2017 (9) TMI 1591 - HC - Income Tax

Reopening of assessment - addition u/s 14A - Held that - AO is obliged to indicate the tangible material on the basis of which he has formed the reason to believe that expenditure in relation to exempt income by the Assessee during the year in question must, in terms of Section 14A of the Act, be disallowed. If indeed there has been no exempt income during the AY in question and that explanation of the Assessee should be accepted by the CIT(A), it is incumbent on the AO to explain on what basis he infers that some expenditure from the alleged income has actually to be disallowed. This appears to be a clear case of non-application of mind. Further, considering that the assessment took place under Section 143(3) of the Act and a specific query was raised in this regard by the AO, revisiting the same issue on the basis of the same material was not justified. Consequently, the first reason for reopening the assessment appears not to be sustainable in law. Excess depreciation was claimed by the Petitioner @ 15% in respect of the electrical installation instead of at the eligible rate of 10% - Held that - AO has failed to indicate the basis for forming reason to believe that income has escaped assessment. This appears to be based on mere change of opinion. As is the case with the first reason, Explanation 2(c)(iv) to Section 147 would not come to the aid of the AO unless the basis for forming such reason to believe is indicated in the reasons for reopening the assessment. Excess credit of tax deducted at source - Held that - Nothing has been indicated by the AO in the reasons for reopening the assessment that should explain the basis for forming reasons to believe that income had escaped Expenses claimed on account of payment made to approved gratuity fund assessment - Held that - Petitioner, in its objections, pointed out that the above reason was based on the original income tax return and not the revised return filed by the Petitioner in which the Petitioner had claimed ₹ 1,98,317/- instead of ₹ 1,98,06,804/- on account of gratuity paid during the AY in question. Obviously, the AO failed to note the changed figures in the revised return. This, being an instance of non-application of mind by the AO, could not constitute a valid reason to believe that income had escaped assessment. None of the reasons for re-opening of the assessment could be said to be valid. - Decided in favour of assessee.

Summary

Issues:
Challenging notice for reopening assessment in AY 2009-10 and subsequent order rejecting objections.

Analysis:
The petitioner, a subsidiary of a Japanese company, challenged a notice dated 31st March, 2014, seeking to reopen the assessment for AY 2009-10, along with the order rejecting objections filed against the reopening. The petitioner declared NIL income due to brought-forward losses in the return for AY 2009-10. The AO passed a draft assessment order on 22nd March, 2013, assessing the total income at Rs. 1665,09,05,642/-. The reasons for reopening included disallowance under Section 14A, excess depreciation, TDS credit discrepancy, and gratuity fund deduction. The petitioner's objections were rejected by the AO in an order dated 11th January, 2016.

The court emphasized that reopening assessments within four years requires tangible material showing income escaped assessment, not a mere change of opinion. The first reason for reopening, disallowance under Section 14A, was found unsustainable as no exempt income was earned by the petitioner. The AO's order lacked discussion on objections, indicating a non-speaking order. The court highlighted the necessity for the AO to demonstrate tangible material forming the reason to believe income escaped assessment.

The second reason for reopening, excess depreciation claimed by the petitioner, was also found lacking a basis for forming a reason to believe income escaped assessment. The court noted that the AO's failure to indicate the basis for forming such belief indicated a mere change of opinion. Similarly, the third reason regarding excess TDS credit and the fourth reason concerning gratuity fund deduction were deemed invalid due to lack of substantial material supporting the belief of income escapement.

Overall, the court concluded that the reasons provided by the AO were based on suspicion rather than tangible material, amounting to a mere change of opinion. Consequently, the notice for reopening assessment and the order rejecting objections were set aside, with the writ petition allowed in favor of the petitioner.