2015 (1) TMI 832 - HC - Income Tax

Invalid Notice under Income Tax Act: Lack of Jurisdiction

GKN Sinter Metals Ltd. (Formerly Mahindra Sintered Products Ltd.) Versus Ms. Ramapriya Raghavan, The Assistant Commissioner of Income Tax Circle 2(1) And Others

GKN Sinter Metals Ltd. (Formerly Mahindra Sintered Products Ltd.) Versus Ms. Ramapriya Raghavan, The Assistant Commissioner of Income Tax Circle 2(1) And ... Issues Involved:1. Challenge to the notice issued under Section 148 of the Income Tax Act, 1961.2. Allegation of disproportionate allocation of expenses among manufacturing units.3. Jurisdiction of the Assessing Officer to reopen the assessment based on 'reason to believe'.4. Allegation of change of opinion by the Assessing Officer.5. Validity of reopening notice based on the material obtained during subsequent assessment proceedings.Detailed Analysis:1. Challenge to the notice issued under Section 148 of the Income Tax Act, 1961:The petitioner challenged the notice dated 14th March 2007 issued under Section 148 of the Income Tax Act, 1961, seeking to reopen the assessment for the Assessment Year 2002-03. The notice was initially stayed on 18th December 2007.2. Allegation of disproportionate allocation of expenses among manufacturing units:The petitioner had three manufacturing units, two of which were located in a backward region and eligible for tax benefits under Section 80IA/80IB. During the original assessment, the petitioner claimed deductions for these units. The Assessing Officer later alleged that there was a disproportionate allocation of expenses between the units eligible for deductions and those that were not, thereby inflating the profits of the eligible units.3. Jurisdiction of the Assessing Officer to reopen the assessment based on 'reason to believe':The court emphasized that for the Assessing Officer to acquire jurisdiction to reopen an assessment under Section 147, there must be a 'reason to believe' that income chargeable to tax has escaped assessment. This must be based on tangible material and not merely a change of opinion. The Supreme Court in Commissioner of Income Tax v/s. Kelvinator of India Ltd., 320 ITR 561, clarified that 'reason to believe' must have a live link with the formation of the belief and cannot be based on a mere change of opinion.4. Allegation of change of opinion by the Assessing Officer:The petitioner argued that the reopening was based on a change of opinion, as the allocation of expenses had been scrutinized and accepted during the original assessment proceedings. The court noted that the Assessing Officer had indeed formed an opinion on the allocation of expenses during the original assessment, and the reopening notice was based on the same facts, thus constituting a change of opinion.5. Validity of reopening notice based on the material obtained during subsequent assessment proceedings:The Revenue argued that the reopening was based on tangible material obtained during the assessment for the year 2004-05. However, the court held that the reasons recorded at the time of issuing the reopening notice did not mention this material. The court reiterated that the validity of a reopening notice must be examined based on the reasons recorded at the time of issuing the notice, and any subsequent material cannot be used to support the notice.Conclusion:The court found that the reopening notice was based on a change of opinion and lacked the necessary jurisdictional basis. Consequently, the notice dated 14th March 2007 and the order disposing of the objections were set aside. The petition was allowed, and no order as to costs was made.