2016 (12) TMI 1287 - HC - Income Tax

Validity of reopening of assessment - Held that - Explanation 3 was introduced by Finance (No. 2) Act, 2009 with retrospective effect from 01.04.1989. Explanation 3 only provides that the Assessing Officer may assess or reassess the income in respect of any issue, which has escaped assessment, and which comes to his notice subsequently in the course of the proceedings, notwithstanding that the reasons had not been included in the reasons recorded under Section 148(2). Even if the reasons recorded do not refer to a particular issue, the Assessing Officer would be entitled to assess the income or reassess the computation of the income with regard thereto if the same comes to his notice during the course of the proceedings for reassessment. That, however, posits a valid notice in the first place for it is a valid notice under Section 148 that gives the Assessing Officer the jurisdiction to adopt proceedings under Sections 147 and 148. In these circumstances, it is held that the notice under Section 148 was illegal and issued without jurisdiction. The reassessment proceedings, therefore, are invalid. - Decided in favour of assessee

Issues Involved:
1. Validity of ITAT's dismissal of the revenue's appeal.
2. Legality of the re-assessment under Section 143(3) read with Section 147.
3. Whether the re-assessment constituted a change of opinion.
4. Validity of the notice under Section 148.
5. Application of Explanation 3 to Section 147.

Detailed Analysis:

1. Validity of ITAT's Dismissal of the Revenue's Appeal:
The court addressed whether the ITAT was right in dismissing the appeal without appreciating the facts. The appellant argued that the ITAT failed to consider the facts correctly. However, the court upheld the ITAT's order, emphasizing that the facts and circumstances were adequately considered by the lower authorities.

2. Legality of the Re-assessment under Section 143(3) read with Section 147:
The re-assessment was challenged on the grounds that it was conducted without proper statutory compliance. The court noted that the initial assessment was processed under Section 143(1), followed by scrutiny under Section 143(2). A notice under Section 148 was issued later, citing four reasons for re-opening the assessment. The court scrutinized each reason and found that they were based on facts already available during the original assessment, thus constituting a change of opinion.

3. Whether the Re-assessment Constituted a Change of Opinion:
The court examined the four reasons for re-opening the assessment:
- Capital Work in Progress: The Assessing Officer (AO) had previously accepted the assessee's explanation regarding the interest capitalization. Re-opening on this ground was deemed a change of opinion.
- Interest Expenses: Similar interest expenses were accepted in previous years. The AO's new stance was considered a change of opinion.
- Exemption under Section 54F: The AO had previously accepted the assessee's claim that two flats were combined into one. Re-opening on this ground was also a change of opinion.
- Deduction under Section 80IC: The AO had earlier accepted the assessee's compliance with Section 80IC requirements. Re-opening on this ground was, again, a change of opinion.

4. Validity of the Notice under Section 148:
The court emphasized that a valid notice under Section 148 is a prerequisite for re-opening an assessment. The reasons for the notice must be based on tangible material and not merely a change of opinion. The court found that the notice in this case was issued without new material, making it invalid.

5. Application of Explanation 3 to Section 147:
The appellant argued that Explanation 3 to Section 147 allowed the AO to assess any income that escaped assessment, even if not mentioned in the initial notice. The court clarified that Explanation 3 applies only if the initial notice under Section 148 is valid. Since the notice was found invalid, Explanation 3 could not be invoked.

Conclusion:
The court concluded that the re-assessment proceedings were invalid due to the invalidity of the notice under Section 148, which was based on a mere change of opinion without new material. The appeal was dismissed, and the questions of law were answered against the appellant.

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