2013 (5) TMI 665 - HC - Income Tax

Invalidity of Notice under Section 148: Change of Opinion renders reassessment order for bad debts and royalty additions void.

The court held that the notice issued under Section 148 of the Income-tax Act, 1961, and all subsequent proceedings were invalid due to a change of ... Reopening of assessment - unaccounted bad debts/ advances written off - Held that:- In the present case AO had clearly raised a specific query with regard to bad debts/ advances written off and the petitioner/assessee had given details in respect thereof. It is obvious that since no such addition was made on that count, the AO had considred and examined the position and held in favour of the petitioner/assessee. Therefore, it can be safely concluded that, in the facts and circumstances of the present case, the assessing officer had, indeed, examined the issue at the time of the original assessment proceedings and had formed an opinion by not making any addition in respect thereof. Thus, the reopening of the assessment which had been concluded on 13.03.2006, would be nothing but a mere change of opinion. Revenue's submission that the point of bad debts written off may have been missed by the AO inasmuch as the present case was a complicated matter - Held that:- AO had finally raised only 4 issues, one of them being the issue of bad debt/advances written off. Therefore, it is not as if the AO had lost sight of the issue of bad debts/advances. In fact, he had specifically raised queries in this regard towards the fag end of the assessment proceedings and therefore it must be presumed that he was very much alive to the issue. Also in the reasons recorded for reopening AO does not says that he missed it as it revealed that AO in the second round was of the view that the addition should have been made in respect of bad debts/advances amounting to Rs. 40 lakhs because of the fact that it was on the capital account. Had the assessing officer felt that this point had been missed out in the first round he would have been stated so. The reasons as recorded also belie the contention raised by the respondent. Thus the notice u/s 148 is invalid - In favour of assessee. Issues Involved:1. Validity of the notice issued under Section 148 of the Income-tax Act, 1961.2. Initiation of proceedings under Section 147 of the Income-tax Act, 1961.3. Allegation of change of opinion in reopening the assessment.4. Reassessment order passed despite court's stay.5. Rejection of objections filed by the petitioner against the reopening of assessment.6. Addition of bad debts and royalty in the reassessment order.Detailed Analysis:1. Validity of the Notice under Section 148:The writ petition challenges the notice dated 18.04.2007 issued under Section 148 of the Income-tax Act, 1961, for the assessment year 2003-04. The petitioner contends that the notice is invalid as it is based on a change of opinion. The court notes that the original assessment order under Section 143(3) was passed on 30.03.2006, where specific queries regarding bad debts were raised and answered by the petitioner. The assessing officer did not make any disallowance regarding bad debts in the original assessment, implying that he had formed an opinion. Therefore, the reopening of the assessment on the same issue is invalid.2. Initiation of Proceedings under Section 147:The court examines the initiation of proceedings under Section 147, which allows reassessment if the assessing officer has reason to believe that income has escaped assessment. The reasons provided for reopening the assessment were that bad debts written off amounting to Rs. 40 lakhs should have been disallowed as they were on the capital account. The court observes that this issue was already examined during the original assessment, and thus, reopening on the same ground constitutes a change of opinion, making the initiation of proceedings under Section 147 invalid.3. Allegation of Change of Opinion:The petitioner argues that the reassessment proceedings are based on a change of opinion, which is not permissible. The court refers to the decision in CIT v. Usha International Ltd., which outlines that reassessment is invalid if the issue was examined in the original assessment and no addition was made. Since the assessing officer had raised specific queries about bad debts, and the petitioner had provided detailed responses, the court concludes that the officer had formed an opinion. Therefore, reopening the assessment on the same issue is a change of opinion and invalid.4. Reassessment Order Passed Despite Court's Stay:Initially, the court had granted a stay on passing the reassessment order, but the proceedings were allowed to continue. Despite this, the reassessment order was passed on 22.11.2007, which was subsequently stayed by the court on 27.03.2008. The court is more concerned with the validity of the notice under Section 148 and the initiation of proceedings under Section 147 rather than the fact that the reassessment order was passed despite the stay.5. Rejection of Objections Filed by the Petitioner:The petitioner filed objections on 10.10.2007 against the reopening of the assessment, arguing that the issue of bad debts had already been considered in the original assessment. The assessing officer rejected these objections, stating that no opinion was formed initially as the issue was not debated. The court disagrees, noting that the specific query and detailed response indicate that the issue was examined, and thus, an opinion was formed. Consequently, the rejection of objections is not justified.6. Addition of Bad Debts and Royalty in the Reassessment Order:In the reassessment order dated 22.11.2007, an addition of Rs. 29,81,515/- was made under bad debts disallowed, and Rs. 112,90,00,000/- was added on account of royalty paid. The petitioner argues that the issue of bad debts was used as a pretext to reopen the assessment, with the main target being the royalty issue. The court finds that since the original assessment had already examined the bad debts issue, reopening on this ground is invalid, making the reassessment order and the additions therein invalid.Conclusion:The court concludes that the notice dated 18.04.2007 under Section 148 and all proceedings pursuant thereto are invalid due to the change of opinion. The reassessment order dated 22.11.2007 is also set aside. The writ petition is allowed, with no orders as to costs.