2022 (1) TMI 652 - HC - Income Tax

Validity of Reopening of assessment u/s 147 - Entitlement to exemption u/s 80P(2) - change of opinion - appellant/assessee is a Co-operative Society governed by the Karnataka Cooperative Societies Act, 1959 and is engaged in the business of banking providing loans and advances to its needy members and similarly collects deposits only from its members and pays interest only to its members - HELD THAT - What could be gathered is that the assessing officer had no independent reason to believe that the deduction claimed by the assessee under Section 80P(2) being the profit on sale of securities was not allowable, as the same has to be charged under the head Capital Gain and is not a gain from the banking business. This would clearly establish that there was no independent application of mind by the Assessing Officer. Indeed the assessing officer objected to the audit objection in giving a reply to the same. On the other hand, the assessing officer was of the firm opinion that the assessment concluded under Section 143(3) of the Act was passed in consonance with various judicial pronouncements and there is no escapement of income. In the case of P.C.Patel Co. v. Dy.CIT 2015 (8) TMI 722 - GUJARAT HIGH COURT as held that any reassessment proceedings initiated at the instance of audit party objection, without the assessing officer himself has reason to believe that the income chargeable to tax having escaped the assessment, must fail. This is the view expressed by the Coordinate Bench of this Court in the case of Commissioner of Income-tax v. GMR Holdings (P) Ltd., 2018 (9) TMI 353 - HIGH COURT OF KARNATAKA AT BANGLORE . Thus on the ground of change of opinion the substantial question of law raised herein require to be answered in favour of the assessee and against the revenue.

Issues Involved:
1. Validity of the reopening of the assessment.
2. Compliance with mandatory conditions for issuing a notice under Section 148.
3. Legality of the notice under Section 148 and subsequent proceedings.
4. Classification of income under the head Capital Gain versus income from business and applicability of exemption under Section 80P(2)(a)(i).

Detailed Analysis:

1. Validity of the reopening of the assessment:
The Tribunal upheld the reopening of the assessment under Section 147/148 of the Income Tax Act, 1961. The appellant argued that the reopening was based on a mere change of opinion without any new material or information. The court referenced the Supreme Court's judgment in Commissioner of Income-tax v. Kelvinator of India Ltd., emphasizing that post-1st April 1989, the power to reopen is broader but must be based on "tangible material" indicating escapement of income. The court found that the Assessing Officer (AO) had no independent reason to believe that the income had escaped assessment, relying solely on an audit objection.

2. Compliance with mandatory conditions for issuing a notice under Section 148:
The appellant contended that the mandatory conditions for issuing a notice under Section 148 were not met. The court reviewed the reasons recorded by the AO, which indicated that the AO had initially accepted the appellant's claim under Section 80P(2) but later issued a notice based on an audit objection. The court concluded that the AO's action lacked independent application of mind and was merely influenced by the audit query, thus failing to comply with the mandatory conditions for reopening the assessment.

3. Legality of the notice under Section 148 and subsequent proceedings:
The court examined whether the notice under Section 148 and the subsequent proceedings were legally valid. It was found that the AO had initially agreed with the appellant's claim for exemption under Section 80P(2), and the reopening was prompted by an audit objection rather than new information or material. Citing precedents, the court held that reassessment proceedings initiated solely on audit objections, without the AO's independent belief of income escapement, are invalid. Therefore, the notice under Section 148 and the subsequent proceedings were deemed illegal.

4. Classification of income under the head Capital Gain versus income from business and applicability of exemption under Section 80P(2)(a)(i):
The Tribunal had held that the amount of ?44,53,500/- should be assessed as Capital Gain and not as income from business, thereby denying the exemption under Section 80P(2)(a)(i). The appellant argued that the profit from the sale of securities was part of its regular banking business and should be exempt under Section 80P(2). The court, however, did not delve into this issue in detail, as it had already determined that the reopening of the assessment was invalid due to a change of opinion. Consequently, this issue became academic and was not addressed further.

Conclusion:
The court concluded that the reopening of the assessment was based on a change of opinion and lacked independent application of mind by the AO. Therefore, the substantial questions of law regarding the validity of the reopening, compliance with mandatory conditions, and legality of the notice under Section 148 were answered in favor of the assessee. The appeal was allowed, rendering the issue of income classification and exemption academic.

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