Introduction: In a recent decision by ITAT Ahmedabad, the guidelines surrounding the initiation of re-assessment proceedings under section 147 of the Income Tax Act came to light. The case in point was “Telecon Consultancy Services LLP Vs ACIT”, where the crux of the matter was whether the Assessing Officer (AO) could initiate proceedings without any tangible evidence indicating the escape of income.
Analysis: The dispute initiated when the AO, based on previous records, believed there was an evasion of tax and initiated the re-assessment process. The AO’s stance was primarily based on the misclassification of interest income and business losses. However, the Assessee challenged the AO’s action, arguing that there were no new tangible materials or evidence to support the re-assessment, calling it merely a “change of opinion”.
Further, the Assessee stressed that the original assessment was done for specific scrutiny items, and there was no discussion regarding the items that the AO raised during the re-assessment.
The primary argument of the Assessee was that the AO had taken action based solely on documents already available during the original assessment without any fresh evidence. As per jurisprudence, if no new tangible material is presented, then re-assessment becomes a mere change of opinion, which is not acceptable under section 147 of the Act.
Conclusion: The ITAT, after considering the arguments from both sides and analyzing past judgments, sided with the Assessee. They concluded that the re-assessment was not based on any fresh tangible material distinct from what was available during the original assessment. As a result, the proceedings under section 147 of the Act were quashed, emphasizing that without new evidence, re-assessment becomes impermissible. The decision serves as a pivotal reminder regarding the sanctity of the re-assessment process and the necessity of tangible evidence.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
1. The captioned appeal has been filed at the instance of the Assessee against the order of the Learned Commissioner of Income Tax (Appeals), Ahmedabad, (in short “Ld. CIT(A)”) arising in the matter of assessment order passed under s. 143(3) r.w.s 147 of the Income Tax Act 1961 (here-in-after referred to as “the Act”) relevant to the Assessment Year 2015-16.
2. The assessee has raised the following grounds of appeal:
1. That the notice issued under section 148 of the Act and subsequent reassessment proceedings and the assessment order passed under section 143(3) by the learned AO is against the law and direction/instruction of the ld. Hon’ble Board and therefore the order passed by the learned AO is to be quashed and accordingly the learned AO be direct to quash the assessment order or accept the returned income.
2. That the learned CIT(Appeal), has erred in law and facts by confirming the action of the learned AO of treating the income under the head Income from other sources as against Business Income and therefore the learnedAO be directed to treat the said interest income as Business Income while computing the total income.
3. That the learned CIT(Appeal), has erred in law and facts by confirming the disallowance of 28,904/- u/s 14A of the Act and accordingly the ld.AO be directed to not to disallow the said amount while computing the income.
4. That your appellant craves a leave to add, alter or amend any grounds at the time of
3. The assessee in ground No. 1 has challenged the validity of the reassessment order framed under section 143(3) read with section 147 of the Act in the absence of fresh tangible materials.
4. The facts in brief are that the assessee in the present case is LLP and it was subject to the assessment under section 143(3) of the Act which was selected under CASS for limited scrutiny for the under mentioned items:
i. Long-term capital gain
ii. Income from heads of income other than business/ profession mismatch
iii. Sales turnover mismatch
4.1 Finally, the assessment was framed under section 143(3) of the Act dated 12 October 2017 accepting the income disclosed by the assessee in the return of income at ₹609,55,32,180.00 only. The breakup of the income disclosed by the assessee in the income tax return stand as under:
|Short-term capital gain||₹183,35,55,560.00|
|ii.||Long-term capital gain||₹395,72,66,557.00
|iii.||Interest income shown under the head business:||₹30,90,55,933.00|
|less brought forward business losses||₹43,45,870.00||₹43,45,870.00|
|Total income as per the return of income||609,55,32,180.00|
5. However, the AO on verification of the case records found that there was no business income shown by the assessee in the income tax return whereas the assessee has set off of the brought forward business losses against the interest income which was to be classified under the head other sources. As per the AO, the business loss brought forward from the earlier year cannot be set off against the income from other sources under the provisions of section 72 of the Act. Thus, as per the AO, the set off of the brought forward business loss against the income from other sources has escaped assessment.
5.1 The AO likewise further found that disallowance under the provisions of section 14A read with rule 8D was to be made for ₹ 28,904.00 but the same has not been made which has resulted the escapement of income. Accordingly, the AO formed reasons to believe that income of the assessee has escaped assessment and initiated the proceedings under section 147 of the Act by issuing notice under section 148 of the Act dated 31st of March 2021. The assessee before the AO objected to the initiation of the proceedings under section 147 of the Act vide letter dated 23 August 2021 which was disposed of by the AO vide order dated 24 August 2021 by dismissing the contention of the assessee.
6. Aggrieved assessee carried the matter before the learned CIT-A who also confirmed the order of the AO.
7. Being aggrieved by the order of learned CIT-A, the assessee is in appeal before us.
8. The learned AR before us contended that the AO has formed reasons to believe that the income of the assessee has escaped assessment merely on verification of the same set of documents which were available during the assessment proceedings. As such there was no fresh tangible material brought on record by the AO from the external sources suggesting that income of the assessee has escaped assessment. According to the learned AR, the reopening under section 147 was made merely based on change of opinion after referring the documents which were available during the assessment proceedings under section 143(3) of the Act.
8.1 It was also contended by the learned AR that the original assessment was carried out under section 143(3) of the Act for the limited items of scrutiny such as long-term capital gain, income from heads of income other than business/ profession mismatch and sales turnover mismatch. There was no whisper during the original assessment proceedings regarding the brought forward of business losses which was set off against the interest income. Similarly, there was no occasion to invoke the provisions of section 14A read with rule 8D of income tax rules during the original assessment proceedings. Accordingly, the learned AR contended that the impugned case was selected for limited scrutiny under the provisions of section 143(3) of the Act, therefore there was no occasion for the AO to touch the issues which were not arising from the limited scrutiny such as set-off of brought forward business losses and the disallowances under the provisions of section 14A read with rule 8D of Income Tax Rules. Thus, the AO during the reassessment proceedings under section 147 of the Act has exceeded the jurisdiction by disturbing those items which were not subject matter of dispute during the original assessment proceedings.
9. The assessee has shown interest income under the head business and profession which was also accepted by the AO during the original assessment proceedings. The AO has accepted the interest income from business and profession which is one of the possible views and therefore the same cannot be disturbed during the assessment proceedings under section 147 of the Act. If it is done so, then it is nothing but mere a change of opinion which is not permitted for initiating the proceedings under section 147 of the Act.
10. On the contrary, the learned DR vehemently supported the order of the authorities below.
11. We have heard the rival contentions of both the parties and perused the materials available on record. At this juncture, we find relevant to refer part of the reasons recorded by the AO for initiating the proceedings under section 147 of the Act which are reproduced as under:
2.1 On verification of the case records, it is noticed from income and expenditure account for the period 21.05.2014 to 31.03.2015 ===========
11.1 What is emerging from the above reasons is this that the AO has initiated the proceedings after verification of the case records which implies that there was no fresh tangible material available on record distinct from what was available during the original assessment proceedings. Thus, in the absence of any fresh material coming to the notice of the AO giving rise to draw the reasons to believe that the income of the assessee has escaped assessment, in our considered view, is without any basis and therefore the proceedings initiated under section 147 of the Act is liable to be quashed. In holding so, we draw support and guidance from the judgement of Hon’ble Gujarat High Court in the case of Ball Aerosol Packaging India (P.) Ltd. v. Assistant Commissioner of Income tax reported in 150 taxmann.com 189 wherein it was held as under:
12. At this stage, as we have noticed that the entire reassessment is not on the basis of any fresh tangible material distinct from what was already available during the assessment proceedings, and as such, the petitioner has made out a case to fall within the proposition as laid in the case of Shanti Enterprise (supra). Since we have considered the same, the observations as contained in Para-11, we may deem it proper to quote herein below;
11. The contention of the Revenue that the impugned action is within the period of four years and, therefore, it is always open for the authority to reopen the assessment cannot be accepted. Simply because the action is within the period of four years would not give a leverage to the authority to just go on repeating the exercise of examining the issue which has already been gone into. There appears to be no tangible material distinct from what was made a part of the assessment proceedings and, therefore, reopening of the assessment is not permissible. The proposition of law is aptly clear, as stated above and, therefore, in our opinion, permitting the authority to reopen the assessment would not be valid. We cannot shut our eyes over the aforesaid circumstance simply because it is within the period of four years and having regard to the decisions of Apex Court which propounded that the Courts would be failing to perform their duty, if reliefs were refused without adequate reasons, we see that the action on the part ofthe respondent authority is impermissible in view of aforesaid set of circumstance. The observations made by the Apex Court in case of Calcutta Discount Co. Ltd. v. ITO reported in [41 ITR 191 at page 195 head-note (v) are worth to be reproduced hereafter:
“That though the writ of prohibition or certiorari would not issue against an executive authority, the High Courts had power to issue in a fit case an order prohibiting an executive authority from acting without jurisdiction. Where such action of an executive authority, acting without jurisdiction subjected, or was likely to subject, a person to lengthy proceedings and unnecessary harassment, the High Courts would issue appropriate orders or directions to prevent such consequences. The existence of such alternative remedies as appeals and reference to the High Court was not, however, always a sufficient reason for refusing a party quick relief by a writ or order prohibiting an authority acting without jurisdiction from continuing such action. When the constitution conferred on the High Courts the power to give relief it becomes the duty ofthe Courts to give such relief in fit cases and the courts would be failing to perform their duty if relief were refused without adequate reasons.”
11.2 In view of the above, we are of the opinion that the reopening is not as per the provisions of law but based on the same set of documents which were available during the original assessment proceedings. Accordingly, we quashed the proceedings initiated under section 147 of the Act. Hence, the ground of appeal of the assessee is hereby allowed.
11.3 As we have decided the issue raised by the assessee on technical ground in its favour and quashed the assessment order framed under section 147 of the Act in itself, we do not find any reason to decide the issue raised by the assessee on merit. As such the issues raised by the assessee on merit do not require any separate adjudication and become infructuous. Accordingly, we dismiss the same.
12. In the result, the appeal filed by the assessee is partly allowed.
Order pronounced in the Court on 02/08/2023 at Ahmedabad.