2010 (3) TMI 317 - HC - Income Tax

S.148 notice invalid where Assessing Officer lacked tangible material to form reason to believe under S.147; reassessment quashed

HC allowed the petition, holding the s.148 notice invalid because the Assessing Officer lacked tangible material to form a reason to believe that income ... Validity of notice issued u/s 148 - reopened on the ground that income chargeable to tax has escaped assessment within the meaning of section 147 - change of opinion - Deduction on account of 'tank land liability' in computing long-term capital gains - Disallowance of depreciation on obsolete assets - HELD THAT:- The computation of capital gains was reworked after accepting the total deduction claimed in the amount of Rs. 3.16 crores in respect of the aforesaid two items. There is merit in the submission which has been urged on behalf of the assessee that there was no tangible material before the Assessing Officer on the basis of which the assessment could have been reopened and what is sought to be done is to propose a reassessment on the basis of a mere change of opinion. This, in view of the settled position of law is impermissible. No tangible material is shown on the basis of which the assessment is sought to be reopened. In the absence of tangible material, what the Assessing Officer has done while reopening the assessment is only to change the opinion which was formed earlier on the allowability of the deduction. The power to reopen an assessment is conditional on the formation of a reason to believe that income chargeable to tax has escaped assessment. The power is not akin to a review. The existence of tangible material is necessary to ensure against an arbitrary exercise of power. There is no tangible material in the present case. There is merit in the submission which has been urged on behalf of the assessee that under the aforesaid Rules, the reference is to the rate at which depreciation is liable to be allowed on plant and machinery ; whereas, in the present case, the issue relates to the disallowance which was to be effected in respect of the depreciation which was claimed on obsolete assets which had been written off. Consequently, the basis which has been suggested in the affidavit-in-reply is lacking in substance, apart from the fact that the reasons that have been furnished by the Assessing Officer while reopening the assessment do not even advert thereto. On the question as to whether the Assessing Officer had reason to believe that income had escaped assessment within the meaning of section 147, we have come to the conclusion that there was no tangible material before the Assessing Officer to hold so and that the reasons recorded for reopening the assessment constitute a mere change of opinion. In the circumstances, it is not necessary to decide upon the additional submissions which have been urged on behalf of the assessee as noted earlier. Petition is allowed. Issues Involved:1. Deduction of Rs. 2.89 crores on account of 'tank land liability' in computing long-term capital gains.2. Disallowance of depreciation on obsolete assets.Issue-wise Detailed Analysis:A. Deduction of Rs. 2.89 crores on account of 'tank land liability' in computing long-term capital gains:1. The assessee filed a return of income for the assessment year 2004-05, disclosing details about the transfer of development rights for land at Mulund. The development rights were granted through an MOU with Nirmal Lifestyle Pvt. Ltd. for a total consideration of Rs. 35.82 crores.2. The return included a statement of profits from the sale of fixed assets, with sale proceeds for phase III disclosed as Rs. 10.62 crores. Deductions were claimed for consultancy fees of Rs. 27.50 lakhs and Rs. 2.89 crores paid towards meeting the dues of the Government of Maharashtra.3. During the assessment proceedings, the Assessing Officer queried the nature of the transaction and the applicability of section 50C. The assessee provided explanations and the Assessing Officer passed an order under section 143(3), accepting the deductions claimed.4. The principal objection raised by the assessee was that there was full disclosure in the return, and the Assessing Officer had already considered and accepted the deductions. The court found merit in this submission, noting that there was no tangible material to justify reopening the assessment. The reassessment was deemed to be based on a mere change of opinion, which is impermissible under the law.B. Disallowance of depreciation on obsolete assets:1. The assessee submitted a tax audit report under section 44AB, which included an expenditure of Rs. 21.98 lakhs for obsolete assets. This amount was added back in the computation of income.2. The assessee provided a working of depreciation on obsolete assets, calculated at 20%, and claimed that depreciation should be allowed on the written down value of these assets.3. The Assessing Officer disallowed the depreciation based on past assessments where similar claims were not accepted. The disallowance was made at 20% as per the assessee's without prejudice statement.4. The reassessment sought to change the disallowance rate to 25%, which the court found to be a mere change of opinion without any tangible material. The court noted that the rate of depreciation under the Income-tax Rules pertains to plant and machinery, not obsolete assets.Legal Precedents and Additional Submissions:1. The court referenced the Supreme Court's decision in CIT v. Kelvinator of India Ltd., emphasizing that reassessment must be based on tangible material and not a mere change of opinion. The power to reassess is not akin to a power to review.2. The assessee also argued that the issues were already under appeal before the Commissioner of Income-tax (Appeals), invoking the proviso to section 147, which precludes reassessment on matters under appeal. Additionally, it was argued that the Assistant Commissioner lacked jurisdiction to reopen an assessment originally passed by the Additional Commissioner.Conclusion:The court concluded that there was no tangible material to justify the reopening of the assessment. The reasons recorded constituted a mere change of opinion. Consequently, the petition was allowed, and the notice dated March 16, 2009, was quashed and set aside. No order as to costs was made.