2014 (11) TMI 342 - AT - Income Tax

Reopening of assessment u/s 147 Disallowances made on the same books of accounts rejected earlier - Held that - The original assessment was completed u/s 143(3) on 24/09/09 - After completion of the original assessment, CIT initiated proceeding u/s 263 of the Act by issuing show cause notice to assessee on 04/08/11 - when CIT has dropped the proceedings u/s 263 on the very same issue on which reopening of assessment was made, AO was not correct in either initiating proceeding u/s 147 or completing the assessment by making disallowance u/s 40(a)(ia) on subcontract payments - AO has reopened the assessment on the basis of P&L account, and ledger account copies enclosed along with return of income, which not only formed part of the record at the time of original assessment but were also examined by AO while completing original assessment - no fresh and tangible material has come to the possession of AO after completion of original assessment on the basis of which AO has come to believe that income has escaped assessment. Only because books of account, bills and vouchers are not available, AO proposed to reject the book result and estimate the profit and accordingly assessment was completed by estimating the profit at 5.5% clear of deductions and expenses - it cannot be said that books of account of assessee were not rejected - CIT(A) was correct in holding that once books of account are rejected, the AO cannot reopen the assessment for making specific disallowances relying upon the same books of account relying upon Indwell Constructions Vs. CIT 1998 (3) TMI 121 - ANDHRA PRADESH High Court - initiation of proceeding u/s 147 of the Act is not valid, thus, the order of the CIT(A) is upheld Decided against revenue.

Summary

Issues:
Validity of reopening assessment under section 147 based on disallowance u/s 40(a)(ia) after original assessment estimated profit without disallowance.

Detailed Analysis:

1. Validity of Reopening Assessment under Section 147:
The Department appealed against the order of the CIT(A)-V, Hyderabad for the assessment year 2007-08. The Department raised grounds questioning the correctness of the AO's decision to reopen the assessment under section 147. The AO had proposed to reject the book results and estimate the profit due to the assessee's failure to produce books of account. The CIT(A) held that the AO could not reopen the assessment under section 147 based on the same books of account used for estimating profit, citing the decision in Indwell Constructions Vs. CIT, 232 ITR 776. The CIT(A) quashed the assessment order passed under section 147 due to the legal issue of the validity of the proceeding.

2. Disallowance under Section 40(a)(ia) and Original Assessment:
The original assessment was completed under section 143(3) without making a disallowance under section 40(a)(ia) for non-deduction of tax on payments to sub-contractors. The CIT initiated proceedings under section 263, but after considering the assessee's explanation, dropped the proceedings. Subsequently, the AO reopened the assessment under section 147 for the same issue. The reasons for reopening were based on the same facts considered during the original assessment. The Tribunal held that no fresh material was available to the AO for reopening the assessment, and it amounted to a change of opinion, which rendered the reopening invalid. The Tribunal referred to the decision in CIT v Kelvinator of India Ltd., 320 ITR 561 SC, emphasizing the necessity of fresh and tangible material for reopening assessments. The Tribunal concluded that once books of account were rejected for estimating profit, the AO could not reopen the assessment for specific disallowances based on the same books, citing relevant legal precedents.

3. Final Decision:
The Tribunal dismissed the appeal of the revenue, upholding the CIT(A)'s decision to quash the assessment under section 147. As the initiation of proceedings under section 147 was deemed invalid, the Tribunal did not delve into the merits of the disallowance under section 40(a)(ia). The Tribunal's decision was based on the lack of fresh material for reopening the assessment and the principle that once books of account are rejected for estimating profit, no specific disallowances can be made based on the same books. The Tribunal's ruling was in line with legal precedents and established principles governing the validity of reopening assessments.