AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2011 (2) TMI 1595
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.... the Commissioner of Income-tax (Appeals) XXIX [CIT(A)] has erred in: "1. Confirming reassessment proceedings: a) confirming the reassessment proceedings without appreciating that reopening of assessment based on change of opinion and unintelligible reasons are void and invalid and therefore the reassessment proceedings should be quashed. b) Upholding the reassessment proceedings without appreciating that the issue of Lease Equalisation Reserve which was the very basis of initiating reassessment proceedings has been decided in favour of the Appellant." 3. The assessee is a Company and is engaged in the profession of acting as advertising agents and providing equipments on lease. For the assessment year 2000-01, it filed the return of income on 29/11/2000 declaring total income of ₹ 29.49 lacs under section 115JA of the Income Tax Act, 1961 (the Act). The return was processed u/s. 143(1) of the Act. A notice was issued u/s. 154 of the Act dated 16/1/2006 was issued by the A.O to rectify the intimation passed u/s. 143(1) of the Act on the basis that Lease Equalization Reserve (LER) of ₹ 1,75,89,839/- is nothing but a portion of the capital asset and the same should....
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....investment of the lessor outstanding in the finance lease. 4. The Assessee highlighted the fact that the entries passed in the books of accounts vis-à-vis the lease equalization adjustment is tax neutral and has no implications under the Income tax Act, either in terms of the allowability of depreciation under Section 32 or in terms of determining the quantum of gross lease rentals liable to tax. The difference in the method of accounting followed for books and for tax purposes has also been recognized by the CBDT vide its Circular No.2/2001, dated 9th February, 2001, which reads as follows: "It has come to the notice of the Board that the New Accounting Standard on "leases" issued by the Institute of Chartered Accountants of India require capitalization of the asset by the lessees in financial lease transaction. By itself, the accounting standard will have no implication on the allowance of depreciation on assets under the provisions of the Income-tax Act." 5. The Assessee further submitted that though for accounting purposes we have shown lease equalization adjustment under the schedule of fixed assets as an adjustment to fixed assets, for tax purposes we have claimed ....
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....(A), the Assessee challenged the validity of initiation of reassessment proceedings u/s.147 of the Act, on several grounds which included the ground that there did not exist any "reason to believe that income of the Assessee chargeable to tax has escaped assessment". The learned CIT(A) held that since no assessment was made u/s. 143(3) of the Act was made for the relevant AY, it cannot be said that the reopening of assessment was done purely on a change of opinion and for a valid reopening of assessment, the AO is only required to form a prima facie belief that income has escaped assessment. 9. Aggrieved by the order of the CIT(A) upholding the validity of initiation of reassessment proceedings, the Assessee in its appeal has raised ground No.1 before the Tribunal. Before us the ld. Counsel for the assessee submitted that the assessee has leased certain assets (eg. Windmill, electric meters, etc.) to various parties. It was in receipt of lease rentals pre-determined in accordance with the terms of the respective agreements entered into with the parties. The assessee has created a LER in its books of accounts in compliance with the Guidance Note on Accounting for Leases(Revised)(gu....
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....ve' that any income has escaped assessment. Such reason to believe is sine qua non for the initiation of the proceedings. It was argued that in various judicial pronouncements, it has been laid down that the words 'reason to believe' import the cumulative presence of following four elements: - Some material or materials and not merely fancy, imagination, speculation, suspicion. - A nexus between such material and the belief of escapement of income from assessment in the circumstances outlined in section 147. - An application of mind by the AO to such material. - An inference based on reason drawn tentatively by the officer that income has escaped assessment. It was submitted that the while reopening the assessment proceedings for A.Y 2000-01 the above conditions have not been satisfied. The only reason for reopening of the assessment proceedings provided by the AO is that " This amount, being a portion of capital asset, should have been capitalized as the assessee is claiming depreciation on the leased asset." It was submitted that the AO has failed to apply his mind in comprehending the concept of LER. With an unclear mind, the learned AO has provided an unclear reason wh....
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..... In the initial years lease equalization charges are credited to the P&L Account and towards the end of the period of lease they are debited to the P&L Account. While filing the return of income for Income Tax purposes, the assessee reduced the profit as per P&L Account and whenever LER is credited to the P&L account. Whenever the LER is credited to P&L Account again the same is added to the profit as per P&L Account. Thus as far as income offered for the purpose of tax is concerned there was no effect on account of LER accounted by the assessee in compliance with the guidelines issued by ICAI. This position is quite evident and has been duly highlighted by the assessee in its reply to the notice issued by the Assessing Officer under section 154 of the Act. The proceedings under section 154 of the Act commenced by issue of notice date 16/1/2006, on the very same issue on which proceedings under section 147 were initiated. The assessee sent a reply to the notice under section 154 on 24/1/2006. No action whatsoever has been taken by Assessing Officer. However, on 9/10/2006 the Assessing Officer recorded reasons for issue of notice under section 148 of the Act. It is thus clear that ....
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....would not form the basis for such belief. In this context, the following judgments are relevant. Ganga Saran& Sons (P) Ltd. vs. ITO & Ors 130 ITR 1(SC). The relevant observations of the Apex Court are as follows: " The important words in section 147(a) are "has reason to belief" and these words are strong than the words "is satisfied". The belief entertained by the Income-tax Officer must not be arbitrary or irrational. It must be reasonable or in other words, it must be based on reasons, which are relevant and material. The Court of course, cannot investigate into the adequacy or sufficiency of the reasons which have weighed with the Income-tax Officer in coming to the belief, but the Court can certainly examine whether the reasons are relevant and have a bearing on the matters in regard to which he is required to entertain the belief before he can issue notice under section 147(a). If there is no rational and intelligible nexus between the reasons and the belief, so that, on such reasons, no one properly instructed on fact and law could reasonably entertain the belief, the conclusion would be inescapable that the Income-tax Officer could not have reason to believe that any par....
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....f the assessee chargeable to tax has escaped assessment. The debit or credit of LER in the profit and loss account was only in compliance with the requirement under the Companies Act, 1956. Consequently, we hold that the initiation of reassessment proceedings is not valid. Consequently the order under section 147 is annulled. In view of the decision on the validity of initiation of reassessment proceedings the other issues raised by the assessee as well as the revenue in their appeals are not taken up for consideration. ITA No.3634/M/08 & 4071/M/08:- 15. Ground No.1 raised by the assessee in it's appeal reads as follows: "Based on the facts, circumstances of the case and in law, Grey Worldwide (India) Private Limited (hereinafter referred to as the' Appellant') submits that the Commissioner of Income-tax (Appeals) XXVIII [CIT(A)] has erred in: "1. Confirming reassessment proceedings: c) confirming the reassessment proceedings without appreciating that reopening of assessment based on change of opinion and unintelligible reasons are void and invalid and therefore the reassessment proceedings should be quashed. d) Upholding the reassessment proceedings without appreciating....