2011 (2) TMI 1595 - AT - Income Tax

Tribunal annuls reassessment for tax years 2000-01 & 2001-02 due to invalid initiation under section 147.

The Tribunal annulled the reassessment proceedings for the assessment years 2000-01 and 2001-02, finding the initiation of reassessment under section 147 ... Reason to believe - reassessment under section 147 - reopening of assessment - lease equalization reserve - Accounting for Leases (guidance note/AS) - change of opinion - nexus / live-link between material and beliefReason to believe - reassessment under section 147 - lease equalization reserve - Accounting for Leases (guidance note/AS) - nexus / live-link between material and belief - change of opinion - Validity of initiation of reassessment proceedings for AY 2000-01 - HELD THAT: - The Assessing Officer issued a notice under section 148 alleging that the Lease Equalization Reserve (LER) set off from net profit ought to have been capitalised and therefore income had escaped assessment. The assessee demonstrated that LER was an accounting adjustment made in compliance with the ICAI guidance note on leases, that it was not considered for tax computation and that no depreciation or deduction in respect of LER was claimed for tax purposes. The Assessing Officer had earlier issued a notice under section 154 on the same issue and received the assessee's explanation, but took no action before recording reasons for reopening. The Tribunal applied the settled test that a reopening under section 147 requires a bona fide 'reason to believe' based on relevant material which bears a direct nexus to the conclusion of escapement of income; suspicion, change of opinion or unintelligible reasons are insufficient. On the facts the AO was aware that LER was not included in taxable income and hence there was no rational and intelligible basis from which a reasonable officer could form a belief that tax had escaped; consequently the initiation of reassessment was invalid and amounted to reopening based on an inadequate/intelligible reason rather than relevant material establishing escapement of income. [Paras 12, 13, 14]Initiation of reassessment proceedings for AY 2000-01 quashed; order under section 147 annulled.Reason to believe - reassessment under section 147 - lease equalization reserve - Accounting for Leases (guidance note/AS) - nexus / live-link between material and belief - Validity of initiation of reassessment proceedings for AY 2001-02 - HELD THAT: - The facts and the reasons recorded by the Assessing Officer for AY 2001-02 were identical to those in AY 2000-01 except that an assessment under section 143(3) had been completed. The Tribunal held that the legal test for 'reason to believe' is the same irrespective of whether the original assessment was under section 143(1) or 143(3). Applying the same reasoning as in AY 2000-01, the LER was an accounting entry under the ICAI guidance and was not part of the taxable computation; the AO's reasons did not establish a relevant nexus to justify belief of escapement of income. Therefore reopening was not in accordance with law. [Paras 16, 17]Initiation of reassessment proceedings for AY 2001-02 quashed; order under section 147 annulled.Final Conclusion: The Tribunal allowed the assessee's appeals and dismissed the revenue's appeals by holding that the Assessing Officer did not possess a valid 'reason to believe' that income chargeable to tax had escaped assessment in respect of the Lease Equalization Reserve for AY 2000-01 and AY 2001-02, and accordingly annulled the reassessment orders under section 147. Issues Involved:1. Validity of reassessment proceedings u/s 147.2. Treatment of Lease Equalization Reserve (LER) in computation of taxable income.Summary:Issue 1: Validity of reassessment proceedings u/s 147Ground No.1 raised by the assessee in ITA No.3633/M/08 and ITA No.3634/M/08 contends that the CIT(A) erred in confirming the reassessment proceedings without appreciating that reopening of assessment based on change of opinion and unintelligible reasons are void and invalid. The assessee argued that the AO failed to establish a 'nexus' between the capitalization of LER and the addition of LER to the Assessee's income, and that the AO's reasons were not intelligible. The Tribunal noted that the AO had already dropped proceedings u/s 154 on the same issue, indicating awareness that LER was not considered for determining income under the Act. The Tribunal held that there was no 'reason to believe' that income chargeable to tax had escaped assessment, making the initiation of reassessment proceedings invalid. Consequently, the order u/s 147 was annulled.Issue 2: Treatment of Lease Equalization Reserve (LER)The assessee, engaged in acting as advertising agents and providing equipment on lease, created a LER in compliance with the Guidance Note on Accounting for Leases issued by the ICAI. The Tribunal observed that LER was an item of debit or credit in the P&L Account prepared under the Companies Act, 1956, and was not considered by the assessee for determining its income under the Income Tax Act. The Tribunal emphasized that the LER was purely an accounting entry and did not represent real income. The Tribunal concluded that the AO's belief that LER should have been capitalized was based on a misunderstanding of the concept of LER, and thus, there was no rational and intelligible nexus between the reasons recorded by the AO and the belief that income had escaped assessment.Conclusion:The Tribunal allowed the appeals by the assessee and dismissed the appeals by the revenue, annulling the reassessment orders for both assessment years 2000-01 and 2001-02 on the grounds of invalid initiation of reassessment proceedings.Order pronounced in the open court on the 9th day of February 2011.