2025 (8) TMI 1182 - AT - Income Tax

Reopening under Section 147/148 invalid where reassessment based on bogus interest belief but income added for TDS

Sunanda Constructions Nandadeep Versus DCIT, Central Circle 2 (2), Pune

Sunanda Constructions Nandadeep Versus DCIT, Central Circle 2 (2), Pune - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether reopening of assessment under section 147 read with section 148 is valid where the reasons recorded state belief of escaped income on account of allegedly bogus interest expense, but the Assessing Officer makes additions on a different ground (non-deduction of TDS under section 194A) not forming part of the reasons for reopening. 2. Whether an Assessing Officer, after issuing notice under section 148 on specific grounds, may assess or reassess income other than that which formed the basis of the reason to believe without issuing a fresh notice when, during proceedings, he accepts the assessee's contention that the original escaped-income allegation does not subsist. 3. Ancillary issues considered but not adjudicated on merits in view of the decision on Issue 1-2: applicability of section 40(a)(ia) disallowance where interest is capitalized; liability to deduct TDS under section 194A in respect of interest paid to cooperative credit societies (Patsansthas); and restriction of disallowance in light of retrospective amendment to section 40(a)(ia). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of reassessment when addition made on a ground different from the reasons for reopening Legal framework: Section 147 empowers reopening where the Assessing Officer has reason to believe income chargeable to tax has escaped assessment; section 148 provides for issuance of notice based on recorded reasons. Explanation 3 to section 147 (post-insertion) permits assessment/reassessment of the income which formed the basis of the belief and also any other income which comes to notice during proceedings. Precedent Treatment: The Court relied on the authoritative precedent interpreting the effect of Explanation 3 and the scope of assessments following issuance of notice under section 148. That precedent held that Explanation 3 does not nullify the substantive conditions of section 147: if the AO, after notice, accepts the assessee's contention that the income which formed the basis of the reason to believe has not, in fact, escaped assessment, he cannot proceed to assess other income not forming part of the notice without issuing a fresh notice. Interpretation and reasoning: The Tribunal examined the reasons recorded for reopening (allegation of bogus interest expense) and compared them with the assessment order (which made additions under section 40(a)(ia) for non-deduction of TDS). The Tribunal found no addition in the assessment on the very issue that formed the basis for reopening; instead, the AO assessed on a different ground. Relying on the precedent, the Tribunal reasoned that once the AO accepts that the original ground for reopening does not result in escaped income, he cannot independently assess different income without issuing a fresh section 148 notice; Explanation 3 does not abrogate requirements of section 147. Ratio vs. Obiter: Ratio - Where the basis for issuance of a section 148 notice is a specific alleged escapement of income, and the AO, in assessment proceedings, does not make any addition on that specific issue but makes additions on unrelated grounds, such additions are not sustainable unless a valid fresh notice for those grounds is issued. Observations on the role of Explanation 3 and its limits constitute binding ratio for the facts. Conclusions: The reassessment addition made on an issue different from that recorded as reasons for reopening (non-deduction of TDS instead of alleged bogus interest) is invalid. The Tribunal set aside the addition and directed deletion. Because this legal ground disposed of the appeal, other grounds were rendered academic. Issue 2 - Whether AO may assess other income after accepting that originally alleged escaped income did not escape assessment Legal framework: As above, section 147, section 148 and Explanation 3 govern the scope of reassessment; the language 'and also' indicates cumulative assessment of the income which formed the basis and any other income that comes to notice during proceedings. Precedent Treatment: The Tribunal followed the precedent which interpreted Explanation 3 as not eliminating the substantive requirement that section 147 must be satisfied with respect to the income that formed the basis of the reason to believe; if the AO accepts the assessee's contention negating escapement on that basis, he cannot proceed to assess unrelated income without fresh notice. Interpretation and reasoning: The Tribunal accepted the reasoning that Explanation 3 permits assessment of other incomes discovered during proceedings only if the AO proceeds to assess the income which formed the basis for reopening. The Tribunal applied that interpretation to the facts: the AO did not assess the originally alleged income; consequently, assessing unrelated income (non-deduction of TDS additions) was impermissible without a fresh notice. Ratio vs. Obiter: Ratio - Where the Assessing Officer abandons or accepts away the very escapement allegation that formed the basis of the section 148 notice, he may not lawfully proceed to assess other income not encompassed by the notice unless a fresh section 148 notice is issued; Explanation 3 cannot be read to override the substantive prerequisites of section 147. Observations clarifying the cumulative meaning of 'and also' in section 147 reflect authoritative interpretation. Conclusions: The AO's action of assessing different income after issuing notice on a specific ground (and not assessing that ground) was contrary to law; deletion of the additions was directed. The Tribunal followed the precedent and granted relief on this legal point. Ancillary issues (Capitalization of interest; TDS on interest to cooperative societies; retrospective amendment to section 40(a)(ia)) - treated as academic Legal framework: Section 40(a)(ia) disallows certain payments for which tax was required to be deducted at source but was not; section 194A regulates TDS on interest; accounting treatment (capitalization of interest) affects whether expense is claimed in the year. Precedent Treatment: Various decisions were cited and distinguished at appellate levels concerning whether TDS obligation arises for interest paid to cooperative credit societies and the effect of capitalization on disallowance. The Tribunal recorded these contentions and the lower authority's handling but did not decide them on merits. Interpretation and reasoning: Because the Tribunal's primary legal ruling on the invalidity of additions (Issue 1-2) disposed the appeals, the Tribunal did not examine or rule upon these ancillary contentions; they remain academically noted and not adjudicated. Ratio vs. Obiter: Obiter - observations regarding capitalisation, exemption of payee (cooperative societies) from TDS, and retrospective amendment to section 40(a)(ia) were not finally decided and therefore are non-binding in the present judgment. Conclusions: Ancillary grounds concerning applicability of section 40(a)(ia), requirement to deduct TDS under section 194A for payments to cooperative societies, and effect of capitalization and retrospective amendments were left undecided as academic since the primary legal defect in reassessment led to full relief.