THE issues before the Bench are - Whether role of the Audit parties is to point out factual mistakes and not to advise the AO on legal matters and Whether, if an AO, reopens the assessment on the legal advice of the audit party, it cannot be held as the formation of an independent opinion for the purpose of section 147. And the verdict goes against the Revenue.
Assessee-company, engaged in the business of leasing and investment banking, filed its original return that was assessed u/s 143(3) of the Act on 25.02.2005. AO determined the total income of the assessee at Rs.90,48,86,939/-under the normal provisions and at Rs. 85,99,59,539/- u/s.115JB of the Act. While passing order u/s 143(3) of the Act, AO made the additions on account of leasing equalisation reserve was added to the total income of the assessee, while computing the income under the normal provisions of the Act, but while computing the book profit u/s 115JB of the Act, AO did not add the said amount. Similarly, provision for investment valuation was considered by the AO for computing income as per the provisions of section 115JB of the Act, but same was not considered for computing income under normal provisions of the Act.
Subsequently, AO re-opened the case u/s 147 of the Act as he was of the opinion that there were reasons to believe that certain income chargeable to tax had escaped assessment. Accordingly, a notice u/s 148 of the Act was issued. The assessee vide his letter dated 05.01.2006 stated that the original return filed by it should be taken as the return filed in response to notice issued u/s 148.
During re-assessment proceedings, the AO asked for various details from the assessee and after considering the explanation of the assessee certain additions/disallowances were made in the assessment order passed u/s 143(3) r.w. section 147 of the Act. CIT(A) upheld the action of the AO in initiating reassessment proceedings.
On further appeal, the ITAT held that,
++ reopening of a completed assessment, is governed by certain principles. One of the settled principles, in this regard, is that the assessing authority cannot keep improving his case from time to time and that the reassessment proceedings have to stand or fall on the basis of what is stated in the reasons recorded u/s.148(2) and nothing more. Secondly, it can hardly be disputed that once the AO notices a certain claim made by the assessee in the return filed, has some doubt about eligibility of such a claim and, therefore, raises queries, extracts response from the assessee, thereafter in what manner such claim should be treated in the final order of assessment, is an issue on which the assessee would have no control whatsoever. Whether the AO allows such a claim, rejects such a claim or partially allows and partially rejects the claim, are all options available with the AO, over which the assessee beyond trying to persuade the AO, would have no control whatsoever;
++ if the AO on his own for reasons best known to him, chooses not to assign reasons for not rejecting the claim of an assessee after thorough scrutiny, it can hardly be stated by the Revenue that the AO cannot be seen to have formed any opinion on such a claim. Such a contention, would be devoid of merits. If a claim made by the assessee in the return is not rejected, it stands allowed. If such a claim is scrutinised by the AO during assessment, it means he was convinced about the validity of the claim. His formation of opinion is thus complete. Merely because he chooses not to assign his reasons in the assessment order would not alter this position. It may be a non-reasoned order but not of acceptance of a claim without formation of opinion. In other words, in a situation where the AO during scrutiny assessment, notices a claim of exemption, deduction or such like made by the assessee, having some prima facie doubt raises queries, asking the assessee to satisfy him with respect to such a claim and thereafter, does not make any addition in the final order of assessment, he can be stated to have formed an opinion whether or not in the final order he gives his reasons for not making the addition;
++ jurisdictional High Court, in the case of Export Credit Guarantee Corporation of India Ltd. (2013-TIOL-56-HC-MUM-IT), has held that when an assessment is sought to be reopened within a period of four years from the end of the relevant assessment year, the test to be applied is whether there is tangible material to do so. What is tangible is something which is not illusory, hypothetical or a matter of conjecture. Something which is tangible need not be something which is new. Thus, the most important factor to issue notice u/s.148 of the Act is existence of tangible material;
++ the AO even within a period of four years cannot reopen an assessment merely on the basis of a change of opinion. The AO has no power to review an assessment which has been concluded. But, where he has tangible material to come to the conclusion that there is an escapement of income from assessment, the power to reopen can be exercised. In the case under consideration only tangible material referred to by the AO is his errors in including/excluding certain items of income while calculating the income of the assessee under the normal provisions or under MAT provisions;
++ reassessment proceedings were initiated by the AO after objections were received from the internal audit party, the dates of audit objections and the dates of issue of notice u/s. 148 establish the fact that there was nexus between the two. From the sequence of the events it is clear that the AO had issued the notice for reopening after considering the issues raised by the audit party. The items involved in the audit objections find place in the reasons recorded by the AO. While passing the original assessment order, AO had called for the details about lease equalisation reserve as well as about the writing off of non- performing assets. Question No. 16 & 18 of the questionnaire issued by the AO on 16.11.2004 is about these two issues. After considering the submissions of the assessee, AO decided that lease equalisation reserve and provision of diminution in investment has to be given particular treatment. One of the items was taxed under normal provisions and not under MAT provisions, whereas the other item was considered for MAT provisions and not for computation under normal provisions of the Act. Thus, an informed decision was taken by the AO about both the items. In these circumstances, if AO decided to issue a fresh notice for reopening the completed assessment, it has to be treated as change of opinion. It can also be said that the order of assessment that was passed by the AO u/s 143(3) is not silent in respect of points on the basis of which the assessment was sought to be reopened. There is merit in the contention which has been urged on behalf of the assessee that queries had been raised during the course of the assessment and the assessment order would ex facie disclose that the AO had applied his mind to the points on the basis of which the assessment was now sought to be reopened. Thus, no tangible material existed to reopen the assessment in the present case;
++ role of the Audit parties is to point out the factual mistakes and not to advise the AO on legal matters. Therefore, if an AO, reopens the assessment on the legal advice of the audit party, it cannot be held forming of an independent opinion. Whether a particular item has to be added or not while computing the income under normal provisions or MAT provisions is an issue to be decided by the AO. He is the only person to interpret the law pertaining to computation of income as per the provisions of section 115 JB of the Act. It is not the case that AO had not called for any details from the assessee in this regard. He analysed the pieces of information supplied by the assessee about both the issues and later on decided to assess the income in a particular manner. It is noteworthy that order was passed by a senior officer of the department i.e. by Additional CIT in the case under consideration an experienced officer has taken a view after considering the relevant facts and law.He has not initiated reassessment proceedings on his own. As stated earlier, 148 notice was issued after receiving objection from audit party. It is true that, while initiating 147 proceedings, he has not mentioned that reason for reopening was not the audit objections. But, if we consider the surrounding circumstances it is clear that trigger point was the objections raised by the audit party;
++ considering the particular facts and circumstances of the case under consideration, reopening was result of change of opinion. Fact that the AO did not record reasons for computing income under normal/MAT provisions, would be of no consequence. Therefore, the notice u/s. 148 in the present case was issued without jurisdiction.
Facts of the case
Assessee-company, engaged in the business of leasing and investment banking, filed its original return that was assessed u/s 143(3) of the Act on 25.02.2005. AO determined the total income of the assessee at Rs.90,48,86,939/-under the normal provisions and at Rs. 85,99,59,539/- u/s.115JB of the Act. While passing order u/s 143(3) of the Act, AO made the additions on account of leasing equalisation reserve was added to the total income of the assessee, while computing the income under the normal provisions of the Act, but while computing the book profit u/s 115JB of the Act, AO did not add the said amount. Similarly, provision for investment valuation was considered by the AO for computing income as per the provisions of section 115JB of the Act, but same was not considered for computing income under normal provisions of the Act.
Subsequently, AO re-opened the case u/s 147 of the Act as he was of the opinion that there were reasons to believe that certain income chargeable to tax had escaped assessment. Accordingly, a notice u/s 148 of the Act was issued. The assessee vide his letter dated 05.01.2006 stated that the original return filed by it should be taken as the return filed in response to notice issued u/s 148.
During re-assessment proceedings, the AO asked for various details from the assessee and after considering the explanation of the assessee certain additions/disallowances were made in the assessment order passed u/s 143(3) r.w. section 147 of the Act. CIT(A) upheld the action of the AO in initiating reassessment proceedings.
On further appeal, the ITAT held that,
++ reopening of a completed assessment, is governed by certain principles. One of the settled principles, in this regard, is that the assessing authority cannot keep improving his case from time to time and that the reassessment proceedings have to stand or fall on the basis of what is stated in the reasons recorded u/s.148(2) and nothing more. Secondly, it can hardly be disputed that once the AO notices a certain claim made by the assessee in the return filed, has some doubt about eligibility of such a claim and, therefore, raises queries, extracts response from the assessee, thereafter in what manner such claim should be treated in the final order of assessment, is an issue on which the assessee would have no control whatsoever. Whether the AO allows such a claim, rejects such a claim or partially allows and partially rejects the claim, are all options available with the AO, over which the assessee beyond trying to persuade the AO, would have no control whatsoever;
++ if the AO on his own for reasons best known to him, chooses not to assign reasons for not rejecting the claim of an assessee after thorough scrutiny, it can hardly be stated by the Revenue that the AO cannot be seen to have formed any opinion on such a claim. Such a contention, would be devoid of merits. If a claim made by the assessee in the return is not rejected, it stands allowed. If such a claim is scrutinised by the AO during assessment, it means he was convinced about the validity of the claim. His formation of opinion is thus complete. Merely because he chooses not to assign his reasons in the assessment order would not alter this position. It may be a non-reasoned order but not of acceptance of a claim without formation of opinion. In other words, in a situation where the AO during scrutiny assessment, notices a claim of exemption, deduction or such like made by the assessee, having some prima facie doubt raises queries, asking the assessee to satisfy him with respect to such a claim and thereafter, does not make any addition in the final order of assessment, he can be stated to have formed an opinion whether or not in the final order he gives his reasons for not making the addition;
++ jurisdictional High Court, in the case of Export Credit Guarantee Corporation of India Ltd. (2013-TIOL-56-HC-MUM-IT), has held that when an assessment is sought to be reopened within a period of four years from the end of the relevant assessment year, the test to be applied is whether there is tangible material to do so. What is tangible is something which is not illusory, hypothetical or a matter of conjecture. Something which is tangible need not be something which is new. Thus, the most important factor to issue notice u/s.148 of the Act is existence of tangible material;
++ the AO even within a period of four years cannot reopen an assessment merely on the basis of a change of opinion. The AO has no power to review an assessment which has been concluded. But, where he has tangible material to come to the conclusion that there is an escapement of income from assessment, the power to reopen can be exercised. In the case under consideration only tangible material referred to by the AO is his errors in including/excluding certain items of income while calculating the income of the assessee under the normal provisions or under MAT provisions;
++ reassessment proceedings were initiated by the AO after objections were received from the internal audit party, the dates of audit objections and the dates of issue of notice u/s. 148 establish the fact that there was nexus between the two. From the sequence of the events it is clear that the AO had issued the notice for reopening after considering the issues raised by the audit party. The items involved in the audit objections find place in the reasons recorded by the AO. While passing the original assessment order, AO had called for the details about lease equalisation reserve as well as about the writing off of non- performing assets. Question No. 16 & 18 of the questionnaire issued by the AO on 16.11.2004 is about these two issues. After considering the submissions of the assessee, AO decided that lease equalisation reserve and provision of diminution in investment has to be given particular treatment. One of the items was taxed under normal provisions and not under MAT provisions, whereas the other item was considered for MAT provisions and not for computation under normal provisions of the Act. Thus, an informed decision was taken by the AO about both the items. In these circumstances, if AO decided to issue a fresh notice for reopening the completed assessment, it has to be treated as change of opinion. It can also be said that the order of assessment that was passed by the AO u/s 143(3) is not silent in respect of points on the basis of which the assessment was sought to be reopened. There is merit in the contention which has been urged on behalf of the assessee that queries had been raised during the course of the assessment and the assessment order would ex facie disclose that the AO had applied his mind to the points on the basis of which the assessment was now sought to be reopened. Thus, no tangible material existed to reopen the assessment in the present case;
++ role of the Audit parties is to point out the factual mistakes and not to advise the AO on legal matters. Therefore, if an AO, reopens the assessment on the legal advice of the audit party, it cannot be held forming of an independent opinion. Whether a particular item has to be added or not while computing the income under normal provisions or MAT provisions is an issue to be decided by the AO. He is the only person to interpret the law pertaining to computation of income as per the provisions of section 115 JB of the Act. It is not the case that AO had not called for any details from the assessee in this regard. He analysed the pieces of information supplied by the assessee about both the issues and later on decided to assess the income in a particular manner. It is noteworthy that order was passed by a senior officer of the department i.e. by Additional CIT in the case under consideration an experienced officer has taken a view after considering the relevant facts and law.He has not initiated reassessment proceedings on his own. As stated earlier, 148 notice was issued after receiving objection from audit party. It is true that, while initiating 147 proceedings, he has not mentioned that reason for reopening was not the audit objections. But, if we consider the surrounding circumstances it is clear that trigger point was the objections raised by the audit party;
++ considering the particular facts and circumstances of the case under consideration, reopening was result of change of opinion. Fact that the AO did not record reasons for computing income under normal/MAT provisions, would be of no consequence. Therefore, the notice u/s. 148 in the present case was issued without jurisdiction.
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