2014 (3) TMI 759 - HC - Income Tax

Power of reopening of assessment u/s 147 Explanation 1 r.w section 143(1) of the Act - Advance tax paid and considered it as capital receipt Held that - The decision in CIT vs. Kelvinator (India) Ltd. 2010 (1) TMI 11 - SUPREME COURT OF INDIA followed - there was no tangible material and that the mere circumstance that advance tax to the tune of Rs.27.6 lakhs was paid did not amount to admission by him - a valid reopening of assessment has to be based only on tangible material to justify the conclusion that there is escapement of income - the note forming part of the return clearly mentioned and described the nature of the receipt under a non-compete agreement - The reasons for the notice u/s 147 nowhere mentioned that the revenue came up with any other fresh material warranting reopening of assessment thus, mere conclusion of the proceedings u/s 143(1) ipso facto does not bring invocation of powers for reopening the assessment the order of the Tribunal upheld Decided against Revenue.

Summary

Issues:
1. Validity of reopening assessment based on tangible material.
2. Classification of receipt as capital or business income.
3. Justification for reassessment based on Explanation 1 of section 147.

Issue 1: Validity of reopening assessment based on tangible material
The High Court considered the appeal by the revenue against the order of the Income Tax Appellate Tribunal (ITAT) allowing the assessee's appeal. The revenue sought to reopen the assessment for the assessment year 1999-2000, claiming that the income of Rs. 88 lakhs received by the assessee should be chargeable to tax under the head "Profit & Gains of Business of Profession." The assessee objected to the reopening of the assessment, arguing that there was no fresh or tangible material discerned by the revenue for reassessment. The High Court held that a valid reopening of assessment must be based on tangible material to justify the conclusion of income escapement. The Court noted that the note filed by the assessee clearly described the nature of the receipt under a non-compete agreement, and the reasons for the notice under section 147 did not mention any other fresh material warranting reassessment. The Court concluded that the mere conclusion of proceedings under section 143(1) did not automatically justify the reopening of the assessment, and upheld the ITAT's decision.

Issue 2: Classification of receipt as capital or business income
The revenue argued that the amount received by the assessee should be treated as business income rather than a capital receipt. The revenue contended that the nature of the consideration receipt, as per the terms of the agreement, indicated that it was income and not a capital receipt. However, the ITAT, considering the decision in CIT vs. Kelvinator (India) Ltd., held that there was no tangible material to support the revenue's claim. The Court noted that the mere payment of advance tax did not amount to an admission by the assessee. The Court emphasized that a valid reassessment must be based on tangible material, and in this case, the nature of the receipt was clearly described in the note filed by the assessee, supporting the contention that it was a capital receipt. Therefore, the Court dismissed the revenue's appeal.

Issue 3: Justification for reassessment based on Explanation 1 of section 147
The revenue argued that the reassessment proceedings were justified based on Explanation 1 of section 147, read with section 143(1). The revenue contended that the agreement under which the amount was paid had not been filed during the assessment stage, justifying the reassessment. However, the Court held that the reasons to believe for reopening the assessment must be based on tangible material, as established in previous judgments. The Court found that the reasons provided for the notice under section 147 did not present any fresh material warranting reassessment. Therefore, the Court upheld the ITAT's decision and dismissed the revenue's appeal, concluding that the reassessment was not justified based on the available evidence and legal principles.