2025 (3) TMI 1440 - HC - Income Tax

Reassessment proceedings under Section 147 quashed for lack of proper examination and impermissible review of original assessment

Bombay HC quashed reassessment proceedings under Section 147 initiated within four years of the relevant assessment year. The court held that reasons for ... Reopening of assessment u/s 147 - reopening notice is issued within the period of four years from the end of relevant assessment year - HELD THAT:- Respondents have recorded reasons without looking at the records of the Petitioner and on the same being pointed out by the Petitioner in its objections have not been rebutted. Therefore the reasons recorded are without any application of mind and without perusing the records of the Petitioner and therefore on this short ground itself, the impugned proceedings are required to be quashed and set aside. For the sake of completeness, we examine each of the issues on which the reopening is sought to be initiated independently on what we have observed above. Adding on account of provision of wage revision while computing the book profit u/s 115JB - As in the reasons recorded it is stated that this figure was disallowed under normal provisions of the Act in the assessment order on the ground that it is a contingent liability but however same was not added back while computing the book profit. In an appeal proceedings before CIT (A), on remand, the AO has admitted that this provision ought not to have been disallowed and accordingly CIT (A) based on this admission of the AO in the remand report has given relief to the Petitioner and deleted the addition. This order of the CIT (A) was available to the AO while recording reasons for reopening the case on 27 March 2021. Therefore, on the date of recording the reasons which were based on the findings in the assessment order which findings were reversed by the CIT (A) and on the basis of admission in the remand proceedings by the Assessing Officer there could not have been any reasons to believe that any income has escaped assessment. The base of reopening falls to ground, therefore on this account, the reopening on the issue of provision for wage revision to be added while computing the book profit is required to be quashed and set aside. Adding interest on non-performing investment while calculating book profit, the officer in the reasons recorded proceeds on footing that the profit and loss account is not prepared in accordance with Schedule III of the Companies Act, 2013. The Petitioner is banking company and the provisions of Schedule III of the Companies Act is not applicable. As per the second provision to Section 129 of the Companies Act 2013, the banking company is required to prepare its financials as per the Banking Regulation Act and not as per Schedule III of the Companies Act. Secondly, the issue of computation of book profit was examined during the assessment proceedings and the AO added various other items and calculated revised book profit. Therefore it cannot be said that the AO has not examined the issue of computation of book profit, qua interest on non-performing investment. Petitioner is justified in relying upon the decision in the case of Century Textiles & Industries Ltd. [2018 (10) TMI 379 - SC ORDER] wherein it is held if certain aspects were examined in the course of the assessment proceedings, then reopening is not permissible on the ground that other aspects were not considered. Therefore, even on this count there could not have been any reasons to believe that income has escaped assessment. Deduction u/s 36 (1) (viia), a specific query was raised in the course of the assessment proceedings on this issue and the Petitioner vide letter dated 30 November 2018 filed its detailed submissions. In the assessment order, sum was disallowed u/s 36 (1) (vii)/36 (1) (viia) of the Act. The said issue was also subject matter of appeal before the CIT (A). Therefore, in our view the issue of deduction under Section 36 (1) (vii) and 36 (1) (viia) was examined during the course of the original assessment proceedings and therefore any attempt to reopen the case on this issue would result into conferring power of review on the AO based on change of opinion which is not permissible u/s 147 of the Act. The order disposing the objection does not give any reasoning for rejection of objection except reproducing the extracts of various case laws. In our view, this was not the correct approach. Therefore, even on this count the objection raised by the Petitioner goes unrebutted. We have no hesitation in holding that the impugned proceedings are required to be quashed and set aside. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Court were:Whether the reopening notice issued under Section 148 of the Income-tax Act, 1961, was validly issued within the four-year period from the end of the relevant assessment year.Whether the reasons recorded for reopening the assessment were based on factual inaccuracies and constituted a lack of application of mind by the Assessing Officer.Whether the issues raised for reopening had already been examined during the original assessment proceedings, and if so, whether the reopening constituted an impermissible review based on a change of opinion.Whether the Respondents' failure to address the Petitioner's objections in a reasoned manner affected the validity of the reopening proceedings.ISSUE-WISE DETAILED ANALYSIS1. Validity of Reopening Notice Within Four YearsThe legal framework under Section 148 of the Income-tax Act allows for the reopening of assessments if income has escaped assessment. The Court noted that the reopening notice was issued within four years from the end of the relevant assessment year, which is permissible under the Act. However, the validity of the notice also depends on the adequacy and correctness of the reasons recorded for reopening.2. Factual Inaccuracies and Lack of Application of MindThe Court found significant factual inaccuracies in the reasons recorded for reopening the assessment. The recorded reasons contained incorrect dates and figures regarding the filing of returns, declared income, and deductions claimed. The Court emphasized that these inaccuracies demonstrated a lack of application of mind by the Assessing Officer. The Respondents failed to rebut these inaccuracies when pointed out by the Petitioner, further undermining the validity of the reopening.3. Examination of Issues During Original AssessmentThe Court examined whether the issues raised for reopening had already been scrutinized during the original assessment proceedings:Provision for Wage Revision: The Court found that the CIT (A) had already addressed this issue, and the Assessing Officer had admitted that the provision should not have been disallowed. Therefore, reopening on this ground was unjustified.Interest on Non-Performing Investment: The Court noted that the Petitioner's financials were prepared in accordance with the Banking Regulation Act, not Schedule III of the Companies Act, as incorrectly assumed by the Assessing Officer. The issue had been examined during the original assessment, rendering the reopening invalid.Deduction under Section 36 (1) (viia): The Court observed that this issue was specifically queried during the original assessment and was also a subject of appeal. Reopening on this basis would constitute an impermissible review based on a change of opinion.4. Failure to Address ObjectionsThe Court criticized the Respondents for failing to address the Petitioner's objections in a reasoned manner. The order disposing of the objections merely reproduced case law extracts without engaging with the Petitioner's factual and legal arguments. This lack of reasoning further invalidated the reopening proceedings.SIGNIFICANT HOLDINGSThe Court held that the reopening proceedings were invalid due to factual inaccuracies, lack of application of mind, and the impermissible review of issues already examined during the original assessment. The Court emphasized the principle that reopening based on a change of opinion is not permissible under Section 147 of the Act.Core Principles Established:Reopening of assessments must be based on accurate and factually correct reasons, reflecting a proper application of mind by the Assessing Officer.Reassessment proceedings cannot be used as a tool for reviewing issues already examined during the original assessment, absent fresh tangible material.The failure to provide reasoned responses to objections raised by the taxpayer undermines the validity of reopening proceedings.Final Determination:The Court quashed the impugned notice under Section 148 and the order rejecting the objections, declaring them without jurisdiction, illegal, and arbitrary.