2016 (5) TMI 804 - HC - Income Tax

Reopening of assessment - share of loss from the firm wrongly claimed - Held that - When the case at hand is examined it is seen that the return filed having been processed under Section 143 (1) of the Act there was no occasion for the AO to form an opinion on whether that was any escapement of income to begin with. A perusal of reasons to believe reveals that the AO on going through the return subsequently found that the Assessee had showed a loss of the firm M/s. Rangwala Enterprises at 3, 12, 885. A loss of 12, 94, 055 of the firm was converted into a loss of the proprietary concern. Thus it was after comparing the profit and loss account for the two periods i.e. prior to the Assessee taking over the partnership firm and thereafter it was noticed that the Assessee had wrongly claimed share of loss from the firm which was impermissible in terms of Section 10 (2A) of the Act. The AO was of the view that the Assessee had artificially and with an ulterior motive reduced the income from the property by setting off loss accruing to the firm. Apart from this the P . The other objections of the Assessee to the reopening are left open to be urged before the AO in the assessment proceedings in accordance with law. By the order dated 26th November 2002 the Court had directed that the assessment proceedings would go on before the AO but no final order would be passed. The Court now vacates the said interim order and directs that the AO will now pass a final order within eight weeks from today after affording the Petitioner one opportunity of being heard.

Issues Involved:
1. Legality of the notice issued under Section 148 of the Income Tax Act, 1961 for reopening the assessment.
2. Validity of the reasons to believe for reopening the assessment.
3. Applicability of the legal principles established in prior judgments regarding the reopening of assessments.

Issue-wise Detailed Analysis:

1. Legality of the Notice Issued under Section 148 of the Income Tax Act, 1961:

The petitioner challenged the notice dated 25th June/6th July 2001 issued by the Deputy Commissioner of Income Tax under Section 148 of the Income Tax Act, 1961, seeking to reopen the assessment for the Assessment Year (AY) 1999-2000. The petitioner also contested the consequent notice dated 26th November 2001 issued under Section 143(2)/142(1) of the Act, requiring her to furnish the requested details. The court allowed the proceedings under Section 148 to continue but restrained the Assessing Officer (AO) from passing a final order during the pendency of the writ petition.

2. Validity of the Reasons to Believe for Reopening the Assessment:

The petitioner argued that the reasons for reopening the assessment were recorded after the issuance of the notice, which is against the mandatory requirement of Section 148(2) of the Act. The petitioner also contended that there was no tangible material justifying the formation of 'reasons to believe' that income had escaped assessment, asserting that the material referred to was already available with the AO at the time of the initial assessment under Section 143(1).

The court examined the reasons recorded by the AO, which included discrepancies in the profit and loss accounts of the petitioner and the firm M/s. Rangwala Enterprises. The AO noted that the petitioner had wrongly claimed a share of loss from the firm and had also claimed a loss on account of bad debt belonging to the firm, which was impermissible under Section 10(2A) of the Act. The court held that the reasons to believe were not merely a change of opinion but were based on a detailed examination of the returns and accompanying documents.

3. Applicability of Legal Principles Established in Prior Judgments:

The court referred to the Supreme Court's decision in Assistant Commissioner v. Rajesh Jhaveri Stock Brokers P. Ltd., which clarified that an intimation under Section 143(1) is not an assessment and that the AO can initiate reassessment proceedings if the conditions under Section 147 are fulfilled. The court also discussed the decision in Commissioner of Income Tax v. Orient Craft Limited, which emphasized that the reasons to believe must exist even for reopening an assessment based on an intimation under Section 143(1).

The court noted that the legislative history of Section 143 indicates that an intimation under Section 143(1) does not involve a detailed scrutiny of the return, and therefore, the AO is not required to come across fresh tangible material to form reasons to believe that income has escaped assessment. The court concluded that the AO's reasons to believe were valid and not based on a mere change of opinion.

Conclusion:

The court dismissed the writ petition, vacated the interim order restraining the AO from passing a final order, and directed the AO to pass a final order within eight weeks after affording the petitioner an opportunity of being heard. The court did not express any opinion on the AO's reasons to believe at this stage, leaving the petitioner free to raise other objections during the assessment proceedings.

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