MUMBAI, JULY 24, 2013: THE issues
before the Bench are - Whether role of the Audit parties is to point
out factual mistakes and not to advise the AO on legal matters and
Whether, if an AO, reopens the assessment on the legal advice of the
audit party, it cannot be held as the formation of an independent
opinion for the purpose of section 147. And the verdict goes against the
Revenue.
Facts of the case
Assessee-company,
engaged in the business of leasing and investment banking, filed its
original return that was assessed u/s 143(3) of the Act on 25.02.2005.
AO determined the total income of the assessee at Rs.90,48,86,939/-under
the normal provisions and at Rs. 85,99,59,539/- u/s.115JB of the Act.
While passing order u/s 143(3) of the Act, AO made the additions on
account of leasing equalisation reserve was added to the total income of
the assessee, while computing the income under the normal provisions of
the Act, but while computing the book profit u/s 115JB of the Act, AO
did not add the said amount. Similarly, provision for investment
valuation was considered by the AO for computing income as per the
provisions of section 115JB of the Act, but same was not considered for
computing income under normal provisions of the Act.
Subsequently,
AO re-opened the case u/s 147 of the Act as he was of the opinion that
there were reasons to believe that certain
income chargeable to tax had escaped assessment. Accordingly, a notice
u/s 148 of the Act was issued. The assessee vide his letter dated
05.01.2006 stated that the original return filed by it should be taken
as the return filed in response to notice issued u/s 148.
During
re-assessment proceedings, the AO asked for various details from the
assessee and after considering the explanation of the assessee certain
additions/disallowances were made in the assessment order passed u/s
143(3) r.w. section 147 of the Act. CIT(A) upheld the action of the AO
in initiating reassessment proceedings.
On further appeal, the ITAT held that,
++
reopening of a completed assessment, is governed by certain principles.
One of the settled principles, in this regard, is that the assessing
authority cannot keep improving his case from time to time and that the
reassessment proceedings have to stand or fall on the basis of what is
stated in
the reasons recorded u/s.148(2) and nothing more. Secondly, it can
hardly be disputed that once the AO notices a certain claim made by the
assessee in the return filed, has some doubt about eligibility of such a
claim and, therefore, raises queries, extracts response from the
assessee, thereafter in what manner such claim should be treated in the
final order of assessment, is an issue on which the assessee would have
no control whatsoever. Whether the AO allows such a claim, rejects such a
claim or partially allows and partially rejects the claim, are all
options available with the AO, over which the assessee beyond trying to
persuade the AO, would have no control whatsoever;
++ if the AO
on his own for reasons best known to him, chooses not to assign reasons
for not rejecting the claim of an assessee after thorough scrutiny, it
can hardly be stated by the Revenue that the AO cannot be seen to have
formed any opinion on such a claim. Such a
contention, would be devoid of merits. If a claim made by the assessee
in the return is not rejected, it stands allowed. If such a claim is
scrutinised by the AO during assessment, it means he was convinced about
the validity of the claim. His formation of opinion is thus complete.
Merely because he chooses not to assign his reasons in the assessment
order would not alter this position. It may be a non-reasoned order but
not of acceptance of a claim without formation of opinion. In other
words, in a situation where the AO during scrutiny assessment, notices a
claim of exemption, deduction or such like made by the assessee, having
some prima facie doubt raises queries, asking the assessee to satisfy
him with respect to such a claim and thereafter, does not make any
addition in the final order of assessment, he can be stated to have
formed an opinion whether or not in the final order he gives his reasons
for not making the addition;
++
jurisdictional High Court, in the case of Export Credit Guarantee Corporation of India Ltd. (2013-TIOL-56-HC-MUM-IT),
has held that when an assessment is sought to be reopened within a
period of four years from the end of the relevant assessment year, the
test to be applied is whether there is tangible material to do so. What
is tangible is something which is not illusory, hypothetical or a matter
of conjecture. Something which is tangible need not be something which
is new. Thus, the most important factor to issue notice u/s.148 of the
Act is existence of tangible material;
++ the AO even within a
period of four years cannot reopen an assessment merely on the basis of a
change of opinion. The AO has no power to review an assessment which
has been concluded. But, where he has tangible material to come to the
conclusion that there is an escapement of income from assessment, the
power to reopen can be exercised. In the case under
consideration only tangible material referred to by the AO is his
errors in including/excluding certain items of income while calculating
the income of the assessee under the normal provisions or under MAT
provisions;
++ reassessment proceedings were initiated by the AO
after objections were received from the internal audit party, the dates
of audit objections and the dates of issue of notice u/s. 148 establish
the fact that there was nexus between the two. From the sequence of the
events it is clear that the AO had issued the notice for reopening after
considering the issues raised by the audit party. The items involved in
the audit objections find place in the reasons recorded by the AO.
While passing the original assessment order, AO had called for the
details about lease equalisation reserve as well as about the writing
off of non- performing assets. Question No. 16 & 18 of the
questionnaire issued by the AO on 16.11.2004 is about these
two issues. After considering the submissions of the assessee, AO
decided that lease equalisation reserve and provision of diminution in
investment has to be given particular treatment. One of the items was
taxed under normal provisions and not under MAT provisions, whereas the
other item was considered for MAT provisions and not for computation
under normal provisions of the Act. Thus, an informed decision was taken
by the AO about both the items. In these circumstances, if AO decided
to issue a fresh notice for reopening the completed assessment, it has
to be treated as change of opinion. It can also be said that the order
of assessment that was passed by the AO u/s 143(3) is not silent in
respect of points on the basis of which the assessment was sought to be
reopened. There is merit in the contention which has been urged on
behalf of the assessee that queries had been raised during the course of
the assessment and the assessment order would ex facie
disclose that the AO had applied his mind to the points on the basis of
which the assessment was now sought to be reopened. Thus, no tangible
material existed to reopen the assessment in the present case;
++
role of the Audit parties is to point out the factual mistakes and not
to advise the AO on legal matters. Therefore, if an AO, reopens the
assessment on the legal advice of the audit party, it cannot be held
forming of an independent opinion. Whether a particular item has to be
added or not while computing the income under normal provisions or MAT
provisions is an issue to be decided by the AO. He is the only person to
interpret the law pertaining to computation of income as per the
provisions of section 115 JB of the Act. It is not the case that AO had
not called for any details from the assessee in this regard. He analysed
the pieces of information supplied by the assessee about both the
issues and later on decided to assess the income in a
particular manner. It is noteworthy that order was passed by a senior
officer of the department i.e. by Additional CIT in the case under
consideration an experienced officer has taken a view after considering
the relevant facts and law.He has not initiated reassessment proceedings
on his own. As stated earlier, 148 notice was issued after receiving
objection from audit party. It is true that, while initiating 147
proceedings, he has not mentioned that reason for reopening was not the
audit objections. But, if we consider the surrounding circumstances it
is clear that trigger point was the objections raised by the audit
party;
++ considering the particular facts and circumstances of
the case under consideration, reopening was result of change of opinion.
Fact that the AO did not record reasons for computing income under
normal/MAT provisions, would be of no consequence. Therefore, the notice
u/s. 148 in the present case was issued without
jurisdiction.