2020 (2) TMI 941 - AT - Income Tax

Reopening of assessment u/s 147 - reasons to believe and not reasons to suspect - HELD THAT - Provisions imposing condition precedent for initiating reassessment proceedings is to ensure finality of proceedings. The Act also provides that such reason must be recorded in writing before issue of notice of reassessment so as to judge the existence of such belief before initiating reassessment proceedings by issue of notice u/s.148. The above requirements are meant to ensure that powers to initiate reassessment proceedings are not exercised in an arbitrary manner. The Courts have analyzed and explained in several cases as to what could be the valid reason to believe escapement of income, which would enable the AO to successfully reopen the assessment. It has been held that the words reason to believe are stronger than the words reason to suspect or reason to doubt . It requires more than merely satisfaction of the Assessing Officer. The belief entertained by the AO must not be arbitrary or irrational. The expression reason to believe does not mean purely subjective satisfaction of the Assessing Officer. The belief must be held in good faith. It cannot be merely pretence. Again, the belief must be of an honest and reasonable person based upon reasonable grounds. AO may act upon direct or circumstantial evidence, but his belief must not be based on mere suspicion, gossip or rumors. AO would be acting without jurisdiction, if the reasons for his belief are not material or relevant. There should be nexus between the information coming into possession of the AO and his belief on the basis of such information that income of the Assessee chargeable to tax has escaped assessment. Therefore, we note that it is a case of change of opinion and hence we quash the reassessment proceedings. - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of reopening the case under Section 147 of the Income Tax Act, 1961.
2. Disallowance of deduction claimed under Section 80IB of the Income Tax Act, 1961.
3. Disallowance of deduction claimed under Section 80HHC of the Income Tax Act, 1961.

Detailed Analysis:

1. Validity of Reopening the Case under Section 147 of the Income Tax Act, 1961:

The primary issue was whether the reopening of the assessment under Section 147 was valid. The assessee argued that the reopening was based on "Audit Objections" and amounted to a "Change of Opinion" on the same set of facts, which is not permissible under the law. The original assessment was completed under Section 143(3), and the deductions under Sections 80IB and 80HHC were allowed based on the information and audit reports submitted. The Assessing Officer (AO) issued a notice under Section 148, citing reasons to believe that income had escaped assessment due to wrongful claims of deductions. However, the Tribunal noted that the AO recorded reasons for reopening twice, which indicated a lack of application of mind. The Tribunal emphasized that there must be tangible material for the belief that income has escaped assessment, and mere change of opinion does not confer jurisdiction to reassess. The Tribunal referred to the Supreme Court's judgment in CIT vs. Kelvinator of India Ltd., which held that reassessment must be based on new tangible material and not on a mere change of opinion. Consequently, the Tribunal quashed the reassessment proceedings, deeming them invalid.

2. Disallowance of Deduction Claimed under Section 80IB of the Income Tax Act, 1961:

The AO disallowed the deduction claimed under Section 80IB, amounting to ?25,05,619/-, on the grounds that certain incomes (export incentives, fabrication charges, sizing charges, excise duty refund, discount, and insurance claim) were not derived from the industrial undertaking. The CIT(A) upheld the AO's decision, stating that the AO had independently applied her mind and found that the income had escaped assessment due to wrongful claims. The Tribunal, however, noted that the AO had already examined these claims during the original assessment and allowed them based on the audit reports. The Tribunal found that there was no new material to justify the reassessment and that the AO's action amounted to a change of opinion, which is not permissible. Therefore, the Tribunal allowed the assessee's appeal on this ground.

3. Disallowance of Deduction Claimed under Section 80HHC of the Income Tax Act, 1961:

The AO also disallowed the deduction claimed under Section 80HHC, amounting to ?37,98,609/-, on similar grounds that certain incomes were not derived from the business. The AO argued that the assessee had shown a loss under "Profits of business" and calculated the deduction on 90% of export incentives, which was in contravention of the 5th proviso of Section 80HHC(3). The CIT(A) upheld the AO's decision, but the Tribunal found that the AO had not applied her mind independently and that the reassessment was based on audit objections. The Tribunal reiterated that there was no new tangible material to justify the reassessment and that it was a case of change of opinion. Consequently, the Tribunal quashed the reassessment proceedings and allowed the assessee's appeal on this ground as well.

Conclusion:

The Tribunal concluded that the reassessment proceedings were invalid as they were based on a mere change of opinion and not on any new tangible material. The Tribunal quashed the reassessment proceedings and allowed the assessee's appeal, thereby upholding the original assessment under Section 143(3) and allowing the deductions claimed under Sections 80IB and 80HHC.