2025 (4) TMI 1033 - AT - Income Tax

Validity of reopening of assessment - reason to believe or suspect - assessment was reopened to make addition u/s 68 but ultimately AO has made no such addition and he has ended up making addition u/s 28(ii) - HELD THAT - The less strict interpretation of the words reason to believe vis- -vis an intimation issued u/s 143(1) cannot be permitted. There is no whisper in the reasons recorded of any tangible material which came to the possession of the AO subsequent to the issue of the intimation which reflects an arbitrary exercise of the power conferred under section 147. The ratio of cited decision would squarely apply to the facts of present case. The decision in Cognizant Technology Solutions India P. Ltd. 2022 (8) TMI 1095 - MADRAS HIGH COURT is also on the same lines. Considering the ratio of this decision the adjudication of CIT(A) on legal grounds could not be faulted with. We would hold that the impugned order is liable to be quashed since Ld. AO did not have valid jurisdiction to reopen the case of the assessee. Assessment was reopened to make addition u/s 68 but ultimately AO has made no such addition and he has ended up making addition u/s 28(ii) - The ratio of decision of Jet Airways (I) Ltd. 2010 (4) TMI 431 - BOMBAY HIGH COURT would also apply as held by Hon ble Court that Explanation-3 could not override the necessity of fulfilling the conditions set out in the substantive part of Sec.147. An Explanation to a statutory provision is intended to explain its contents and cannot be construed to override it or render the substance and core nugatory. Section 147 has this effect that the Assessing Officer has to assess or reassess the income ( such income ) which escaped assessment and which was the basis of the formation of belief and if he does so he can also assess or reassess any other income which has escaped assessment and which comes to his notice during the course of the proceedings. However if after issuing a notice under section 148 he accepted the contention of the assessee and holds that the income which he has initially formed a reason to believe had escaped assessment has as a matter of fact not escaped assessment it is not open for him to independently assess some other income. If he intends to do so a fresh notice under section 148 would be necessary the legality of which would be tested in the event of a challenge by the assessee. This decision has been followed in the case of Ranbaxy Laboratories Ltd. 2011 (6) TMI 4 - DELHI HIGH COURT Thus the impugned additions are not sustainable on this score only. The corresponding grounds raised by the assessee in the cross-objection succeeds.

The core legal questions considered in this appeal pertain to the validity and legality of reopening an income tax assessment under section 147 read with section 144B of the Income Tax Act, specifically:

1. Whether the reopening of the assessment was valid in law, given that the Assessing Officer (AO) initiated it despite not accepting the audit objection and based on material already available at the time of the original assessment.

2. Whether the reopening constituted a mere change of opinion by the AO, which is impermissible under settled legal principles.

3. Whether the AO was justified in making additions under section 28(ii) of the Act instead of section 68, contrary to the stated reasons for reopening.

4. Whether the CIT(A) erred in not taxing the escaped income under sections 68 or 56 of the Act.

5. Whether the approval and satisfaction recorded for reopening by the Additional Commissioner of Income Tax complied with statutory requirements and was based on an application of mind.

Issue-wise Detailed Analysis

Validity of Reopening under Section 147 r.w.s. 144B

The legal framework governing reopening of assessments under section 147 mandates that the AO must have "reason to believe" that income has escaped assessment. This belief must be based on tangible material that was not available at the time of the original assessment. The reopening cannot be based on a mere change of opinion on the same material already considered. This principle is firmly established by the Supreme Court in the Kelvinator of India Ltd. case, which held that reopening without fresh tangible material is impermissible and amounts to an abuse of power.

In the present case, the AO reopened the assessment despite having disagreed with the audit objection, basing the reopening on the same material that was available during the original assessment proceedings. The audit objection itself was rejected by the AO, and no new material had come into possession post original assessment. The AO's "satisfaction" was thus a borrowed satisfaction, which is impermissible.

The Court examined the reasons recorded by the AO and found no indication of any fresh tangible material that could justify reopening. The reopening was therefore held to be a mere review of the original assessment, which is not permissible under the law. The Court relied on the Kelvinator decision and the Madras High Court ruling in Cognizant Technology Solutions India P. Ltd., both affirming that reopening on the basis of existing material is invalid.

The Court concluded that the reopening was bad in law and quashed the assessment order on this ground.

Change of Opinion Doctrine

The Court reiterated the settled legal position that reopening an assessment cannot be justified on the ground of a change of opinion by the AO. The formation of belief regarding escapement of income must be independent and based on fresh material. The AO's reopening in this case was found to be a disguised review, which is impermissible.

Assessment under Section 28(ii) versus Section 68

The AO initially reopened the assessment to make additions under section 68, which pertains to unexplained cash credits. However, ultimately, the AO made additions under section 28(ii), which relates to profits and gains from business or profession.

The Court referred to the Bombay High Court decision in CIT vs. Jet Airways (I) Ltd., which clarified that Explanation 3 to section 147 cannot override the substantive conditions of section 147. If the AO forms a reason to believe that a particular income has escaped assessment and issues a notice under section 148 accordingly, the reassessment must be confined to that income. If the AO accepts that the income initially believed to have escaped assessment does not, in fact, escape assessment, the AO cannot proceed to assess other income without issuing a fresh notice under section 148.

Applying this principle, the Court held that the AO's action of making additions under section 28(ii) without issuing a fresh notice was not sustainable. This ground was also raised by the assessee in cross-objection and was upheld.

Applicability of Section 28(ii) and Capital Receipt Classification

The CIT(A) had held that the impugned receipt fell under the fifth proviso to section 28(ii), inserted by the Finance Act, 2018, effective from 01-04-2019, which exempts certain capital receipts from being taxed as business income. The receipt in question was characterized as a capital receipt and not taxable under section 28(ii).

The Court agreed with the CIT(A)'s conclusion on this point, rendering the merits of the addition academic due to the invalidity of reopening.

Compliance with Statutory Requirements for Reopening

The assessee challenged the approval and satisfaction recorded by the Additional Commissioner of Income Tax for reopening, contending that it was without application of mind. The Court, while not extensively elaborating on this point, implicitly found that since the reopening itself was invalid, the approval process was also flawed.

Treatment of Competing Arguments

The revenue argued that the reopening was justified due to audit objections and that the AO had the jurisdiction to reassess under section 28(ii). The Court rejected these contentions, emphasizing that the AO had not accepted the audit objection and that reopening on the basis of audit objections without fresh material is impermissible. The Court also rejected the revenue's attempt to sustain the addition under section 28(ii) when the reopening was for section 68 additions.

Conclusions

The Court concluded that the reopening of the assessment was bad in law as it was based on the same material considered during the original assessment, amounting to an impermissible change of opinion. The AO's satisfaction was a borrowed satisfaction, and the reopening was thus quashed. The addition under section 28(ii) was also unsustainable as the AO had not issued a fresh notice for such income. The CIT(A)'s order was upheld on these grounds, and the revenue's appeal was dismissed while the assessee's cross-objections were partly allowed.

Significant Holdings

"The formation of belief of escapement of income to reopen the case of the assessee is necessarily to be that of Assessing Officer and nobody else. Only and only if Ld. AO is satisfied that certain income escaped assessment, the case could be reopened."

"The reopening would be nothing but mere change of opinion on existing material which is impermissible as per the decision of Hon'ble Apex Court in Kelvinator of India Ltd."

"Explanation-3 could not override the necessity of fulfilling the conditions set out in the substantive part of Sec.147. Section 147 has this effect that the Assessing Officer has to assess or reassess the income ('such income') which escaped assessment and which was the basis of the formation of belief."

"If after issuing a notice under section 148, he accepted the contention of the assessee and holds that the income which he has initially formed a reason to believe had escaped assessment, has as a matter of fact not escaped assessment, it is not open for him to independently assess some other income."

← Previous Next →