2018 (7) TMI 362 - AT - Income Tax

Reopening of assessment - Addition to prior period income - Held that - AO has mentioned that this information was available in the Form 3CD report which had been filed for the assessee. In reply to a query raised by the AO, the assessee, in its submission dated 06.10.2008 in paragraph 6, had submitted before the AO that prior period expenses had not been claimed by the assessee company in its return of income and as the profit / loss for the year had been considered only before the claim of previous year expenses, no disallowance was needed in the assessment proceedings. Sales Tax Deferment also disclosed in the computation of income of the assessee which was filed along with return of income. As much evident that all this information was before the AO at the time of the original assessment proceedings. There was no fresh tangible material which had come in possession of the AO with regard to the prior period income so as to warrant initiation of reassessment proceedings in the case of the assessee. We hold that the reassessment was based on a mere change of opinion by the AO which, under law, he was not entitled to do. Admittedly, the reopening is within 4 years, however, the issue is squarely covered in favour of the assessee by the judgment of the Hon ble Apex Court in the case of CIT vs. Kelvinator of India Ltd. (2010 (1) TMI 11 - SUPREME COURT OF INDIA). Reopening was bad in law in view of no tangible material having come in possession of the AO subsequent to the original assessment proceedings and relating to the prior period income. Thus, it is a case of mere change of opinion by the AO which amounts to review of his earlier order and the same cannot be upheld. Therefore, the order of the CIT (A) is set aside and the reassessment proceedings u/s 147/148 of the Act are quashed as being void ab initio - Decided in favour of assessee.

Issues Involved:
1. Deletion of addition of ?6,11,69,969/- relating to prior period income.
2. Validity of reassessment proceedings initiated u/s 147/148 of the Income Tax Act, 1961.

Issue 1: Deletion of Addition of ?6,11,69,969/- Relating to Prior Period Income

The department challenged the deletion of the addition of ?6,11,69,969/- made by the Assessing Officer (AO) on the grounds that the assessee, following the mercantile system of accounting, should have added this prior period income back to its income. The AO initiated reassessment proceedings based on the information from the 3CD Report annexed to the tax audit report. The reassessment was completed at an income of ?5,97,81,407/- after making the addition of the prior period income.

The assessee contended that the details of the prior period income, including related expenses, were duly reflected in the tax audit report attached with the return of income. Specifically, ?5,69,80,980/- of the prior period income pertained to deferred sales tax loan written back on the Net Present Value (NPV), which was disclosed in the audited balance sheet and credited to the Profit & Loss Account under 'Prior Period Adjustment'.

The assessee argued that this information was available during the original assessment, and no fresh tangible material justified the reassessment. The reassessment was claimed to be based on a mere change of opinion, which is not permissible under the law. Reliance was placed on the judgments in CIT vs. Kelvinator of India Ltd. and CIT vs. Usha International Ltd., which emphasize that reassessment requires tangible material and cannot be based on a change of opinion.

The tribunal agreed with the assessee, noting that all relevant information was disclosed during the original assessment. Therefore, the reassessment was based on a mere change of opinion, which is not allowed under the law. The reassessment proceedings were quashed as void ab initio, rendering the merits of the addition academic.

Issue 2: Validity of Reassessment Proceedings Initiated u/s 147/148

The assessee challenged the reassessment proceedings' validity on several grounds, including:
- The reasons for reassessment were based on audit objections, not fresh tangible material.
- The reassessment was based on a change of opinion.
- The AO did not independently apply his mind, relying on borrowed satisfaction.
- The reasons for reassessment were based on surmises and suspicion, not a reason to believe.
- There was no nexus between the reasons recorded and the alleged income escapement.
- The assessee had fully and truly disclosed all material facts necessary for the original assessment.

The tribunal examined the reasons recorded for reassessment, which indicated that the AO believed the prior period income should have been added back, resulting in under-assessment. The tribunal found that all relevant information was available during the original assessment, and no new tangible material justified the reassessment. The reassessment was deemed a mere change of opinion, which is not permissible.

The tribunal cited the Supreme Court's judgment in CIT vs. Kelvinator of India Ltd., which clarified that reassessment requires tangible material and cannot be based on a change of opinion. The Delhi High Court's judgment in CIT vs. Usha International Ltd. further supported the view that reassessment is invalid if the assessee had disclosed full and true particulars during the original assessment.

Consequently, the tribunal quashed the reassessment proceedings as void ab initio and dismissed the department's appeal, allowing the assessee's cross-objection.

Conclusion:

The tribunal quashed the reassessment proceedings initiated u/s 147/148, holding them void ab initio due to the absence of fresh tangible material and the reassessment being based on a mere change of opinion. The department's appeal was dismissed, and the assessee's cross-objection was allowed.

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