Re-Assessment merely on direction from Superiors is Invalid

Full Text of the ITAT Order is as follows:-

Both these appeals filed by the revenue are directed against the orders of the learned Commissioner of Income-tax(A)- V, Hyderabad, both, dated 18/11/2016 for AYs 2002-03 and 2003-04. The assessee also filed C.O.s against the said orders of CIT(A). As the issue is identical in both the appeals, they were clubbed and heard together and, therefore, a common order is passed for the sake of convenience.2. Briefly the facts of the case, as taken from AY 2002-03, are that assessee is engaged in the business of generation and distribution of power. For the AY 2002-03, it had originally filed return of income on 25/10/2002 admitting NIL income after claiming deduction u/s 80IA of the Act. The said return was processed u/s 143(1) of the Act. Subsequently, the assessment was reopened u/s 147 by issuing notice u/s 148. The AO vide letter dated 04/02/2008 communicated the reasons to the assessee for reopening the assessment which are as under:

“While allowing deduction u/s 80IA the other income of Rs. 20,08,749/- was also considered for calculating deduction u/s 80IA, which is not correct. Since the income asses sable to tax has escaped assessment by incorrect allowance of deduction u/s 80IA, the assessment is reopened.”

Accordingly, assessment was completed u/s 144 rws 147 of the Act on 19/12/2008 by treating the said sum of Rs. 20,08,749/- under the head ‘income from other sources’. AO also made various additions.

3. When the assessee carried the matter in appeal before the CIT(A), the CIT(A) allowed various grounds raised by the assessee including the ground of addition of Rs. 20,08,749/- treating the same as ‘income from other sources’ in order to deny the assessee’s claim of deduction u/s 80 IA, which is the subject matter of appeal now.

4. Aggrieved by the order of the CIT(A), the revenue is in appeal before us raising the following grounds of appeal, which are common in both the appeals except the quantum of addition:

1. The CIT(A) is erred in law and on facts.

2. The CIT(A) ought to have upheld the dis allowance of deduction u/s.80IA w.r.t. interest income of Rs. 20,08,749/- on merits as the interest on term deposits, is not derived from business but is to be treated as income from other sources instead of income from business.

3. Any other ground that may be urged at the time of hearing.”

5. These appeals were dismissed by this Bench due to tax effect as per Circular No. 21/2015. Subsequently, Department filed M.A. No. 59 & 60/Hyd/2016 requesting for recall of the appeals as the same are falling under exceptional categories of 8(c) of the Circular No. 21/2015, consequent to the revenue audit, which were accepted by the Department. Accordingly, these appeals were recalled and heard.

6. Ld. AR submitted that these appeals were recalled due to objection raised by audit party, these appeals were reopened on the behest of ACIT on 20/11/2007 consequent to the audit objection. He brought to our notice the letter copy of ACIT, dated 21/06/2007, in which, the audit objection was discussed and subsequent to that on 20/11/2007, ACIT advised the AO to reopen the assessment and accordingly, AO reopened the assessment 21/11/2007, it is clear from the order sheet copy submitted by the department. It shows that AO has not recorded the satisfaction applying his independent mind. In that process, he relied on the decision of the coordinate bench of ITAT, Hyderabad in the case of Keerti Industries Ltd. ITA No. 754/Hyd/2015, in which, the bench has dismissed the appeal under similar circumstances.

7. Based on the above objection from the ld. AR, the Bench asked for the assessment records and replies, proceedings on such audit Ld. DR submitted copies of replies to the audit parties and copies of order sheet for initiation of reassessment proceedings.

8. Ld. DR submitted that the department has to function by following internal procedures Whenever the audit findings are forwarded, CIT will review the replies to the audit party and legal issues and direct the Officers accordingly. Based on the above procedures, AO was asked to reopen the assessment. Further, he submitted that any cogent material can be brought to the notice of AO, even by the audit parties, AO can take appropriate actions. He relied on the judgment of the Hon’ble Supreme Court in the case of PVS Beadies Pvt. Ltd., 237 ITR 13. He vehemently argued that AO has in fact recorded his satisfaction before initiating reassessment proceedings and it is proper.

9. Ld. AR, again, objected to such reopening of the assessment and relied on the decision of the coordinate bench in the case of Keerthi Industries (supra).

10. Considered the rival submissions and perused the material facts on record. We have considered various letters and communication filed by the ld. DR. It is clear from the record that AO has initiated reassessment proceedings only on the direction of ACIT and, moreover, AO has defended the case before audit parties. It gives an impression that AO was satisfied and believed that the original assessment was proper and the assessee has merit in its claim as per the return of income. Only on the behest of internal communication and direction from superiors, he has initiated reassessment It clearly shows that the AO has not applied his mind independently to initiate the proceedings u/s 147 and not recorded the satisfaction before initiating the proceedings. We are bound by the decision of the coordinate benches that AO has not recorded proper satisfaction before initiating proceedings u/s 147. Accordingly, we follow the decision in the case of Keerthi Industries Ltd., (supra) wherein the coordinate Bench has decided the issue, under similar circumstances as in the present case, as under:

“8. Considering the submissions of both the counsels and material facts on record, we find that the AO had reopened the assessment on the ground that the waiver of loan by the bank has escaped assessment. The same was pointed out in the audit objection. We have perused the audit objection and the reasons recorded by the AO for reopening the assessment. No doubt, on record the reasons recorded by the AO are based on his own reasons of view, but, the same was indulged on findings of the audit objection raised by the audit party as it can be considered as it will fall in the similar situation as held in the case of CIT Vs. PVS Beadies (supra). But as the findings recorded by CIT, the timings of the correspondence of Addl. CIT, which is dated 13/03/20 13 and timings of the notice u/s 148, which was issued on 26/03/20 13 clearly shows that the reopening was done on the behest of the Addl. CIT. It clearly shows that the AO had not applied his mind independently even though the reasons recorded on the basis of the factual error pointed out by the audit party. The reasons for reopening an assessment need to be based on tangible material which has a live-link with the formation of the belief that there was an escapement of income. For this proposition, CIT relied on the decision of the Hon’ble Supreme Court in the case of CIT Vs. Kelvinator of India Ltd., 320 ITR 561. Therefore, we do not find any infirmity in the order of CIT(A) in quashing the reopening of assessment made by the AO u/s 147 of the Act. Accordingly, ground No. 2 is dismissed.”

Following the above decision, we dismiss the appeals filed by the revenue.

11. In the C.Os., the assessee has raised the following objections:

“1. The assumption of jurisdiction u/s 147 by the AO is bad in law.

2. The assessment was admittedly reopened on the basis of an audit objection and as per the directions of the CIT as stated in the communication in F.No. Review/CIT-VI/07-08, dated 19/11/2007 of The CIT-VI, Hyd.

3. It is thus clear the AO had not applied his mind independently and came to the conclusion that there was escapement of income; and that provisions of section 147 are attracted to the case.

13. As we have dismissed the appeals of the revenue on validity of reassessment u/s 147, the grounds raised by the assessee to object the initiation of proceedings u/s 147 on the behest of audit objection, we have adjudicated in its favour, accordingly, grounds raised by the assessee in its COs are allowed.

14. In the result, both the appeals of revenue are dismissed and the Cos file by the assessee are allowed.

Pronounced in the open court on 15^th November, 2017.