2015 (7) TMI 801 - AT - Income Tax

Validity of reopening of assessment - assessee set off unabsorbed depreciation for the AY.1994-95 amounting to ₹ 25.81 crores in the AY.2004-05 - Held that - There is no doubt the reassessment notice was issued after four years for AY under appeal, that the provisions of proviso to section 147 were applicable to the case,that the AO had not mentioned that the failure of the assessee to disclose the relevant and material facts led to under assessment or escapement of income for the assessment year under consideration.From the reasons recorded the belief of assessee in failure of the assessee is not emerging.The FAA has also not dealt with the issue at all.The operative part of this order reads as under In view of the foregoing,I find that the issuance of notices u/s.148 by the AO is in order and no interference is therefore called for.This ground of appeal is accordingly, dismissed. Nowhere he had discussed as to how the facts of the cases relied upon by him were applicable to the facts of the case under appeal.In these circumstances,in our opinion,the order of the FAA is not a speaking order.He had not dealt with the objections raised by the assessee.As the basis for endorsing the reopening after four years is missing,so,we are reversing his order.We hold that the order passed by the AO and upheld by the FAA was not a valid order,as the twin conditions of reopening of the matter,after a period of four years,were missing.Effective ground of appeal filed by the assessee is decided in its favour. Directors remuneration for making disallowance u/s.14 A - Held that - While completing the original assessment,the AO had called for information about commission payment and had considered it while computing the disallowance to be made under section 14A of the Act.At that time if he did not invoke the provisions of section 36(1)(ii)then it has to be presumed that he had applied his mind and had taken a conscious decision about the disputed item.It is not the case of the AO or the FAA that material was not available at the time of the original assessment.The AO has reviewed his original order and in our opinion in the reassessment proceedings it is not permissible. See M/s. OHM Stock Brokers Pvt. Ltd. Versus Commissioner of Income Tax-4, Mumbai and another 2013 (3) TMI 200 - BOMBAY HIGH COURT - Decided in favour of assessee.

Issues Involved:
1. Defective jurisdiction - Issue of Notice u/s. 148 on a change of opinion - Re-assessment Order may be quashed.
2. Disallowance u/s. 36(1)(ii) on account of alleged non-allowable commission payment to the Directors.
3. Levy of Penal Interest u/s. 234A, 234B, 234C, and 234D.
4. Directions by CIT(A) to verify and allow remuneration to directors.

Detailed Analysis:

1. Defective jurisdiction - Issue of Notice u/s. 148 on a change of opinion - Re-assessment Order may be quashed:

The primary contention was that the notice issued under section 148 was based on a change of opinion. The assessee argued that during the original scrutiny assessment, all materials were furnished, and the Assessing Officer (AO) had duly applied his mind, considering the same claim while making disallowance u/s. 14A. Therefore, the jurisdiction acquired through the issue of notice u/s. 148 becomes defective and untenable for being tainted with a change of opinion. The appellate authority (FAA) did not adequately address these objections, leading to the conclusion that the order passed by the AO and upheld by the FAA was not valid, as the twin conditions of reopening the matter after a period of four years were missing. The reassessment was thus quashed for the assessment years 2005-06 and 2006-07.

For the assessment year 2007-08, although the reopening was within four years, it was still found to be based on a change of opinion, which is not permissible. The AO had already considered the commission payment while making disallowance u/s. 14A during the original assessment. Hence, the reassessment order was invalidated.

2. Disallowance u/s. 36(1)(ii) on account of alleged non-allowable commission payment to the Directors:

The AO disallowed the commission payments to the directors under section 36(1)(ii), arguing that the payments were in lieu of dividends and thus not allowable as deductions. The FAA supported this view, stating that the payments were not linked to any extra services rendered by the directors and were a device to avoid tax. However, the tribunal found that the payments had been consistently allowed in previous years and were made for services rendered by the directors. The tribunal referred to judgments like Ohm Stock Brokers Pvt. Ltd. and Voltas Ltd., which held that reassessment based on a mere change of opinion is not valid. Thus, the disallowance was not upheld.

3. Levy of Penal Interest u/s. 234A, 234B, 234C, and 234D:

The appellant denied liability to penal interest on merits. However, as the reassessment orders were invalidated, this issue became moot and was not adjudicated separately.

4. Directions by CIT(A) to verify and allow remuneration to directors:

The FAA had directed the AO to verify whether the remuneration paid to the directors was within the limits prescribed by the Companies Act and allowable as per the company's resolution. The tribunal, having invalidated the reassessment proceedings, decided the grounds of appeal against the AO for the assessment years 2005-06 and 2006-07.

Conclusion:

The appeals of the assessee were allowed, and the reassessment orders for the assessment years 2005-06, 2006-07, 2007-08, and 2008-09 were quashed due to the invalidity of the reopening based on a change of opinion. Consequently, the appeals of the AO were dismissed.

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