2023 (11) TMI 433 - AT - Income Tax

Reassessment under Section 147 invalid when based on incorrect factual assumptions about fund approval status

The ITAT Rajkot set aside reassessment proceedings under section 147 against a superannuation fund. The revenue reopened assessment assuming the fund was ... Reopening of assessment u/s 147 - reasons to believe - Superannuation fund - Exemption u/s 10(25)(iii) - excess funds do not form part of “approved fund”, and hence is not exempt from taxation - HELD THAT:- Notice for reasons for reopening of assessment does not make any indication of violation of conditions of approval of Superannuation Trust, thereby leading to the “deemed withdrawal” of approval as on the date of violation. Instead, the notice for reopening of assessment has been issued on the assumption that as on the date of issuance of notice, the assessee trust is “not” an approved fund. A perusal of order passed under Rule 3 of Part B of Schedule-IV of the Income Tax Act, 1961 dated 31-03-2014 shows that the approval of the fund was only withdrawn with effect from the date of passing of the aforesaid order, which was on 31-03-2014. Therefore, evidently, as on the date of issuance of notice of reopening of assessment on 24-03-2014, the fund was an “approved fund” and therefore, the case of the assessee was reopened on the basis of incorrect assumption of fact that as on the date of issuance of reassessment notice the assessee fund was “not approved”. Accordingly, since the reasons for the opening of assessment itself were based on an incorrect assumption of facts, the reassessment notice and consequential assessment proceedings are liable to be set aside. It is a well-settled law that reopening of reassessment on an incorrect assumption of facts is invalid - Decided in favour of assessee. Issues Involved:The validity of reopening notice and reassessment order, Exemption of interest earned from approved fund, Compliance with conditions for approval of trust fund, Incorrect factual assumptions in reopening assessment notice.Validity of Reopening Notice and Reassessment Order:The assessee challenged the validity of the reopening notice and reassessment order, contending that the case was reopened on the incorrect assumption that the fund was not approved, while in reality, the fund was approved as of the date of the notice. The withdrawal of approval mentioned in the order did not specify a retrospective date, rendering the reopening notice invalid due to incorrect factual assumptions.Exemption of Interest Earned from Approved Fund:The dispute centered on the exemption of interest amounting to Rs 84,00,000 earned from an approved fund. The CIT(A) held that this interest was not entitled to exemption, leading to a disagreement with the appellant who argued that the income received by such a fund is exempt under Section 10(25)(iii). The appellant contended that taxing this interest would result in double taxation when the retired employee is taxed on annuity payments in the future.Compliance with Conditions for Approval of Trust Fund:The Department argued that the approval granted to the trust was conditional, and since the trust failed to comply with the conditions, the approval was deemed withdrawn. Violations included not filing accounts and returns on time and exceeding prescribed contribution limits. The withdrawal of approval was deemed effective from the date of violation, justifying the initiation of reassessment proceedings.Incorrect Factual Assumptions in Reopening Assessment Notice:While non-compliance with approval conditions could lead to approval withdrawal, the notice for reopening assessment incorrectly assumed that the fund was not approved as of the notice date. The absence of a specific date in the withdrawal order meant it took effect only from the order date. The reopening notice was based on incorrect factual assumptions, leading to its invalidity and the consequent setting aside of the reassessment order.Legal Precedents:Reference was made to legal precedents emphasizing that reopening assessments on mistaken assumptions of facts renders the process invalid. Cases like Mumtaz Haji Mohamad Menon v. ITO and Champaklal Mathurbhai Mehta highlighted the importance of accurate factual grounds for reopening assessments.This comprehensive summary highlights the key issues of the judgment, including challenges to the validity of the reopening notice, disputes over exemption of interest from an approved fund, compliance issues with trust fund approval conditions, and the significance of accurate factual assumptions in assessment processes.