2016 (6) TMI 170 - AT - Income Tax

Reopening of assessment - reasons to believe - Held that - As the audit objection cannot be considered as tangible material for the AO to reopen u/s 147/148 of the Act concluded assessment u/s 143(3) of the Act , unless the AO records his own satisfaction that income has escaped assessment . In the instant case there is no independent application of mind by the AO to the audit objection to come to the conclusion that income has escaped assessment. While in this instant case, the AO has after considering of the entire material and facts on records have formed an opinion that capital relief is not exigible to tax in the original assessment proceedings , and now it will be covered by change of opinion which is not permissible , as the audit team has also relied upon the same material to propound interpretation of law which is exceeding their jurisdiction - Decided in favour of assessee.

Issues Involved:
1. Validity of reopening the assessment under Section 147 of the Income Tax Act, 1961.
2. Applicability of Section 41 of the Income Tax Act, 1961 to the relief amount transferred to the capital reserve.
3. Whether the reassessment was based on a change of opinion.
4. The role of audit objections in reopening the assessment.

Detailed Analysis:

1. Validity of Reopening the Assessment under Section 147:
The Revenue appealed against the order of the Commissioner of Income Tax (Appeals) [CIT(A)], which annulled the reopening of the assessment under Section 147. The original assessment was completed under Section 143(3) on 24th November 2008, accepting the returned income. The Assessing Officer (AO) issued a notice under Section 148 within four years from the end of the assessment year, citing that income chargeable to tax had escaped assessment. The CIT(A) held that the reopening was invalid as it was based on a change of opinion, and there was no fresh tangible material to justify the reopening. The Tribunal upheld the CIT(A)’s decision, emphasizing that the AO had already considered the issue during the original assessment proceedings.

2. Applicability of Section 41 of the Income Tax Act:
The AO contended that the relief amount of ?1,37,19,684/- transferred to the capital reserve should be taxable under Section 41 as cessation of liability. The assessee argued that this amount was on capital account and not a trading liability, and hence, Section 41 was not applicable. The CIT(A) and the Tribunal upheld the assessee’s contention, noting that the amount was never claimed as a deduction in any earlier previous year, and it was disclosed in the audited financial statements and directors’ report.

3. Reassessment Based on Change of Opinion:
The CIT(A) and the Tribunal found that the reassessment was based on a change of opinion, which is not permissible under the law. The AO had already examined the issue of the one-time settlement with the bank and the treatment of the relief amount during the original assessment. The Tribunal cited several case laws, including the Supreme Court’s decision in CIT v. Kelvinator of India Ltd., which held that reassessment based on a mere change of opinion is invalid.

4. Role of Audit Objections:
The reopening of the assessment was triggered by an audit objection from the Revenue audit team. The Tribunal noted that audit objections could not be the sole basis for reopening an assessment unless the AO independently applies his mind and records his satisfaction that income has escaped assessment. The Tribunal observed that the AO had mechanically accepted the audit objections without independent application of mind, which rendered the reopening invalid.

Conclusion:
The Tribunal dismissed the Revenue’s appeal, affirming the CIT(A)’s order that annulled the reopening of the assessment. It held that the reassessment was invalid as it was based on a change of opinion and there was no fresh tangible material. The role of audit objections was also scrutinized, emphasizing that they cannot be the sole basis for reopening an assessment without independent application of mind by the AO. The Tribunal did not adjudicate on the merits of the addition as the reopening itself was held to be invalid.

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