2014 (10) TMI 147 - HC - Income Tax

Reopening of assessment u/s 148 - Validity of notice Computation of income and indexed cost of improvement - Held that - The AO himself had no reason to believe that any income had escaped the assessment and such reopening of the assessment is clearly at the behest of the audit party objections - any issuance of notice of reopening at the best of the audit party sans satisfaction of the AO himself, such notice must be quashed - What is important while issuing the notice for reopening within four years from the end of relevant assessment year or beyond four years must have a reason to believe that the income chargeable to tax has escaped the assessment at the time of filing of the return of income, the assessee had in computation of income, claimed long term capital gain after showing the profit on sale of land - The statement of long term capital gain also specifies the particulars, the sale price and the year, indexed cost of the year, indexed cost of improvement and the capital gain - Again, in the computation of tax in the total income, the statement of long term capital gain is making it very clear as to what is indexed cost of improvement - The profit and loss account for the year ending 31st March 2008 shows the profit on sale of land, the balance sheet as on 31.3.2008 also in partners capital account has reflected land as an asset and the value has been quantified. The assessee had in computation of income, claimed long term capital gain after showing the profit on sale of land - The statement of long term capital gain also specifies the particulars, the sale price and the year, indexed cost of the year, indexed cost of improvement and the capital gain - the belief of the AO even if would have been there that income chargeable to tax had escaped assessment, the same lacks validity - Any reopening if is resorted to under Section 147 of the Act fundamental requirement of the AO is to have a reason to believe that the income chargeable to tax had escaped assessment - This fundamental requirement is not done away with - as decided in Asstt. Commissioner of Incometax V. Rajesh Jhaveri Stock Brokers (P) Limited, 2007 (5) TMI 197 - SUPREME Court - such reason to believe need not necessarily be a final decision of the AO and yet when this requirement is not being fulfilled and when the AO himself has no reason to believe that any income chargeable to tax has escaped the assessment, the very notice lacks validity decided in favour of assessee.

Issues Involved:
1. Legality of the notice issued under Section 148 of the Income Tax Act, 1961 for reopening the assessment.
2. Validity of reopening the assessment based on audit objections.
3. Requirement of "reason to believe" for reopening the assessment.
4. Examination of the original assessment and the details furnished by the petitioner.
5. Relevance of the cost of improvement incurred before obtaining permission for non-agricultural use.

Issue-wise Detailed Analysis:

1. Legality of the Notice Issued Under Section 148:
The petitioner challenged the notice dated 7th March 2013 issued under Section 148 of the Income Tax Act, 1961, for reopening the assessment within four years from the end of the relevant assessment year (2008-09). The petitioner sought a writ of certiorari to quash the notice and the order rejecting the objections, and a writ of mandamus to prevent further proceedings in pursuance of the said notice.

2. Validity of Reopening Based on Audit Objections:
The petitioner argued that the notice was issued at the behest of the audit party and lacked the subjective satisfaction of the Assessing Officer. The original file revealed that the audit party pointed out an incorrect computation of capital gain, but the Assessing Officer did not find the audit party's observations acceptable. Despite this, the assessment was reopened as a precautionary measure, which indicates that the reopening was influenced by the audit objections rather than the Assessing Officer's independent belief.

3. Requirement of "Reason to Believe":
The court emphasized that the Assessing Officer must have a "reason to believe" that income chargeable to tax has escaped assessment. This belief must be based on tangible material. In this case, the Assessing Officer initially did not believe that any income had escaped assessment and only proposed reopening the assessment to verify the audit party's objections. This indicates a lack of the requisite "reason to believe," making the reopening invalid.

4. Examination of the Original Assessment:
During the original assessment, the petitioner had provided detailed information about the long-term capital gains, including the cost of improvement. The Assessing Officer had scrutinized these details and accepted the return. The court noted that reopening the assessment based on the same material without any new tangible evidence amounts to a mere change of opinion, which is not permissible.

5. Relevance of Cost of Improvement:
The audit party objected to the cost of improvement claimed by the petitioner before obtaining permission for non-agricultural use of the land. The Assessing Officer, however, found this objection irrelevant, stating that the expenditure on improvement is allowable under Section 48 of the Act, irrespective of the permission date. The court supported this view, highlighting that the cost of acquisition and improvement should be considered based on the capital asset's status and not on the permission date for non-agricultural use.

Conclusion:
The court concluded that the reopening of the assessment was invalid as it was based on audit objections without the Assessing Officer's independent belief that income had escaped assessment. The notice dated 7th March 2013 was quashed, and all consequential proceedings were annulled. The court reiterated that reopening of assessment must be based on new tangible material and not merely to verify audit objections or re-examine previously accepted claims.

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