2023 (11) TMI 1109 - HC - Income Tax

AO cannot reopen assessment under section 14A without fresh evidence beyond original material

The Gujarat HC held that reopening of assessment was invalid where the AO relied solely on material from the original assessment without fresh evidence. ... Validity of Reopening of assessment - petitioner was selected for scrutiny assessment under CASS for limited scrutiny to verify the low income compare to high loans/advances/investment in shares and high interest expenses relatable to exempt income u/s 14A during the previous year - HELD THAT:- It appears that the respondent has recorded the reasons for reopening only on the basis of the material available during the course of the original assessment and there is no fresh material to form a reason to believe that income has escaped assessment. The assessee has disclosed all material facts during the course of the original assessment and even in response to the notices issued u/s 143(2) and 142(1) of the Act. The assessment order is passed after considering the details provided by the assessee and therefore it cannot be said that the assessee has withheld any information during the course of the original assessment. Merely because the AO was of the opinion the assessee ought to have charged interest at the rate of 12% on the loans advances vis-a-vis the interest paid on the borrowed funds would not have been the basis of reopening the assessment, as such inference is based without any material in support thereof. It is also emerging from the record that the assessee has not mentioned any exact income u/s 14A which might have given a reason to believe to the respondent AO that the income has escaped assessment by not charging the income interest on the loans advances by the assessee. Only because the assessee company did not charge the advance made to the other loans and advances, such Assessing Officer even otherwise could not have made the notional addition on the basis of the income accrued in the regular course of assessment and such on the basis of the principle of real income. We are of the opinion that when the AO did not have any jurisdiction to issue the impugned notice in absence of any basis except assumptions and presumptions accorded in the reasons recorded to come to the conclusion that he has reason to believe that the income has escaped assessment. Petition succeeds and is accordingly allowed Issues Involved:The legality and validity of the notice dated 29.03.2021 issued under Section 148 of the Income Tax Act, 1961 for assessment year 2016-17.Details of the Judgment:Issue 1: Original Assessment and ReopeningThe petitioner challenged the notice issued under Section 148 of the Income Tax Act for the assessment year 2016-17. The petitioner, engaged in the business of manufacturing engineering goods, had filed the return of income for the said assessment year. The case was selected for scrutiny assessment under CASS for limited scrutiny. The Assessing Officer framed the assessment by determining the total taxable income. The impugned notice under Section 148 was issued within four years from the assessment year. The reasons for reopening included under-assessment of interest income and verification of loans advanced and received. The petitioner objected to the reasons for reopening, contending that the inference drawn by the Assessing Officer was factually incorrect.Issue 2: Objections and AssessmentThe petitioner filed objections with regard to the reasons for reopening, stating that the approving authority had not considered the reasons properly. The Assessing Officer rejected the objections and passed an order. The petitioner then preferred a petition challenging the reopening of assessment. The petitioner argued that the Assessing Officer had no material except what was already on record during the original assessment. The petitioner contended that the inference drawn regarding interest on loans advanced was factually incorrect based on the annual report.Issue 3: Rival Submissions and Court's AnalysisThe revenue submitted that the Assessing Officer had reason to believe that the petitioner should have charged interest on loans advanced. The revenue argued that the petitioner diverted funds and claimed interest expenses on unused funds. The Court considered the reasons recorded for reopening and found that there was no fresh material to form a reason to believe that income had escaped assessment. The Court noted that the petitioner had disclosed all material facts during the original assessment and in response to notices issued. It was observed that the Assessing Officer could not have made the notional addition based on assumptions and presumptions without proper basis.Final Judgment:The Court held that the Assessing Officer did not have jurisdiction to issue the impugned notice as there was no basis except assumptions and presumptions in the reasons recorded. The petition succeeded, and the impugned notice for the assessment year 2016-17 and all consequential proceedings were quashed and set aside. The rule was made absolute to that extent.