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. The petitioner, selected for CASS scrutiny regarding low income versus high loans/investments and interest expenses under section 14A, had disclosed all material facts during original assessment. The court found the AO lacked jurisdiction to reopen based merely on assumptions that the assessee should have charged 12% interest on advances, as this inference lacked supporting material. The reopening was deemed invalid absent any basis beyond presumptions to conclude income had escaped assessment. Petition 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 Reopening
The 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 Assessment
The 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 Analysis
The 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.

---