2024 (9) TMI 1829 - AT - Income Tax

Assessee victory: reassessment under section 147 limited to s.148 reasons; AO may invoke Explanation (3); s.263 revision unsustainable per Alagendran

ITAT KOLKATA allowed the taxpayer's appeal, holding the reassessment framed u/s 147 was not erroneous or prejudicial to revenue. The Tribunal found the ... Revision u/s 263 - revising the assessment framed u/s. 147 r/w 143(3) - assessment was revised directing the AO to modify the assessment for making disallowance u/s. 37(1) of the Act on account of excess salary paid to the director which is prohibited u/s. 197(9) of the Companies Act, 2013 after affording reasonable opportunity to the assessee - HELD THAT:- Undisputedly, assessee has filed return of income on 30.09.2016 which was processed u/s.143(1) accepting the returned income. Thereafter, the case of the assessee was reopened u/s. 147 by issuing notice u/s. 148 on the ground that the four expenses as stated hereinabove was wrongly allowed in the computation of income and thus the income has escaped assessment. Accordingly, the assessment was framed by making addition in respect of above four expenses. Admittedly, the issue of excess salary to the tune of Rs.138.16 lacs was neither subject matter of the reasons recorded u/s. 148(2) nor any such excess disallowance came to the notice of the AO during the course of proceedings subsequently. Whether the assessment framed u/s. 147 of the Act is erroneous and prejudicial to the interest of the revenue or the CIT has no jurisdiction to revise the said assessment for the reason that the issue wrecked up in the 263 was not the subject matter of the reasons recorded nor it was noticed by the AO in the assessment proceeding? - In our opinion, the order u/s. 147 of the Act is neither erroneous nor prejudicial to the interest of the revenue as there is no mistake in the said order and prejudices is caused, we are in agreement with the argument presented before us by the Ld. CIT, DR, the AO has jurisdiction under Explanation (3) to section 147 to make any addition on the issue which were not subject matter of the reasons recorded provided the said issue comes to the notice of the AO during the course of subsequent proceedings. Similar issue has been decided by the Hon’ble Apex Court in the case of Alagendran Finance Ltd. [2007 (7) TMI 304 - SUPREME COURT] wherein held that reassessment proceedings culminating to do with the items of income which was sought to be raised by Pr. CIT by revising the order of assessment which relate to Lease Equalisation Fund. The Hon’ble Apex Court held that the doctrine of merger did not apply to a case of this nature and the period of limitation commenced from the date of original assessment and not from the date of reassessment since the latter had not had anything to do with the Lease Equalisation Fund. The Hon’ble Apex Court have further held that this was not a case where the subject matter of reassessment and the subject matter of the assessment were the same. Appeal of the assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the Principal Commissioner's exercise of revisionary jurisdiction under section 263 of the Income Tax Act to revise an assessment framed under section 147 read with section 143(3) is valid where the reassessment did not consider a distinct issue of excess managerial remuneration that was not part of the reasons recorded under section 148(2) and was not noticed by the Assessing Officer during reassessment proceedings. 2. Whether Explanation (3) to section 147 empowers the Assessing Officer to raise and decide an issue not mentioned in the reasons recorded under section 148(2), and if so, whether the omission of such an issue by the AO in framing the reassessment renders the reassessment order 'erroneous and prejudicial to the interests of revenue' for the purpose of section 263. 3. Whether the Principal Commissioner could validly, by invoking section 263, revise issues that were part of the original assessment order under section 143(1) after the period of limitation prescribed by section 263(2) had expired, and whether the doctrine of merger affects the limitation applicable to revision under section 263. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of section 263 revision of an assessment framed under section 147 when reassessment did not consider a distinct issue (excess managerial remuneration) Legal framework: Section 263 empowers the Commissioner to revise an assessment if it is found to be erroneous and prejudicial to the interests of the revenue. Section 147 (with section 148) permits reopening of assessment where income has escaped assessment. Explanation (3) to section 147 allows the AO, once reassessment is reopened, to assess or reassess income in respect of any issue which comes to his notice subsequently even if that issue was not specified in the reasons recorded under section 148(2). Precedent treatment: The decision of the Bombay High Court in ICICI Bank (summarized in the judgment) and the Supreme Court in Alagendran Finance were considered and applied. Both authorities hold that where a reassessment does not deal with a particular issue that was part of the original assessment, the period of limitation for revising the original order under section 263 runs from the date of the original assessment and is not extended by the reassessment that did not concern that issue; further, reassessment that does not deal with a subject does not merge the original assessment on that subject. Interpretation and reasoning: The Tribunal analyzed whether the assessment framed under section 147 was 'erroneous and prejudicial' because it omitted a disallowance for excess managerial remuneration (Rs.138.16 lakhs) which was not part of the reasons recorded under section 148(2) and was not noticed by the AO during reassessment proceedings. The Tribunal accepted that Explanation (3) to section 147 empowers the AO to assess issues not listed in the reasons, but only if such issues come to the AO's notice during the course of reassessment proceedings. Where such an issue did not come to the AO's notice and therefore was not decided in the reassessment order, the reassessment cannot be characterized as erroneous and prejudicial for the purpose of section 263 in respect of that issue. The Tribunal observed that the Principal Commissioner could have sought to revise the earlier section 143(1) order which dealt with the subject but was time-barred under section 263(2). Ratio vs. Obiter: Ratio - A reassessment framed under section 147 is not rendered 'erroneous and prejudicial' under section 263 merely because it omits an issue that was not the subject of reasons recorded and was not noticed by the AO during reassessment; Explanation (3) does not enlarge the scope of section 263 or negate the limitation applicable to revision of the original assessment. Obiter - Observations regarding the AO's theoretical power under Explanation (3) to raise issues that come to his notice are explanatory of statutory scope but do not change the conclusion on the facts. Conclusion: The Principal Commissioner's revision under section 263 in respect of the excess managerial remuneration was invalid because the reassessment did not deal with that issue and the revisional remedy against the earlier order under section 143(1) was time-barred. Issue 2 - Effect and scope of Explanation (3) to section 147 and whether omission by AO in reassessment makes the reassessment order erroneous and prejudicial Legal framework: Explanation (3) to section 147 allows the AO, in a reopened assessment, to assess or reassess income in respect of any issue which comes to his notice subsequently, notwithstanding that the reasons recorded under section 148(2) did not include that issue; section 263 applies where an assessment order is 'erroneous and prejudicial to the interests of the revenue.' Precedent treatment: The Tribunal relied on the interpretation in ICICI Bank and Alagendran Finance that Explanation (3) facilitates the AO's power to consider new issues in reassessment but does not affect the period of limitation for revision under section 263 where the issue remained governed by the original assessment that was not merged into the reassessment. Interpretation and reasoning: The Tribunal read Explanation (3) as a doctrine-lifting provision enabling the AO to raise issues during reassessment if they come to his notice, but it does not create a duty or presumption that every new issue must necessarily be noticed or that failure to notice it converts a reassessment into an 'erroneous and prejudicial' order. The key enquiry is whether the AO actually had the issue before him and decided it in the reassessment; if not, section 263 cannot be used to revisit the original order on that issue beyond the period allowed by section 263(2). Ratio vs. Obiter: Ratio - Explanation (3) does not automatically render a reassessment erroneous and prejudicial where an issue was not part of the reasons and was not noticed during reassessment; the jurisdiction under section 263 cannot be used to bypass limitation constraints. Obiter - The statement that an AO 'has jurisdiction under Explanation (3) to make any addition on the issue which were not subject matter of the reasons recorded provided the said issue comes to the notice of the AO' is explanatory of the AO's scope of power. Conclusion: Omission by the AO to decide an issue not included in reasons does not, by itself, make the reassessment order vulnerable to section 263; Explanation (3) cannot be invoked to revive revisional remedy that is otherwise time-barred. Issue 3 - Limitation under section 263(2) and doctrine of merger where reassessment and original assessment concern different subject matters Legal framework: Section 263(2) prescribes a two-year limitation from the end of the financial year in which the order sought to be revised was passed. The principle of merger is relevant to determine whether reassessment replaces the original assessment for all issues. Precedent treatment: The Tribunal applied ICICI Bank and Alagendran Finance which held that where reassessment does not deal with a particular issue decided in the original assessment, the original assessment on that issue continues to operate and the limitation for revision runs from the date of the original assessment; the doctrine of merger does not apply to issues not covered by reassessment. Interpretation and reasoning: The Tribunal found that the Principal Commissioner could have sought revision of the section 143(1) order that originally accepted returned income and dealt with the remuneration issue, but the period of limitation under section 263(2) had expired. Because the reassessment under section 147 did not deal with the excess remuneration issue, the original assessment on that issue did not merge into the reassessment; hence the Commissioner could not lawfully invoke section 263 in 2024 to revise an order from 2018 that should have been challenged within the statutory period. Ratio vs. Obiter: Ratio - Where reassessment does not address a particular subject matter of the original assessment, the original order on that subject remains extant and the limitation for revision is not extended by the reassessment; the doctrine of merger does not apply to unaddressed issues. Obiter - None material beyond the cited ratio. Conclusion: The revisional action under section 263 was time-barred in respect of the excess managerial remuneration because the original order that dealt with that subject could no longer be revised after expiry of the statutory two-year period; consequently, the section 263 order was quashed.