2011 (8) TMI 655 - AT - Income Tax

Tribunal Invalidates AO's Reopening; Allows Some Claims

The Tribunal held that the Assessing Officer's reopening of the assessment under Section 147 was invalid due to lack of tangible material, as previous ... Re-assessment under 147 - Change of opinion - Intimation under 143(1) - deduction claimed under 35D was restricted to 3,43,138 - Revenue appealed before Commissioner and thereafter Tribunal, however appeal was turned down both the times - in later years notice under 148 issued - Held That:- Reason has been clearly stated by the assessing authority that the quantum of relief claimed by the assessee under section 35D was not correct as claimed.The fact that for certain assessment years the issue has been decided by the Commissioner of Income-tax (Appeals) in assessee's favour cannot be a better to the Assessing Officer in exercising his jurisdiction under section 147. Thematic interpretation of the words 'reason to believe' - held that:- The thematic interpretation of the words 'reason to believe' should not be unreasonable. Judicial pronouncements have almost unanimity in their view that the reason needs to be a 'prima facie reason' to believe that income has escaped assessment. The assessing authority need not have a conclusive view that income has escaped assessment so as to initiate the reassessment proceedings. The final view will emerge only on conclusion of the reassessment, or after considering the objections raised by the assessee. What is necessary to reopen an assessment is not the final verdict but a prima facie reason. Expenditure in respect of exempt income - applicability of proviso to 14A - Held That:- By majority it was held that Notice under 148 was issued to make assessment of expenses under 35D, therefore Assessing Officer is justified in dealing with the issue arising under section 14A as well. Issues Involved:1. Jurisdiction of the Assessing Officer (AO) under Section 147 of the Income-tax Act, 19612. Disallowance of Expenditure under Section 14A of the Income-tax Act, 19613. Allowance of Electricity Charges4. Allowance of Depreciation on Certain Items5. Levy of Interest under Section 234D of the Income-tax Act, 1961Issue-Wise Detailed Analysis:1. Jurisdiction of the Assessing Officer (AO) under Section 147 of the Income-tax Act, 1961The primary issue was whether the AO had valid jurisdiction to reopen the assessment under Section 147. The assessee argued that no fresh material was available, and the AO had no tangible material to believe that income had escaped assessment, especially since appellate authorities had consistently ruled in favor of the assessee for earlier years. The AO's reason for reopening was based on the restriction of the claim under Section 35D for earlier years, which had been overturned by appellate authorities.The Tribunal, after considering the arguments and relevant case laws, concluded that the AO could not have had a reason to believe that income had escaped assessment when appellate authorities had consistently ruled in favor of the assessee. Therefore, the reopening of the assessment was held to be invalid, and the reassessment proceedings were quashed.2. Disallowance of Expenditure under Section 14A of the Income-tax Act, 1961The Revenue challenged the CIT(A)'s deletion of the disallowance made by the AO under Section 14A. The AO had disallowed a portion of the expenses related to exempt income, which the CIT(A) had deleted. The Tribunal noted that the proviso to Section 14A specifically barred the AO from making reassessment for any assessment year prior to AY 2002-03 for invoking Section 14A. The Tribunal upheld the CIT(A)'s decision, stating that the specific bar in the proviso saved the assessee from being visited with a liability under Section 14A for any AY prior to AY 2002-03.However, the Third Member disagreed, stating that once an assessment is reopened for a valid reason, the AO can deal with any issue that surfaces during the reassessment proceedings. Therefore, the AO was justified in dealing with the issue under Section 14A. The matter was remitted to the AO to work out the quantum of disallowance afresh.3. Allowance of Electricity ChargesThe Revenue's appeal included a ground regarding the allowance of electricity charges paid by the assessee to M/s Wescare. The CIT(A) had allowed the claim based on the Tribunal's decision for AY 1998-99, which held that the appellant could not be treated as the owner of WTGs and that the electricity charges should be allowed. The Tribunal upheld the CIT(A)'s decision, noting that the Revenue had not provided any new evidence to warrant a different approach for the impugned AY.4. Allowance of Depreciation on Certain ItemsThe AO had disallowed the claim of 100% depreciation on certain items, which the assessee argued should be allowed as normal business expenditure if not as depreciation. The CIT(A) found that except for the overhauling of generator sets, all other expenses were revenue in nature and directed the AO to allow the claim. The Tribunal upheld the CIT(A)'s decision, agreeing that the expenses were either spares or repairs and should be allowed as revenue expenditure.5. Levy of Interest under Section 234D of the Income-tax Act, 1961The Revenue challenged the CIT(A)'s deletion of interest under Section 234D. The Tribunal noted conflicting decisions from different High Courts on the retrospective application of Section 234D but chose to follow the decision that supported the assessee, holding that Section 234D would apply from AY 2004-05 only. Therefore, the CIT(A)'s deletion of interest under Section 234D was upheld.Conclusion:- Reopening of Assessment: Quashed as invalid.- Disallowance under Section 14A: Remitted to AO for fresh quantification.- Electricity Charges: Allowed as per CIT(A)'s decision.- Depreciation on Certain Items: Allowed as revenue expenditure.- Interest under Section 234D: Deletion upheld.The appeal of the Revenue was partly allowed for statistical purposes, and the cross-objections of the assessee were dismissed.