2012 (8) TMI 332 - AT - Income Tax

Validity of reassessment order passed u/s 147 of the order framed u/s 143(3), when the same was subject matter of rectification u/s 154 - assessment reopened on ground that write off of loan of Rs 1.35 crores is the capital loss and should not have been allowed as bad debts - Held that - It is found that Notice u/s. 154 was issued to rectify the mistake apparent from record of allowance of the claim of bad debt of Rs. 1.35 crore. Also, reasons given for the reopening of the assessment are on principle identical with the reasons given for the reopening of the assessment which shows that AO himself was not certain as to under which section he should proceed while framing the assessment u/s. 147. Further, no tangible material has been brought on record, the AO has simply disallowed the claim of write off on the facts and circumstances which were available before him while framing the original assessment. This approach clearly show that the AO has merely changed his opinion in relation to the allowability of the said write off. Moreover, it cannot be said that assessment proceedings were completed as the order passed u/s. 154 is also an order which can be subject to appeal and revision and as the proceedings are not been completed on record, it cannot be said that any income has escaped assessment. Hence, assessment order passed u/s. 147 is bad in law and is accordingly cancelled - Decided in favor of assessee.

Summary

Issues:
1. Validity of notice u/s. 148 and correctness of order disallowing bad debts claimed.
2. Whether the write off of a loan should be treated as a capital loss.
3. Whether the AO had valid reasons for reopening the assessment.
4. Whether the AO's actions constituted a change of opinion.
5. Whether the assessment order passed u/s. 147 was legal.

Issue 1: The appellant contested the validity of the notice u/s. 148 and the correctness of the order disallowing bad debts claimed. The AO disallowed the claim of bad debts amounting to Rs. 1,35,00,000, treating it as a capital loss. The appellant argued that the loan given was in the ordinary course of business and should be allowed as a bad debt u/s. 36(2) of the Act.

Issue 2: The question arose whether the write off of the loan should be treated as a capital loss. The AO contended that the write off of the loan was in contravention of provisions of Sec. 36(2) and disallowed the claim. The appellant argued that the loan given was part of its principal business of money lending and was covered by the Object Clause of the Company's Memorandum of Association.

Issue 3: The validity of the reasons for reopening the assessment was challenged. The AO sought to rectify the assessment order, claiming that the allowance of the bad debt was a mistake apparent from the record. The appellant objected to the reopening, stating that all details were already on record and had been considered during the original assessment.

Issue 4: The appellant argued that the AO's actions amounted to a change of opinion, citing judicial precedents. The AO had issued a notice u/s. 154 to rectify the assessment, and then a notice u/s. 148 to reopen the assessment based on similar reasons. The appellant contended that the AO was uncertain about the nature of the issue, indicating a change of opinion.

Issue 5: The tribunal held that the assessment order passed u/s. 147 was bad in law and accordingly cancelled it. The tribunal noted that no tangible material had been presented to show that income had escaped assessment. The tribunal also referenced similar cases where assessments u/s. 147 had been quashed, emphasizing the need for a link between the reason to believe income had escaped assessment and tangible material.

In conclusion, the tribunal allowed the appeal filed by the assessee, emphasizing that the loan amount was given in the ordinary course of business and should be allowed as a bad debt u/s. 36(2) of the Act. The tribunal found the assessment order passed u/s. 147 to be legally flawed and cancelled it based on the lack of tangible material showing income had escaped assessment.