882 - AT - Income Tax

Reopening of assessment - reason to believe or change of opinion - interest income should be assessed as income from other sources and taxed separately without setting off against the current year s business loss of the club - HELD THAT - Assessee is running race club and having income from business and other sources, filed its return of income by claiming a current loss for the impugned Assessment year. Which was selected for scrutiny and completed the assessment order u/s.143(3) and the same was partly allowed by the CIT(A). The very same issue has been raised in the notice issued by the AO u/s. 148 for reopening the original assessment and passed an order u/s. 143(3) r.w.s 147 - On appeal, CIT(A) was pleased to confirm the same. Reasons for reopening was questioned by the assessee stating that the very same issues have already been subject matter of original assessment and have been drawn from the existing materials of the assessment records hence the reopening of assessment is bad in law, however the AO was not convinced and continued to proceed with the reassessment. The reason to believe was judicially interpreted to mean an independent belief of the AO not based on borrowed satisfaction or opinion of another authority . Such reason to believe was to be based on new tangible material and not on material already available on record . The Hon ble Supreme Court in Calcutta Discount Co. Ltd. 1960 (11) TMI 8 - SUPREME COURT held that even if the conclusion drawn by the AO from the facts disclosed by the assessee during the course of original assessment is erroneous, the AO cannot reopen the assessment to change that erroneous conclusion once reached at. Also in CIT v. Kelvinator of India Ltd. 2010 (1) TMI 11 - SUPREME COURT held that mere change of opinion cannot per se be a reason to reopen the concluded assessment. The Court highlighted the conceptual difference between power to review and power to reassess and that review cannot be done in the garb of reopening the assessment. The concept of change of opinion must be treated as an in-built test to check abuse of power by the AO. CBDT in Circular No. 549 dated 31 October 1989 provided that it was to allay the fears that the AO shall reopen past assessments on mere change of opinion that the expression has reason to believe was reintroduced in place of the words for reasons to be recorded by him in writing, is of the opinion (by the Amending Act, 1989) in the then existing Section 147 of the Act. The Circular itself indicates that Legislature has never been the intention to permit the Assessing Officer to reopen an assessment on the basis of change of opinion . Therefore, in the cases where an original assessment had taken place and the Assessing Officer had formed a particular view based on the available material, the Assessing Officer could not have validly reopened an assessment. In the present case, the AO has reopened the original assessment with no fresh tangible material but based on the material available in the assessment records which was also taken upto the CIT(A). Therefore, the action of the AO/CIT(A) cannot be countenanced. Assessee appeal allowed.

Summary

Issues Involved:

1. Jurisdiction of the Assessing Officer (AO) to reopen the assessment under Section 147.
2. Treatment of interest income as 'income from other sources.'
3. Treatment of rental income as 'income from other sources.'
4. Validity of reassessment proceedings based on previously assessed issues.
5. Application of Section 74A regarding losses from racing activities.
6. Assessment of capital gains from a lease agreement as a deemed sale.

Detailed Analysis:

1. Jurisdiction of the AO to Reopen the Assessment:

The primary issue was whether the AO had the jurisdiction to reopen the assessment under Section 147. The appellant argued that the reopening was based on the same set of facts and documents already considered during the original assessment. The Tribunal agreed, citing that the reopening was without jurisdiction as it was based on a 'mere change of opinion,' which is not permissible. The Tribunal relied on the Supreme Court's decision in CIT v. Kelvinator of India Ltd., which emphasized that reassessment must be based on new tangible material, not merely a review of existing records.

2. Treatment of Interest Income:

The AO had treated the interest income as 'income from other sources' rather than part of the business income, which was contested by the appellant. The Tribunal noted that the CIT(A) had already addressed this issue in the original assessment, directing the exclusion of the interest income from business loss computation. The Tribunal held that the interest income had been correctly assessed as 'income from other sources' in the original proceedings, and no new material justified reopening this issue.

3. Treatment of Rental Income:

Similar to the interest income, the AO argued that rental income should be treated as 'income from other sources.' The appellant contended that this income was part of the business operations. The Tribunal found that the CIT(A) had previously considered this issue, and if the rental income were assessed as 'income from other sources,' it would not change the net loss figure. Thus, there was no escapement of income, and reopening on this basis was unjustified.

4. Validity of Reassessment Proceedings:

The Tribunal held that the reassessment proceedings were invalid as they were based on issues already adjudicated by the CIT(A). The Tribunal emphasized that the AO cannot reopen an assessment on grounds that have merged with the appellate order, as this would amount to a review rather than a reassessment.

5. Application of Section 74A:

The AO suggested that losses from racing activities could not be set off against other income under Section 74A. The Tribunal found no basis for this claim, as there was no evidence that the losses arose from owning and maintaining racehorses. The CIT(A) had previously treated these as business losses, and the Tribunal upheld this view, dismissing the AO's contrary conclusion.

6. Assessment of Capital Gains from Lease Agreement:

The AO treated a long-term lease agreement as a deemed sale, applying Section 50C to assess capital gains. The Tribunal disagreed, noting that the lease deed did not transfer full ownership and was not registered as a sale deed. The Tribunal highlighted that the actual sale occurred in 2018, and the AO's conclusion was factually and legally incorrect. The Tribunal found the reliance on the Supreme Court decision in R.K. Palshikar (HUF) v. CIT misplaced and distinguished it on facts.

Conclusion:

The Tribunal quashed the reassessment order, ruling that the reopening was without jurisdiction and based on a change of opinion rather than new material. The appeal was allowed, and the grounds on merits were not adjudicated as they became academic due to the decision on the legal issue.