2013 (1) TMI 177 - HC - Income Tax

Reopening of assessment - excessive allowance of the deduction under Section 80HHC - sale proceeds of the quota cannot be considered as export turnover but represented business income covered u/s 28(iv) and had to be reduced to the extent of 90% from the business income as per section 80HHC(baa) - Held that - The eligibility of the assessee for the deduction under Section 80HHC in respect of premium on sale of quota was covered in favour of the assessee by the order of the Tribunal in the earlier years as well as the orders passed by his predecessor in the assessee s case for the assessment years 2000-01 and 20001-02 and accordingly upheld the assessee s stand. There was no fresh material which came to the notice of the Assessing Officer after the original return was processed under Section 143(1) and having regard to the orders of the Tribunal(supra) and the instruction of the CBDT dated 23rd February, 1998 regarding the treatment to be given to the premium received on transfer of quotas, there was no escapement of income and thus the notice was without jurisdiction. As decided in CIT vs. Kelvinator of India Ltd. 2010 (1) TMI 11 - SUPREME COURT OF INDIA AO has no power to review, he has the power to reassess. But reassessment has to be based on fulfilment of certain preconditions and if the concept of change of opinion is removed, as contended on behalf of the Department, then, in the garb of reopening the assessment, review would take place. One must treat the concept of change of opinion as an in-built test to check abuse of power by the Assessing Officer.The reasons to believe must have a material bearing on the question on escapement of income. It does not mean a purely subjective satisfaction of the assessing authority; the reason be held in good faith and cannot merely be a pretence. The reasons disclose that the AO reached the belief that there was escapement of income on going through the return of income filed by the assessee after he accepted the return under Section 143(1) without scrutiny, and nothing more. This is nothing but a review of the earlier proceedings and an abuse of power by the AO both strongly deprecated by the Supreme Court in CIT vs. Kelvinator (supra). The reasons recorded by the AO in the present case do confirm apprehension about the harm that a less strict interpretation of the words reason to believe vis- -vis an intimation issued under section 143(1) can cause to the tax regime. There is no whisper in the reasons recorded, of any tangible material which came to the possession of the assessing officer subsequent to the issue of the intimation. It reflects an arbitrary exercise of the power conferred under section 147 - substantial question of law answered in favour of the assessee.

Summary

Issues Involved:
1. Validity of reassessment proceedings under Section 147 of the Income Tax Act, 1961.
2. Jurisdiction of the Assessing Officer to reopen the assessment.
3. Interpretation of "reason to believe" in the context of reopening assessments.

Issue-wise Detailed Analysis:

1. Validity of Reassessment Proceedings under Section 147:
The core issue was whether the Income Tax Appellate Tribunal was correct in holding that the reassessment proceedings under Section 147 were not validly initiated. The assessee filed a return declaring a total income of Rs. 4,45,35,395/-, which included claims under Sections 80HHC and 10B. The return was initially processed under Section 143(1) without scrutiny. Later, a notice under Section 148 was issued, reopening the assessment on the grounds that income chargeable to tax had escaped assessment. The Assessing Officer believed that the sale proceeds of the quota could not be considered as export turnover for claiming deduction under Section 80HHC, leading to excessive allowance of deduction and escapement of income.

2. Jurisdiction of the Assessing Officer to Reopen the Assessment:
The assessee questioned the jurisdiction of the Assessing Officer to reopen the assessment. The Assessing Officer rejected the objection, citing clause (c) of Explanation 2 below Section 147, which considers claiming excessive deduction as income escaping assessment. The CIT(Appeals) also rejected the jurisdictional objection but upheld the assessee's claim on merits, referencing previous Tribunal orders favoring the assessee for earlier years. The Tribunal examined the reasons for reopening and found no fresh material or tangible evidence to justify the reassessment, referencing the Supreme Court judgment in CIT vs. Kelvinator of India Ltd. (2010) 320 ITR 561, which emphasized that reopening must be based on "tangible material."

3. Interpretation of "Reason to Believe":
The Tribunal and the High Court scrutinized whether the Assessing Officer had "reason to believe" that income had escaped assessment. The High Court noted that even for assessments processed under Section 143(1), the conditions of Section 147, including "reason to believe," must be fulfilled. The court referenced multiple Supreme Court judgments to elaborate on the meaning of "reason to believe," emphasizing that it should be based on tangible material and not merely on a change of opinion or review of earlier proceedings. The court highlighted that the expression "reason to believe" has a well-established judicial interpretation and cannot be diluted. The High Court found that the Assessing Officer's reasons for reopening were based merely on reviewing the original return, without any new tangible material, thus constituting an arbitrary exercise of power.

Conclusion:
The High Court upheld the Tribunal's decision, affirming that the reassessment proceedings were invalid due to the absence of tangible material to justify the reopening. The substantial question of law was answered in favor of the assessee, and the Revenue's appeal was dismissed, emphasizing the necessity of "reason to believe" based on new and tangible material for valid reassessment proceedings.