2022 (9) TMI 1039 - HC - Income Tax

Validity of Reopening of assessment u/s 147 - disallowance of deduction on reversal of provision - AO disallowed the claim made under Section 10(23G) - HELD THAT - Undisputed facts of the case are, before passing the Assessment Order on 16.11.2011 under Section 143(3) of the Act, the AO had sent a questionnaire vide his communication dated 04.05.2011 calling for explanation from the assessee. In response, the assessee submitted its reply on 04.07.2011 and 05.10.2011 and explained that provisions were created with regard to the technical fees for the A.Y.2003-04 to 2007-08 and had not deducted the tax during the respective years and the same was disallowed under Section 40(a) of the Act. Further, assessee did not make any payment and reversed the provision during the year ending March 31, 2008. In substance, assessee's case is, the original provision was not allowed as deduction and therefore reversal of the same cannot be taxed again. Revenue is not without remedy and it can invoke power under Section 263 of the Act where an AO incorrectly applies the law or comes to a wrong conclusion and income chargeable to tax had escaped assessment - initiation of reassessment proceedings will be invalid on the ground of change of opinion. A careful perusal of the re-assessment order and the orders passed by the CIT(A) and the ITAT shows that the same are contrary to the law laid down by the Apex Court as the re-assessment is based on 'change of opinion'. Admittedly, the AO has stated that the issue was 'inadvertently' allowed by him without verifying the reversal of provision. This view amounts to change of opinion and therefore, the reassessment proceedings are invalid. Hence, this appeal merits consideration.

Summary

Issues Involved:
1. Validity of re-assessment order bringing certain amounts to tax on reversal of provisions.
2. Justification of action in bringing certain amounts to tax without proving nexus between provisions disallowed in earlier years and reversal of provisions.
3. Right of the Tribunal to direct the assessing authority to verify the provision credited to P&L A/c.

Analysis:

Issue 1: Validity of re-assessment order on reversal of provisions
The case involved two appeals challenging the order passed by the ITAT in relation to the re-assessment order. The AO had disallowed certain deductions and added back amounts on the ground of non-deduction of tax at source. The CIT(A) partially allowed the appeal but confirmed the disallowance of deductions on reversal of provisions. The ITAT dismissed the appeal, leading to the current challenge. The argument focused on whether the AO had the power to disallow deductions that were previously allowed inadvertently. The Tribunal held that the reassessment proceedings were invalid as they were based on a change of opinion, contrary to the law laid down by the Apex Court.

Issue 2: Nexus between disallowed provisions and reversal of provisions
The Tribunal considered whether the appellant had failed to prove the nexus between provisions disallowed in earlier years and the reversal of provisions in the assessment year in question. The argument centered on the acceptance of the appellant's explanation by the AO in the original assessment order. It was contended that the AO could not review his earlier decision on the ground of inadvertent allowance. Citing legal precedents, it was established that the AO's acceptance of the explanation in the original assessment precluded the disallowance of deductions subsequently. The Tribunal found that the AO's view amounted to a change of opinion, rendering the reassessment proceedings invalid.

Issue 3: Verification of provision credited to P&L A/c
The Revenue's appeal raised the question of whether the Tribunal had the right to direct the assessing authority to verify the provision credited to the Profit & Loss Account. The argument revolved around the assessing authority's conclusion that no reversal had taken place, leading to the disallowance of deductions. The Tribunal's decision to uphold the appellant's appeal indicated that the reassessment proceedings were based on a change of opinion, contrary to legal principles.

In conclusion, the High Court allowed the appellant's appeal, holding in favor of the assessee against the Revenue. The Tribunal's decision to dismiss the Revenue's appeal was based on the invalidity of the reassessment proceedings due to a change of opinion by the assessing authority.