2016 (11) TMI 1125 - AT - Income Tax

Reopening of assessment - income under the head Capital Gains arising from the relinquishment of tenancy rights - Held that - Undisputedly, no new fact or information had come to the knowledge of the AO to form belief that the income in this case had escaped assessment. As noted above, the AO had formed the belief stating that on examination of records, it was observed by him that the assessee was not the tenant for which he had disclosed long term capital gains on account of compensation received for relinquishment of tenancy rights. However, it is also a fact on the file that specific queries were raised by the AO vide letter dated 07.09.06 regarding the tenancy rights of the assessee in the property and the assessee was asked to explain since when the property was in his possession as tenant and also to produce the copy of deed of relinquishment of tenancy rights. The assessee has also proved on the file that the factum of assessee being tenant in the property was not an afterthought version or a colourable device rather in the wealth tax return for the assessment year 1990-91 i.e. prior to the signing of the deed of relinquishment of right/development rights in the year 1995, the assessee was very much shown as a tenant in the property in question. The AO, during the original scrutiny assessment proceedings under section 143(3) of the Act, had thoroughly examined the issue, put the queries to the assessee and thereafter had allowed the claim of the assessee. Without any new fact or information coming into his knowledge and without stating any specific reason merely saying that from the records it is observed that the assessee was not tenant, in our view, is nothing but the change of opinion on the part of the AO. The reasons to believe must have a rational connection with or relevant bearing on the formation of the belief. Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the Assessing Officer and the formation of belief regarding escapement of income. The powers of Assessing Officer to reopen an assessment, though wide, are not plenary. The words of the statute are reason to believe and not reason to suspect . There can be no manner of doubt that the words reason to believe suggest that the belief must be that of an honest and reasonable person based upon reasonable grounds and that the Income-tax Officer may act on direct or circumstantial evidence but not on mere suspicion, gossip or rumour. - Decided against revenue

Issues Involved:
1. Validity of reopening the assessment under section 147/148 of the Income Tax Act.
2. Treatment of compensation received on account of relinquishment of tenancy rights.
3. Deduction under section 80L.
4. Deletion of penalty levied under section 271(1)(c) of the Income Tax Act.

Detailed Analysis:

1. Validity of Reopening the Assessment:
The assessee challenged the reopening of the assessment by the Assessing Officer (AO) under sections 147/148 of the Income Tax Act. The original assessment was completed under section 143(3), where the income was declared under 'Capital Gains' from relinquishment of tenancy rights. The AO later issued a notice under section 148, citing that the assessee never possessed any tenancy rights, leading to substantial revenue escaping assessment. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the reopening, stating that the AO only needed a reason to believe that income had escaped assessment within the four-year time limit. The Tribunal, however, found that no new fact or information had come to the AO's knowledge, and the reopening was based on the same facts already examined during the original assessment. The Tribunal cited the Supreme Court's judgment in "Kelvinator India Ltd." and the Bombay High Court's decision in "Direct Information (P) Ltd. vs. ITO," concluding that the reopening was merely a change of opinion and thus invalid.

2. Treatment of Compensation Received:
The AO treated the compensation received for relinquishment of tenancy rights as deemed dividend under section 2(22)(e) of the Act, contrary to the assessee's declaration as 'Capital Gains.' The Tribunal did not delve into the merits of this issue, as it had already invalidated the reopening of the assessment, rendering any consequential additions moot.

3. Deduction under Section 80L:
The assessee also contested the CIT(A)'s failure to specifically direct the AO to allow a deduction of ?12,000 under section 80L. However, this issue was not addressed separately by the Tribunal since the primary ground of reopening the assessment was held invalid.

4. Deletion of Penalty under Section 271(1)(c):
The Revenue appealed against the CIT(A)'s order deleting the penalty levied under section 271(1)(c) related to the additions made by the AO. Since the Tribunal had already held the reopening of the assessment as invalid and deleted the consequential additions, it found no basis for sustaining the penalty. Consequently, the Revenue's appeal was dismissed as infructuous.

Conclusion:
The Tribunal concluded that the reopening of the assessment was invalid due to the lack of new tangible material and was merely a change of opinion. As a result, all consequential additions and penalties were rendered void. The assessee's appeal was allowed, and the Revenue's appeal was dismissed.

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