2012 (11) TMI 469 - AT - Income Tax

Reopening of assessment - undisclosed commission and interest paid to branches period beyond four years - Held that - The perusal of the computation of total income filed along with return of income that the assessee has disclosed the interest and commission paid to the head offices and branches and also interest earned from head offices and branches. Once these primary facts have been disclosed before the Assessing Officer and has also been accepted by him after verifying them in scrutiny proceedings, it cannot be held that there was any failure on the part of the assessee to disclose fully and truly all material facts on these issues. Even though, the AO has mentioned about the failure on the part of the assessee in the reasons recorded , however, such a failure cannot be ascribed or inferred from the material placed on record for the simple reason as to what the Assessing Officer is contending in the reasons recorded is the legal inference of taxability of such income. It is not in dispute that the AO on September 15, 2003, had himself carried the file to the CIT(A) and on the very same day, rather the same moment in the presence of the AO, CIT(A) granted approval. As a matter of fact, while granting approval it was obligatory on his part to verify whether there was any failure on the part of the assessee to disclose full and true relevant facts in the return of income filed for the assessment of income of that assessment year. It was also obligatory on the part of the Commissioner to consider whether or not power to reopen is being invoked within a period of four years from the end of the assessment year to which they relate. None of these aspects have been considered by him which is sufficient to justify the contention raised by the petitioner that the approval granted suffers from non-application of mind. Thus re-assessment proceedings u/s 147 are treated as void ab initio - in favour of assessee.

Summary

Issues Involved:
1. Validity of re-opening under section 147 of the Income Tax Act, 1961.
2. Failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment.
3. Jurisdictional facts necessary to acquire jurisdiction by the Assessing Officer to re-open a case.
4. Compliance with the statutory requirements for re-opening of assessment.

Detailed Analysis:

1. Validity of Re-opening under Section 147:
The core issue in both assessment years 1997-98 and 1993-94 pertains to the validity of re-opening the assessments under section 147 of the Income Tax Act, 1961. The Tribunal scrutinized whether the Assessing Officer had "reason to believe" that any income chargeable to tax had escaped assessment and whether this belief was held in good faith and based on rational communication. The Tribunal emphasized that the re-opening must not be arbitrary or irrational and must be supported by a direct and live link nexus with the income escaping assessment.

2. Failure on the Part of the Assessee to Disclose Fully and Truly All Material Facts:
The Tribunal examined whether there was a failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. In both assessment years, it was found that the assessee had disclosed all primary facts relating to commission and interest paid to branches/correspondents and other material facts in the return of income. The Tribunal concluded that the Assessing Officer did not record any satisfaction that there was a failure on the part of the assessee to disclose fully and truly all material facts, which is a mandatory requirement to acquire jurisdiction under section 147.

3. Jurisdictional Facts Necessary to Acquire Jurisdiction by the Assessing Officer to Re-open a Case:
The Tribunal reiterated that for the purpose of re-opening an assessment under section 147, the Assessing Officer must have "reason to believe" that any income chargeable to tax has escaped assessment. This belief must be held in good faith and not merely as a pretence. The Tribunal highlighted that the information or material on which the Assessing Officer seeks to re-open the case must have a direct and live link nexus with the income escaping assessment. The Tribunal found that this condition was not satisfied in the present cases, as the "reasons recorded" did not disclose any failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment.

4. Compliance with the Statutory Requirements for Re-opening of Assessment:
The Tribunal scrutinized whether the statutory requirements for re-opening the assessment under section 147 were fully met. It was noted that the first proviso to section 147 carves out a limitation that in cases where the assessment has been completed under section 143(3) or under section 147, no action can be taken after the expiry of four years from the end of the relevant assessment year unless twin conditions are satisfied: (i) any income chargeable to tax has escaped assessment by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148, and (ii) there is a failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. The Tribunal found that these conditions were not met in the present cases, rendering the re-opening of assessments invalid.

Conclusion:
The Tribunal held that the proceedings initiated under section 147, vide notice dated 31st March 2004, and 31st May 2001, respectively, were void ab initio. Consequently, the assessment orders dated 28th March 2005, and 27th March 2003, passed under section 147 r/w section 143(3) were quashed. The Tribunal concluded that since the entire assessment orders were quashed, other issues on merits were rendered academic and were not dealt with. The assessee's appeals for assessment years 1997-98 and 1993-94 were allowed, and the Revenue's appeal for assessment year 1997-98 was dismissed.