2016 (5) TMI 1177 - AT - Income Tax

Tribunal invalidates reassessment under Income-tax Act, citing lack of valid reasons and change of opinion.

The Tribunal invalidated the reassessment proceedings under Section 147 of the Income-tax Act, deeming them illegal due to being based on the same ... Validity of reassessment proceedings and the 'reason to believe' requirement under section 147 - Distinction between 'change of opinion' and formation of belief based on fresh tangible material - Reopening cannot be based on surmise, conjecture or opinion; requires credible/tangible material - Subsequent assessment order as basis for reopening only if it brings fresh tangible information - Once assessment under section 143(3) is completed, presumption of application of mind in original assessment - Assessing Officer's failure to examine an issue in original assessment does not justify reassessment if no new material surfaced - Allowability of business expenditure: necessity is not a precondition for deduction under section 37(1) (principle relied upon)Validity of reassessment proceedings and the 'reason to believe' requirement under section 147 - Distinction between 'change of opinion' and formation of belief based on fresh tangible material - Subsequent assessment order as basis for reopening only if it brings fresh tangible information - Assessing Officer's failure to examine an issue in original assessment does not justify reassessment if no new material surfaced - Reassessment proceedings initiated under section 147 for AY 2005-06 quashed as invalid for want of a valid 'reason to believe' based on fresh tangible material. - HELD THAT: - The Tribunal examined the reasons recorded by the AO and identified that they amounted to (a) the large quantum of expenditure, (b) evasive replies given during survey, (c) cancellation of the agreement and payment of termination fee, (d) alleged failure to prove necessity of the expenditure, (e) addition in a subsequent year's assessment, and (f) the issue not having been examined earlier. Applying settled authorities, the Tribunal held that an opinion or suspicion cannot substitute for a 'reason to believe'; reopening must rest on tangible, credible material not previously considered. The assessment-year 2006-07 order relied upon by the AO did not disclose any fresh tangible material but recorded inferences drawn from the same set of facts; therefore it could not furnish the requisite basis for reopening. The Tribunal also observed that (i) the necessity of expenditure is not a separate legal precondition for allowance under the settled law relied upon, (ii) the AO had indeed called for and received details of the commission payments in the original assessment and chose not to make an addition then, and (iii) any failure of the AO in original proceedings does not empower a subsequent reopening in absence of fresh material. On these grounds the Tribunal concluded that the AO's formation of belief was a mere change of opinion and therefore jurisdictional precondition for section 147 was not satisfied. [Paras 12, 13, 14, 15, 16]Reassessment proceedings under section 147 are null and void for lack of a valid reason to believe; reopening quashed.Final Conclusion: The appeal is allowed; the reassessment proceedings initiated for AY 2005-06 are quashed as invalid for lack of a reason to believe founded on fresh tangible material. Issues Involved:1. Validity of reassessment proceedings under Section 147 of the Income-tax Act.2. Disallowance of commission on sales.3. Disallowance of depreciation on goodwill.Issue-wise Detailed Analysis:1. Validity of Reassessment Proceedings under Section 147 of the Income-tax Act:The primary issue was whether the reassessment proceedings initiated under Section 147 were valid. The assessee argued that the reassessment was based on the same set of facts available during the original assessment, thus constituting a change of opinion by the succeeding Assessing Officer (AO). The reassessment was prompted by the AO's suspicion that the assessee's expenses on Info Tracking and Delivery Schedule were not genuine, which came to light during a survey conducted on 5/11/2009. The AO believed that the Managing Director's evasive replies and the lack of substantial evidence regarding the agreement with South Elegant Ltd. justified the reassessment. However, the Tribunal found that the reasons recorded by the AO did not constitute tangible material necessary for forming a belief that income had escaped assessment. The Tribunal emphasized that an opinion or suspicion cannot be the basis for reassessment, as established by the Supreme Court in ACIT vs. Dhariya Construction Co. (328 ITR 515). The Tribunal concluded that the reassessment proceedings were invalid as they were based on the same material available during the original assessment, amounting to a mere change of opinion, which is not permissible under law.2. Disallowance of Commission on Sales:The AO disallowed the commission payments of Rs. 16,23,91,847/- made to South Elegant Ltd., Hong Kong, and Gruyter Agenture B.V., Netherlands, on the grounds that the payments were not genuine and were not wholly and exclusively necessary for earning business income. The AO's disallowance was based on the lack of substantial evidence proving the existence and services rendered by these foreign entities. The Tribunal noted that the assessee had provided agreements, audited financial statements, invoices, and proof of payment through banking channels. The Tribunal found that the AO's disallowance was based on conjectures and surmises without valid reasons. The Tribunal highlighted that the necessity of expenditure cannot be questioned by the AO, as established by the Supreme Court in Eastern Investment Ltd. v. CIT (20 ITR 1) and CIT vs. EKL Appliances Ltd. (345 ITR 241). The Tribunal concluded that the disallowance of commission expenditure was unwarranted.3. Disallowance of Depreciation on Goodwill:The AO disallowed the depreciation on goodwill amounting to Rs. 6,56,25,000/-. The CIT(A) upheld this disallowance, stating that the assessee had not acquired any rights of commercial nature. However, the Tribunal referred to the Supreme Court's judgment in CIT vs. Smifs Securities Ltd. (348 ITR 302), which held that goodwill is an intangible asset entitled to depreciation under Section 32(1)(ii) of the Act. The Tribunal found that the CIT(A) had erred in not following the Supreme Court's decision and other relevant High Court decisions. Therefore, the Tribunal concluded that the disallowance of depreciation on goodwill was unjustified.Conclusion:The Tribunal quashed the reassessment proceedings, holding them to be illegal and unsustainable in law. Consequently, the Tribunal did not find it necessary to address other grounds of appeal. The appeal filed by the assessee was allowed, and the reassessment order was set aside.