2014 (1) TMI 290 - AT - Income Tax

Validity of reassessment proceedings under Section 147 - Held that - The assessee has sub-let the premises of which he was not the owner - The lessee has not vacated the premises at tyhe end of the lease period for which it paid to assessee mesne profits (i.e. amount for illegal possession of property) in addition to rent - Since the rental income was taxed under the head business the compensation cannot be taxed u/s 22 - The reason recorded by the A. O for reopening the assessment are based on no tangible material - The A. O could not have reason to believe that income chargeable to tax has escaped assessment - To initiate proceedings as per the provisions of section 147 - Recording of reasons obtaining prior approval of the competent authorities supply of a copy of the recorded reasons to the assessee passing an order if objections are filed by the assessee against initiation of reassessment are some of the compulsory things to be done by the AO - AO had issued notice on the basis of the reasons that were not existent - Decided in favour of assessee.

Issues Involved:
1. Initiation of reassessment proceedings under Section 147.
2. Validity of recorded reasons for reassessment.
3. Taxability of mesne profits received.
4. Ignoring Special Bench decision in Narang Overseas (P) Ltd.
5. Allocation of expenses to earning of dividend income.
6. Application of Rule 8D for disallowance under Section 14A.
7. Levy of interest under Section 234B.

Detailed Analysis:

1. Initiation of Reassessment Proceedings under Section 147:
The assessee-company challenged the initiation of reassessment proceedings under Section 147, arguing that the jurisdictional conditions were not satisfied. The Tribunal emphasized that reopening of assessment must be based on "reasons to believe" that taxable income has escaped assessment. It was noted that the procedural requirements for reopening, such as recording reasons, obtaining prior approval, and supplying a copy of the recorded reasons to the assessee, were mandatory. The Tribunal concluded that the reasons recorded by the Assessing Officer (AO) were factually incorrect and did not justify the reopening of the assessment.

2. Validity of Recorded Reasons for Reassessment:
The assessee argued that the recorded reasons were erroneous and did not provide a valid basis for the AO to have "reason to believe" that income chargeable to tax had escaped assessment. The Tribunal found that the AO's conclusions were based on incorrect facts, specifically regarding the nature of the mesne profits and their taxability. The Tribunal held that there was no tangible material to justify the invocation of Section 147 and that the reasons recorded by the AO were not existent.

3. Taxability of Mesne Profits Received:
The AO had treated the mesne profits of Rs. 6,75,000/- received by the assessee as a revenue receipt, whereas the assessee claimed it as a capital receipt. The Tribunal noted that the mesne profits were received as per a court decree for the wrongful occupation of premises and were not taxable as revenue receipts. The Tribunal referred to the consistent treatment of rental income from the premises as business income in previous years and concluded that the mesne profits should not be taxed as revenue receipts.

4. Ignoring Special Bench Decision in Narang Overseas (P) Ltd.:
The assessee contended that the Commissioner of Income Tax (Appeals) ignored the decision of the Special Bench in Narang Overseas (P) Ltd., which was cited before him. The Tribunal did not specifically address this issue in detail, as the primary focus was on the validity of the reassessment proceedings.

5. Allocation of Expenses to Earning of Dividend Income:
The Commissioner of Income Tax (Appeals) directed the AO to recompute disallowance under Section 14A by applying Rule 8D, which the assessee argued was not retrospective. The Tribunal did not delve into this issue as it quashed the reassessment order, making it unnecessary to decide on the merits of the grounds raised by the assessee.

6. Application of Rule 8D for Disallowance under Section 14A:
The assessee argued that the provisions of Rule 8D were not retrospective and should not be applied to the assessment year in question. The Tribunal did not address this issue in detail due to the quashing of the reassessment order.

7. Levy of Interest under Section 234B:
The assessee contended that the levy of interest under Section 234B was excessive and arbitrary. The Tribunal did not specifically address this issue due to the quashing of the reassessment order.

Conclusion:
The Tribunal quashed the reassessment order dated 28.11.2007, holding that the reasons recorded by the AO for reopening the assessment were based on no material and were erroneous. Consequently, the Tribunal did not find it necessary to decide on the merits of the other grounds raised by the assessee. The appeal filed by the assessee was allowed.

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