Reopening of assessment invalid if done without application of mind

Reopening of assessment invalid if done without application of mindThe Hon’ble High Court of Gujarat at Ahmadabad in the case of Elecon Engineering Company Ltd. (Petitioner) vs. Assistant Commissioner of Income Tax (Respondent), being Special Civil Application No. 1641 of 2015 has held that Reopening of assessment invalid if done without application of mind and without citing proper reasons by the Assessing Officer though such reopening is based on information supplied by the audit party.

It has been further held that the reasons of reopening should reflect clear application of mind of the Assessing officer.

The judgment was passed on31.8.2016 by the bench comprising of Hon’ble Justice Mr. Akhil Qureshi and Hon’ble Justice Mr. A.J. Shastri.

Pleaders engaged:

Mr. R.K. Patel, Mr. B.D. Karia along with Mr. Darshan Patel appeared on behalf of the Petitioner. On the other hand, Mr. K.M. Parikh, Advocate appeared on behalf of the Respondent.

Backgrounds of the case:

The petitioner challenged the notice dated 29.3.2014 served upon it by which the respondent no.1 being Assessing Officer asked to reopen the assessment for the assessment year 2009-2010.

The petitioner was a company registered under the Companies Act engaged in manufacturing and other similar businesses.

For the assessment year 2009-2010, the petitioner filed the return of income declaring book profit of Rs.8.73 crores for section 115JB of the Income Tax Act, 1961. The petitioner offered tax at the required rate on its book profit.

The Assessing Officer picked up the return for scrutiny. After examination of many documents, assessment was framed under section 143(3) of the Act on 29.12.2011.

The Assessing Officer framed the gross income of the petitioner at Rs.61.28 crores. To reopen such assessment, the Assessing Officer issued impugned notice within four years from the end of relevant assessment year.

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For reopening under section 148 of the Income Tax Act, 1961, the Assessing Officer recorded the following reasons:

  1. The assessment was finalized under section 143 (3) on 29.12.2011 assessing the total income of the petitioner at Rs.61, 10, 65,280/.
  2. There was information that the company has sold immovable property at more than Rs. 3O Lakhs. As a result, enquiry conducted and certain information regarding the came to teh knowledge of the Assessing Tax Officer.
  3. During the year under consideration, the petitioner had executed “exchange sale agreement” dated 17.11.2008, which showed that the assessee transferred the land under Section 2(47) of the Act and therefore the assessee was liable for capital gain tax.
  4. As the assessee did not disclose any capital gain on such transfer, the capital gain required to be taxed in its hands.
  5. The assessee revised its income to Rs.58,03,61,730/- on 29.3.2011 against earlier income of Rs. 58,97,12,507/-. The reduction was due to withdrawal of interest on income tax refund and for depreciation claimed over that claimed in the original return.
  6. The assessee wrongly reduced its interest income and the same should be added to its income.
  7. In the revised return, the assessee claimed excess depreciation of Rs.21,90,237/-

In view of the above facts, that the Assessing Officer held  that an income chargeable to tax has escaped assessment within the scope of section 147 of the Income Tax Act, 1961 for the assessment year 2009-10.

Therefore notice was issued under section 148 of the Act to the petitioner.

The observations:

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It was observed that reopening was done on the basis of the information that one Ashwin Kumar B. Patel sold immovable property to the assessee for Rs.65.82 lacs but had not offered the gain from such sale to capital gain tax.

It was also noted that the assessee had claimed expenditure of Rs.10.32 lacs towards payment of notified area tax but the receipt for payment was not issued in the name of the assessee. As such, the claim was not allowable.

It was observed that the petitioner raised objections through a letter dated 23.9.2014 to the Assessing Officer to the notice of reopening, raising contentions stating that the issues were examined by the Assessing Officer during the original assessment.

All queries of the learned counsel for the petitioner were replied by the Assessing Officer. The grounds on which the Assessing Officer reopened the assessment were all scrutinized.

The learned Counsel contended that there was no new material on record which would allow the Assessing Officer to re-examine the issues. It was stated that some of the grounds were legally invalid. It was lastly contended that the entire reopening was undertaken at the instance of the audit party.

It was pointed out that the notice of reopening was not issued by the Assessing Officer on his own, but was initiated by audit party for reopening the assessment.

The petitioner’s objection was not dealt with by the Assessing Officer. The specific averments wee also not denied by the respondent.

The Learned counsel placed reliance on the decision of the Court in Gujarat Power Corporation Ltd. vs. Assistant Commissioner of Income Tax, (2013) 350 ITR 266 (Guj), which held that if the Assessing Officer examines a claim during the assessment in the order of assessment, but fails to provide reasons for disbelieving the claim of the Assessing Officer, the Assessing Officer cannot reopen the assessment on such ground.

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The learned counsel also relied on decision of Cadila Health Care Ltd. vs. Assistant Commissioner of Income Tax , 355 ITR 393.

The Hon’ble Court held that unless the Assessing Officer gives reason for believing on the basis of tangible material that an income that was chargeable to tax has escaped assessment, reopening would not be allowed.

The judgment:

It was observed that the case record revealed that the reasons were recorded by the Assessing Officer for issuing the notice. The Assessing Officer included the objections pointed out by the audit party and included another ground that the capital gain on sale of land by the petitioner that escaped tax was not part of the audit objection.

This indicated that the Assessing Officer had applied his mind and formed a belief that on the grounds stated by the audit party in its objection and additional ground which is recorded in the reasons.

As a result, the petition was dismissed

Also read: Under what situation Reopening of assessment is allowed