2024 (4) TMI 645 - AT - Income Tax

Assessment reopening invalid due to mechanical recording without verification or proper application of mind

ITAT Mumbai held that reopening of assessment was invalid and bad in law. The AO mechanically recorded reasons without verification or application of ... Validity of reopening of assessment - reasons to believe - assessee has claimed huge amortization expenses on goodwill - HELD THAT:- As undisputed fact that in the reasons AO has recorded the escapement of income on account of amortization of goodwill which was not claimed by the assessee in computation of normal provisions of the Act and with regard to adjustment in book profit computed u/s 115JB of the Act AO has not disturbed the same in the order passed u/s 143(3) r.w.s. 147 of the Act. So it is very clear that the reasons recorded are without verification of the records and accordingly, without application of mind. AO has not bothered to even verify the information received with the assessment folder whether any such depreciation has been claimed by the assessee or not. It clearly reflects that the AO has mechanically recorded the reasons and issued the notice without applying his own mind. Ld. PCIT has also accorded approval u/s 151 of the Act based on the reasons recorded by the AO without ascertaining the actual facts of the case. Hon’ble Bombay High Court in case of Sharvah Multitrade Compant P Ltd. [2022 (1) TMI 372 - BOMBAY HIGH COURT] dealt with similar case and held that reassessment initiated based on reasons recorded on irrelevant facts and without application of mind cannot survive. This, in our considered opinion, it is against the settled principles of law, as reopening of an assessment is an extraordinary power available to the ld AO and it should not be done in a cavalier manner. That is why the legislature in its wisdom had put lot of restrictions by imposing conditions for seeking approval and sanction from a superior officer in terms of section 151 of the Act. AO recorded wrong facts on many count in the reasons recorded for reopening of the assessment i.e. AO recorded incorrect fact that assessee has claimed huge amortization expenses on goodwill and disallowed the same in the assessment order u/s 32 of the Act which was deleted by Ld CIT(A) by stating that no such expenses actually claimed by the assessee. The AO in the reasons also recorded incorrect fact that no assessment has been completed in this case u/s 143(3) but assessment u/s 143(3) r.w.s. 153C completed on 29/12/2017 as recorded by the AO. AO also incorrectly stated that provisions of section 147(2)(b) are applicable, whereas in the facts of the case provisions of section 147(2)(c) are applicable where the onus on AO is higher to prove escapement of income. The AO, therefore, recorded wrong, incorrect and non-existing reasons for reopening of the assessment. It makes clear that there is a total non-application of mind on the part of the AO while recording the reasons for reopening of the assessment - Thus Reopening of the assessment is invalid and bad in law - Decided in favour of assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether reassessment proceedings under section 148/147 are valid where the reasons recorded for reopening rely on incorrect or unverified facts and there is apparent non-application of mind by the Assessing Officer and the sanctioning authority under section 151. 2. Whether reassessment is barred by limitation under the proviso to section 147 and section 149 where reasons recorded and sanction/communication are made after expiry of limitation (as contended by the assessee). 3. Whether initiation of reassessment proceedings constitutes mere change of opinion in the absence of new tangible material coming into possession of the Assessing Officer after completion of assessment under section 143(3) read with section 153C. 4. Whether the Assessing Officer may make additions or examine issues in reassessment that are different from or not reflected in the reasons recorded for reopening (including reliance on alleged claim of amortisation/depreciation of goodwill when no such claim was made in the return). ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of reassessment where reasons recorded are based on incorrect/unverified facts and there is non-application of mind by AO and sanctioning authority Legal framework: Reopening of assessment under section 147/148 requires that the Assessing Officer record reasons to believe that income chargeable to tax has escaped assessment; sanction/approval under section 151 must be given by a superior officer on the basis of those reasons. The exercise is an extraordinary power and requires application of mind. Precedent Treatment: The Tribunal relied on and followed the principle in the cited High Court decision holding that reassessment initiated based on reasons recorded on irrelevant facts and without application of mind cannot survive. Interpretation and reasoning: The Court examined the recorded reasons which alleged escapement of income on account of amortisation of goodwill post-amalgamation. On review of the return, computation and assessment order, it was found that no amortisation/depreciation under section 32 had been claimed in the return - the item was disallowed in computation and only tangible asset depreciation was claimed. The Assessing Officer (AO) therefore recorded facts contrary to the records (including an incorrect statement that no assessment under section 143(3) had been completed). The AO did not verify whether the alleged deduction had been claimed and mechanically recorded escapement at a large amount. The sanctioning authority accorded approval under section 151 on the basis of these reasons without independent verification or application of mind. Ratio vs. Obiter: Ratio - Reopening based on incorrect, unverified reasons and without application of mind by the AO and sanctioning authority is invalid; such mechanical recording of reasons vitiates jurisdiction. Obiter - Observations on the extraordinary character of reassessment powers and policy reasons for restrictions. Conclusions: The reassessment proceedings were invalid for want of valid reasons and for non-application of mind by both the AO and the sanctioning authority; therefore reopening could not be sustained and the appeal on this legal ground was allowed. Issue 2: Limitation/contention under proviso to section 147 and section 149 (communication of reasons and sanction after expiry of limitation) Legal framework: Sections 147/149 and the proviso set limitation bars and timeframes for initiation of reassessment and communication of reasons/sanction; failure to comply can render proceedings void or barred. Precedent Treatment: The Tribunal considered the assessee's specific grounds alleging limitation and non-provision of sanction within time, but proceeded to decide the case on the core defect of invalid reasons/non-application of mind. The Tribunal noted the contention but did not rest its decision solely on a limitation ground. Interpretation and reasoning: The Court observed that reasons recorded were flawed and sanction was accorded without application of mind; even if limitation arguments were raised, the primary defect of invalid reasons and non-application of mind rendered the reopening unsustainable. The Tribunal also noted that reasons were communicated after completion of assessment under section 143(3) read with section 153C, contrary to AO's recorded statements. Ratio vs. Obiter: Obiter - While limitation issues were pleaded, the decision did not rest on a determination that reassessment was time-barred under the proviso or section 149; instead it was disposed on substantive invalidity of the reasons and sanction. Conclusions: The Tribunal did not need to adjudicate limitation points once reopening was found invalid for non-application of mind; limitation/contention therefore became academic in the facts. Issue 3: Whether reassessment constitutes mere change of opinion absent new tangible material after completion of assessment under section 143(3)/153C Legal framework: Reopening cannot be on account of mere change of opinion; it requires new tangible material or a valid recorded reason demonstrating escapement of income. Precedent Treatment: The Tribunal relied upon established principle that reassessment cannot be sustained where the AO acts on a mere change of opinion and where no fresh material is shown to have been received post completion of assessment. Interpretation and reasoning: The Tribunal found that the reasons purportedly based on survey information were not properly verified against the assessment records and that the AO proceeded without identifying any fresh tangible material that demonstrated undisclosed income by the assessee. The recorded reasons focused on an alleged amortisation/deduction that was not claimed, indicating a failure to distinguish between book adjustments and taxable deduction claims and showing that the AO's action was effectively a change of stance rather than action based on new material. Ratio vs. Obiter: Ratio - Reopening premised on a purported change in view without fresh tangible material and absent verified reasons is invalid as constituting mere change of opinion. Conclusions: The reassessment was unsustainable because it stemmed from an unverified allegation and effectively represented a change of opinion rather than a response to new material; accordingly, the reopening failed this legal standard. Issue 4: Scope of AO's inquiry in reassessment - limitation to matters recorded in reasons and prohibition on making unrelated additions Legal framework: Reopening must be linked to matters set out in the reasons recorded; AO cannot make additions on issues not indicated in the reasons or contrary to the facts forming the basis for reopening. Precedent Treatment: The Tribunal referred to jurisprudence holding that where reasons identify a specific issue, AO cannot make additions on unrelated matters not reflected in the reasons for reopening. Interpretation and reasoning: The Court noted that reasons referred to large escapement due to amortisation of goodwill; since no such amortisation deduction was claimed in the return, AO's focus on that issue was misplaced. Furthermore, the AO did not disturb book profit under section 115JB though reasons suggested otherwise. The Tribunal also referenced the principle that if no addition is made on the issue recorded in reasons, AO cannot introduce other additions not covered by the reasons. Ratio vs. Obiter: Ratio - The AO cannot expand the scope of reassessment to matters not reflected in the reasons; actions inconsistent with the recorded reasons evidence procedural infirmity. Conclusions: The AO's attempt to proceed on an issue not actually claimed in the return and to rely on unrelated additions was procedurally and legally impermissible; this supported the finding of invalid reopening. Cross-reference The determinations on Issues 1-4 are interrelated: the core infirmity was that the reasons were factually incorrect and unverified (Issue 1), which manifested as a de facto change of opinion (Issue 3), rendered limitation and sanction contentions academic (Issue 2), and prevented the AO from legitimately expanding inquiry beyond the recorded grounds (Issue 4). Final Disposition The Court held that reassessment proceedings were invalid for want of valid reasons and for non-application of mind by the Assessing Officer and sanctioning authority; accordingly, reopening could not be sustained and the appeals by the taxpayer were allowed on legal grounds, rendering merits issues academic and the Revenue's appeals not maintainable and dismissed.