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 ... Reopening of assessment under section 147 - reason to believe - tangible material - change of opinion - allowability of selling expenses in computing long-term capital gains - disallowance of depreciation on obsolete assets - power to reassess versus power to reviewReopening of assessment under section 147 - tangible material - allowability of selling expenses in computing long-term capital gains - change of opinion - Validity of reopening the assessment insofar as deductions claimed towards consultancy fees and 'tank land liability' in computing long-term capital gains - HELD THAT: - The assessee had fully disclosed the transfer of development rights and the deductions claimed (consultancy fees and an amount paid towards meeting the State Government demand described as 'tank land liability') in the return and during the assessment proceedings. The Assessing Officer had considered these matters and recomputed capital gains after accepting the aggregate deduction in the original assessment under section 143(3). The Court held that no tangible material was placed before the Assessing Officer to form a fresh reason to believe that income had escaped assessment; the reopening amounted to a mere change of opinion about the allowability of the deductions. Relying on the principle that the power to reopen under section 147 must be grounded in tangible material (and not in a review or mere change of opinion), the notice to reopen was held invalid on this count. [Paras 6, 7, 8, 9, 10]Reopening was invalid as there was no tangible material and it merely reflected a change of opinion; the reason for reopening on this ground is quashed.Reopening of assessment under section 147 - tangible material - disallowance of depreciation on obsolete assets - change of opinion - power to reassess versus power to review - Validity of reopening the assessment insofar as disallowance of depreciation on obsolete assets and proposed change in rate of disallowance - HELD THAT: - The assessee had disclosed the write-off of obsolete assets and had, without prejudice, furnished a computation which the Assessing Officer treated as the basis for a 20% disallowance. The Assessing Officer now sought to reopen the assessment to disallow depreciation at 25% (a different rate), but the reasons recorded did not advert to or supply tangible material justifying reopening on that ground. The affidavit relied upon the rate in the Income-tax Rules for plant and machinery, but the Court observed that the present controversy concerned disallowance in respect of written-off obsolete assets and that the cited basis lacked substance. Applying the settled law (including the test of tangible material and the distinction between reassessment and review), the Court concluded that the reopening on this ground also amounted to a mere change of opinion and could not be sustained. [Paras 11, 12, 13, 14]Reopening was invalid for lack of tangible material and for being a mere change of opinion; the reason for reopening on this ground is quashed.Final Conclusion: The petition is allowed and the notice dated March 16, 2009 under section 148 is quashed and set aside for lack of tangible material to form a reason to believe; the reopening constituted a prohibited change of opinion, and no order as to costs is made. 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.