2017 (8) TMI 241 - HC - Income Tax

Validity of reopening - Validity of notice u/s 148 when scrutiny assessment was made but same was annulled - doctrine of merger - Held that - on same subject matter, there cannot be parallel consideration by the Assessing Officer in the reopened assessment and by higher officer or authority in appeal, reference or revision. For applicability of this proviso and the principle of merger flowing from such proviso, what is necessary is that there has to be income involving the matter which is the subject matter of any appeal, reference or revision and in such a case, it would not be open for the Assessing Officer to make any assessment or reopening with respect to such income. The stress here is on the income involving the matters which are the subject matter of further proceedings. The reopening is based on the belief of the Assessing Officer that the sale proceeds should be taxed as the business income and not as capital gain. This subject matter was not a part of the order of the Commissioner (Appeals). The Commissioner (Appeals) having entertained only part of the assessee s appeal, the principle of merger as flowing from the proviso to section 147 of the Act would not apply. Validity of notice u/s 148 when scrutiny assessment was made but same was annulled - re-appreciation of facts - Held that - Nothing contained in the language of section 147 would permit us to hold that even if all the parameters to enable the Assessing Officer to assess or reassess the income by reopening the assessment are present, same may not be permitted in cases where the original assessment framed by the Assessing Officer has failed on any technical ground, such as in the present case i.e. want of service of notice under section 143(2) of the Act. Once the original assessment is declared as invalid as having been completed without the service of notice on the assessee within the statutory period, there would be thereafter no assessment in the eye of law. Following the decisions of the various High Courts, notice u/s 148 sustained - Decided in favor of revenue.

Issues Involved:
1. Validity of reopening the assessment after the original assessment was set aside due to non-service of notice under section 143(2) of the Income Tax Act.
2. Whether the income from the sale of land should be treated as business income or long-term capital gain.
3. Applicability of the principle of merger under section 147 of the Income Tax Act.
4. Whether the reopening of assessment circumvents the statutory period for issuing notice under section 143(2).

Detailed Analysis:

1. Validity of Reopening the Assessment:
The petitioner challenged the reopening of the assessment for the year 2012-2013 based on a notice dated 8.2.2017. The original assessment was invalidated by the Commissioner (Appeals) due to non-service of the mandatory notice under section 143(2) of the Income Tax Act. The court held that once the original assessment is declared invalid, there is no assessment in the eye of the law. Therefore, reopening the assessment under section 147 is permissible if the Assessing Officer has a bona fide belief that income chargeable to tax has escaped assessment.

2. Nature of Income from Sale of Land:
The Assessing Officer initially treated the income from the sale of land as business income, not as long-term capital gain, arguing that the petitioner, a partnership firm, was engaged in the business of purchasing and developing land. This decision was based on the fact that the land was held as stock in trade and the firm's main business was the sale/purchase of land and buildings. The court upheld the Assessing Officer's view, stating that the income should be taxed as business income.

3. Principle of Merger:
The petitioner argued that the original assessment order merged with the order of the Commissioner (Appeals) and thus could not be reopened. The court clarified that the principle of merger applies only to the extent that the income involving matters which are the subject of any appeal, reference, or revision cannot be reassessed. Since the Commissioner (Appeals) only addressed the validity of the assessment and not the merits of the additions, the principle of merger did not apply to the issue of whether the income should be treated as business income or capital gain.

4. Circumvention of Statutory Period:
The petitioner contended that the reopening of the assessment was an attempt to bypass the statutory period for issuing a notice under section 143(2). The court rejected this argument, stating that section 147 allows for the reopening of an assessment if there is a reason to believe that income has escaped assessment, regardless of whether the original assessment was invalidated due to technical grounds like non-service of notice. The court emphasized that the requirements for reopening under section 147 must be met, and in this case, they were satisfied.

Conclusion:
The court dismissed the petition, upholding the validity of the reopening of the assessment and the treatment of the income from the sale of land as business income. The principle of merger did not apply, and the reopening did not circumvent the statutory period for issuing a notice under section 143(2).

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