2014 (4) TMI 268 - AT - Income Tax

Validity of Income Tax assessments under sections 147/148 for AY 2005-06 upheld, Department's appeals dismissed

The appeals against Assessment Year 2005-06 regarding the validity of assessments framed under sections 147/148 of the Income Tax Act, 1961, based on ... Cancellation of assessment u/s 147/148 of the Act – Held that:- The loss sought to be reduced by reopening the assessments of both the assesses, was voluntarily reduced by them by filing the rectification application - as per the provisions of Section 155 (8) of the Act, an Income-tax Authority must pass an order on a rectification application within a period of six months from the end of the month in which such application is received by it - In case it is not so done, the amendment sought through the rectification application shall be deemed to have been made. The AO went entirely wrong in observing that the assesses could not have filed the rectification applications before filing the returns of income - the assessees, by filing the rectification applications, themselves voluntarily reduced the loss proposed to be reduced by reopening the assessments and this being the only reason recorded for reopening the completed assessments, after such reduction of loss, there remained nothing to validate the reopening – the applications were filed prior to the issuance of notices u/s 148 of the Act - CIT (A) has duly taken into consideration all the facts and there was no error in his action of holding the reopening in both the cases to be invalid and cancelling the assessments – Decided against Revenue. Issues Involved:Appeal against Assessment Year 2005-06; Validity of assessment framed under sections 147/148 of the Income Tax Act, 1961; Reopening of assessment based on license fee deduction; Rectification application filed under section 154 of the Act; Consideration of rectification application in assessing escapement of income.Analysis:The Department filed appeals for Assessment Year 2005-06 against orders passed by the CIT (A)-V, New Delhi, for two independent assesses. The appeals were disposed of together due to similar facts. The main grounds raised by the assessee included questioning the validity of the assessment framed under sections 147/148 of the Income Tax Act, 1961. The return of the assessee was initially processed under section 143(1) of the Act. Subsequently, it was discovered that the assessee had claimed a deduction as revenue expenditure for license fee without proportionately allowing it over the license period as required by Section 35ABB of the IT Act. This led to excess allowance of expenditure and over-assessment of loss, prompting the reopening of assessments through notices under section 148 of the Act.The Assessing Officer rejected the assessee's response, citing the 'GKN Drive Shafts India vs. ITO' case, stating that objections can only be filed after the return is filed and reasons are obtained. The Assessing Officer deemed the objections raised by the assessee as legally untenable. The CIT (A) subsequently canceled the assessment orders made after the reopening notices, deeming the reopening invalid in both cases. The Department contended that the CIT (A) erred in canceling the assessments framed under sections 147/148, arguing that the rectification application filed by the assessee did not nullify the basis for issuing the notices under section 148.The assessee argued that filing rectification applications before the income tax returns demonstrated their good faith, as they voluntarily reduced the losses through these applications. The CIT (A) considered these facts and ruled in favor of the assessee, holding the reopening of assessments as invalid. The Assessing Officer's assertion that rectification applications cannot be filed before income tax returns was deemed incorrect, and the CIT (A) upheld the cancellation of assessments based on the rectification applications filed within the prescribed time limit.The CIT (A) correctly noted that the assessee's voluntary reduction of losses through rectification applications rendered the reopening of assessments unnecessary. The Department's grievances were rejected for lacking merit, and the orders passed by the CIT (A) were upheld. Consequently, the appeals filed by the Department were dismissed, affirming the CIT (A)'s well-reasoned decision.