2024 (9) TMI 1825 - AT - Income Tax

Reopening under s.147 invalid where AO already applied mind under s.143(3); s.142(1) notice led to change of opinion

Dy. Commissioner of Income Tax Circle 3 (3) (1), Mumbai Versus M/s. Small Industries Development Bank of India

ITAT, Mumbai held that reopening under s.147 was invalid where AO had already applied his mind and concluded the issue during original assessment under ... Validity of reopening of assessment - additions made by him on the issue on claim of deduction u/s. 36(1)(viia) (c) - AO issued notice u/s 142(1) to the assessee asking the assessee to explain why the deduction u/s. 36(1)(vii) has not been deducted from the total income before computing the deductions u/s. 36(1) (viia) HELD THAT:- Since the Ld. AO has already applied his mind during the original assessment proceedings u/s. 143(3) and deliberated the issue in detail, the reopening of assessment u/s. 147 of the Income Tax Act on the same issue will tantamount to change of opinion which is not permissible on the given set of facts. Assessee appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the reopening of assessment under section 147/148 was valid where the Assessing Officer (AO) had earlier adjudicated the deduction claims and the reassessment appeared to effect a change of opinion. 2. Whether deduction under section 36(1)(viii) must be computed after reducing the profits by the deduction allowable under section 36(1)(viia)(c), or whether the section 36(1)(viii) deduction is to be computed on eligible business profits before taking into account the deduction under section 36(1)(viia)(c). 3. Whether consistency of treatment across assessment years and prior decisions in the assessee's own cases and coordinate bench decisions are material in determining both the computation question and the propriety of reopening. ISSUE-WISE DETAILED ANALYSIS - Issue 1: Validity of Reopening under Section 147/148 Legal framework: Reopening requires 'reason to believe' that income has escaped assessment; at the reasons-recording stage AO need only form a prima facie or tentative belief without conducting a full enquiry. The proviso to section 147 contemplates failure to disclose material facts. Precedent treatment: The AO relied on settled authorities that the sufficiency of material need not be examined at the notice stage (High Court/Supreme Court authorities recognizing tentative belief/prima facie material). The assessee relied on authorities holding that reassessment cannot be used to review conclusions already reached where no new tangible material exists and reopening would amount to change of opinion. Interpretation and reasoning: The Tribunal examined whether the AO had in fact obtained new material or merely disagreed with conclusions reached in the original assessment. The Tribunal noted that the AO had applied his mind in original assessment (reduction of the assessee's claimed deduction earlier), that the same issue had been previously litigated and accepted in earlier assessment years, and that the AO's present action effectively reopens an issue already considered rather than addressing newly discovered material. The Tribunal accepted coordinate-bench findings that where the AO had access to the relevant material and had deliberated the point in the original 143(3) assessment, reopening on the same basis would amount to impermissible change of opinion. Ratio vs. Obiter: Ratio - where the AO has already applied his mind to the same question in original assessment and no new tangible material is shown, reopening under section 147/148 is impermissible as amounting to change of opinion. Obiter - general observations about the scope of 'reason to believe' remain consistent with established law but are applied to facts showing previous adjudication by the AO. Conclusions: The Court holds that reopening in the facts of the present case was improper because the AO had previously considered the issue in the original assessment, there was no fresh tangible material justifying reassessment, and reopening would amount to change of opinion. The question of reopening is rendered academic once the substantive issue is decided for the assessee; accordingly the Tribunal set aside the reassessment addition. ISSUE-WISE DETAILED ANALYSIS - Issue 2: Interplay between Section 36(1)(viia)(c) and Section 36(1)(viii) Legal framework: Section 36(1)(viia)(c) allows deduction for provision for bad and doubtful debts (specified entities) up to a percentage of total income (computed before deduction under that clause and Chapter VIA). Section 36(1)(viii) allows deduction for a special reserve up to twenty per cent of profits derived from eligible business (profits and gains of business or profession) subject to conditions. The issue concerns whether the denominator/base for computing section 36(1)(viii) must be reduced by amounts deductible under section 36(1)(viia)(c). Precedent treatment: The Tribunal relied on an earlier coordinate-bench decision in the assessee's own case and on higher-court authority favouring computation of the section 36(1)(viii) deduction on eligible business profits before deduction of the section 36(1)(viia)(c) amount (i.e., grossing-up approach favourable to the assessee). The revenue authorities had taken the opposite approach in the reassessment. Interpretation and reasoning: The Tribunal analysed the nature and scope of each provision: section 36(1)(viia)(c) is tied to total income (a broader base) whereas section 36(1)(viii) is linked specifically to eligible business profits (a subset). Given that the legislated bases differ, computing section 36(1)(viii) on the business income prior to subtracting section 36(1)(viia)(c) better reflects the statutory scheme. The Tribunal also gave weight to the need for uniformity and consistency across assessment years and to earlier decisions in the assessee's favour, noting that revenue had accepted earlier favourable treatment by not pursuing appeals in prior years. Ratio vs. Obiter: Ratio - section 36(1)(viii) deduction must be calculated on eligible business profits without reducing those profits by the deduction allowable under section 36(1)(viia)(c); coordinate-bench precedent and consistent prior acceptance by revenue support this ratio. Obiter - ancillary comments on parity, res judicata in tax proceedings (not strictly applicable) and administrative consistency are explanatory but reinforce the ratio. Conclusions: The Tribunal concluded that the disallowance made by the AO by reducing section 36(1)(viii) computation by section 36(1)(viia)(c) was incorrect and deleted the disallowance of Rs. 1,43,07,033/-. The Tribunal therefore allowed the substantive ground in favour of the assessee and, because of that result and prior acceptance in earlier years, treated the reopening ground as academic or improper. ISSUE-WISE DETAILED ANALYSIS - Issue 3: Role of Consistency and Coordinate-Bench Decisions Legal framework: While res judicata does not strictly apply to income-tax proceedings across assessment years, administrative consistency and parity of treatment across years and between tribunals are significant considerations in adjudication. Precedent treatment: The Tribunal relied on coordinate-bench decisions in the assessee's own earlier assessment years where the same computation question was decided in the assessee's favour and where revenue had not appealed further. The Tribunal invoked established principles that consistency and uniformity in approach across assessment years deserve enforcement by tax authorities. Interpretation and reasoning: The Tribunal observed that prior acceptance of the assessee's approach by the revenue (through non-appeal or earlier orders) and the presence of the same facts and legal question in earlier years weigh strongly against revisiting that settled position absent new material. The Tribunal treated such consistency as persuasive and determinative in the present facts. Ratio vs. Obiter: Ratio - prior consistent treatment and coordinate-bench decisions on the same issue in the assessee's case are relevant and may preclude reassessment on identical grounds absent fresh material; this supports the substantive relief granted. Obiter - the Tribunal's remarks on the persuasive force of such consistency are contextual rather than establishing a new rule of law beyond the present facts. Conclusions: The Tribunal applied prior coordinate-bench decisions and the revenue's earlier acceptance of those decisions to affirm the assessee's method of computation and to find the reopening impermissible in the absence of new tangible material; accordingly, the addition was deleted and the appeal by the revenue dismissed.