2022 (4) TMI 859 - AT - Income Tax

Reopening of assessment u/s 147 - Proof of fresh tangible material - whether reopening of assessment is based on reasonable belief of escapement, which suggest escapement of income on the basis of fresh tangible material or mere change of opinion on the issue which has been deliberated upon by the AO during the scrutiny assessment proceedings? - HELD THAT - The facts born out from records clearly indicate that the Assessing Officer has examined issue of compensation paid by the assessee for breach of contract with his employer company and has allowed claim which is evident from fact that the Assessing Officer has left a note not to the assessee in the assessment records as per which, it is clearly evident that the Assessing Officer has applied his mind before allowing claim of the assessee. Reasons recorded by the Assessing Officer to form reasonable belief of escapement is based on audit objection, as per which the audit party also noted that as per note not to the assessee from assessment records, the audit party has raised objection on the issue of deduction allowed towards expenses claimed by the assessee. Basis for reopening of assessment is audit objection and further, which is based on note not to the assessee given on assessment records. Except this, there is no fresh tangible material in the possession of the Assessing Officer to form reasonable basis of escapement of income - once it is noted that basis for reopening of assessment is note not to the assessee available on record, then it is implied that the Assessing Officer had very clearly and definitely formed opinion on the issue and thus, reopening of assessment on the very same issue amounts to change of opinion, which is not permissible under the law. Since, there is no fresh tangible material, except note not to the assessee , with the Assessing Officer to form reasonable belief of the escapement, we are of the considered view that the AO had applied his mind to the issue in the original assessment proceedings and has allowed deduction. Therefore, reopening of assessment on the very same issue in absence of any fresh tangible material amounts to clear case of change of opinion, which is not permissible under the law. CIT(A), after considering relevant facts has rightly quashed the assessment proceedings. Hence, we are inclined to uphold findings of the learned CIT(A) and reject grounds taken by the revenue.

Summary

Issues Involved:
1. Validity of reassessment proceedings based on the ground of "change of opinion."
2. Allowability of compensation paid by the assessee as a business expenditure under Section 37(1) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Validity of Reassessment Proceedings Based on "Change of Opinion":

The Revenue challenged the order of the Commissioner of Income Tax (Appeals) [CIT(A)], arguing that the CIT(A) erred in holding that the Assessing Officer (AO) had made a change of opinion. The CIT(A) quashed the reassessment by treating it as a change of opinion, emphasizing that the AO's decision was influenced by audit objections without any fresh tangible material. The CIT(A) relied on the Supreme Court's decision in CIT Vs Kelvinator of India Ltd (2010) 320 ITR 561, which states that reopening assessments based on a change of opinion is not permissible under the law. The CIT(A) also referenced the Karnataka High Court's decision in CIT Vs. Hardware Trading Company Ltd. (2001) 248 ITR 673, which held that reopening assessments without new material amounts to a change of opinion.

The Tribunal upheld the CIT(A)'s decision, noting that the AO had examined the issue of compensation paid by the assessee during the original assessment proceedings and had allowed the claim. The Tribunal found that the reassessment was based solely on an audit objection and a note in the assessment records, without any fresh tangible material. The Tribunal concluded that reopening the assessment on the same issue without new material constitutes a change of opinion, which is not permissible under the law.

2. Allowability of Compensation Paid as Business Expenditure:

The assessee, a President of a company, diverted contracts to his own business, leading to a settlement with his employer to avoid criminal prosecution. The assessee paid ?1.5 crores as compensation and surrendered 9000 equity shares, claiming this as a business expenditure under Section 37(1) of the Income Tax Act, 1961. The AO initially allowed this deduction but later disallowed it during the reassessment, arguing that the compensation was penal in nature and not related to the assessee's business income.

The CIT(A) and the Tribunal both found that the AO had already formed an opinion on this issue during the original assessment proceedings. The Tribunal reiterated that the AO's reassessment was based on an audit objection and not on any fresh tangible material. Therefore, the Tribunal upheld the CIT(A)'s decision to quash the reassessment proceedings, concluding that the reassessment was a mere change of opinion and not justified under the law.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to quash the reassessment proceedings on the grounds of change of opinion. The Tribunal also dismissed the assessee's cross-objection as infructuous, given the dismissal of the Revenue's appeal. The judgment emphasized that reopening assessments based on audit objections without fresh tangible material amounts to a change of opinion, which is not permissible under the law.