By TIOL News Service

AHEMDABAD, SEPT 15, 2017: THE ISSUE BEFORE THIS BENCH IS - Whether when there is tangible material on record suggesting live link with the formation of belief by the AO that income had escaped assessment, the notice of reopening cannot be struck down on ground that formation of belief was invalid. YES is the verdict.

Facts of the case:

The Assessee company had filed its return declaring total income of Rs. 78.46 lacs, which was accepted u/s 143(1) and no scrutiny assessment u/s 143(3) was framed. Subsequently, a survey was carried out at the premises of Assessee-company, wherein a statement of the Director of the company Shri Parasmal Jain was recorded, and it was pleaded that, for purpose of avoiding litigation & penalty and to buy peace, the company would voluntarily disclose an amount of Rs. 9 crores as its undisclosed income which would comprise of Rs. 7.52 crores for the A.Y 2009-10 towards share capital reserves and Rs. 1.48 crores for the A.Y 2013-14 towards estimated profit for the year. However, despite such letter, the assessee-company did not offer such income to tax. The AO thereupon issued notice u/s 148 to reopen the assessment of Assessee company on the ground that it had introduced unaccounted capital through share capital and share premium. Finally, he made addition of Rs. 7.52 crores as bogus share capital and computed the assessee's total income at Rs. 8.32 crores which included assessee's original returned income of Rs. 78.46 lacs. On appeal, the Tribunal held that reopening of assessment was bad in law and therefore did not enter into the question of correctness of the additions.

On appeal, the HC held that,

++ we may recall that the return filed by the assessee was originally accepted without scrutiny. The notice for reopening was issued after the survey was carried out at the premises of the company during which, various documents were found and impounded. Statement of the Director of the company was recorded. In fact, after such survey was over, the company had written a letter to the AO showing its willingness to offer income of Rs. 7.52 crores for A.Y 2009-10 under the head of share capital reserves. The letter of course suggested that this was being done to by peace and to avoid protected litigation as also since it was not possible to reconcile the company's accounts after long gap of time. We may also recall that neither before the AO nor before the CIT(A) the assessee had raised any ground of invalidity of the notice of reopening of assessment. This is not to suggest that before the Tribunal, the same could not have been raised for the first time. Being a jurisdictional issue, it is always open for the assessee to take up a legal contention with respect to the validity of the reopening as long as supporting factual material was already on record. Therefore, the Tribunal did not commit any error in allowing the assessee to raise such a contention. The question is, did the Tribunal adopt the correct approach in declaring a notice for reopening invalid on the grounds it has so done. In case of Rajesh Jhaveri Stock Brokers P. Ltd, the Supreme Court highlighted a clear distinction between the assessment u/s 143(1) and one in which, the assessment is made after scrutiny u/s 143(3). In this context, it was observed that in the scheme of things the intimation u/s 143(1) cannot be treated to be an order of assessment and that being the position the question of change of opinion does not arise;

++ the conclusion, that a certain addition or disallowance was not permissible in face of the evidence on record, rests in the realm of testing the AO's findings on the issue and must necessarily take within its sweep the evidence and materials brought on record during the assessment proceedings and sometimes, even additional material which may have been allowed to be brought on record at the appellate stage. Such exercise would necessarily rests on evaluation of evidence and preponderance of probability. The conclusion, that the notice for reopening of an assessment is invalid, has an entirely different connotation and effect. To declare the notice as invalid, on the basis that the formation of belief by the AO that income chargeable to tax had escaped assessment by evaluating the evidence on record and by coming to the conclusion that the belief was wrong, would simply not be permissible. This is so because a certain distinction in approach is required while examining a finding by the AO as to the addition or disallowance in an order of assessment and his formation of belief that income chargeable to tax had escaped assessment. The former would be in the realm of appreciation of evidence which would be on the basis of preponderance of probabilities and application of mind on the facts so deduced. The later would be in the realm of reasonableness of the belief of the AO that income chargeable to tax had escaped assessment. If therefore, there was tangible material on record suggesting live link with the formation of the belief by the AO that income had escaped assessment, the notice of reopening cannot be struck down on the ground that the formation of belief was invalid. This is not to suggest that under no circumstances the material brought on record after issuing notice of reopening, the same cannot be looked into for testing the correctness of the belief of the AO that income chargeable to tax has escaped assessment;

++ in plain terms, the proviso to section 147 would apply only in a case where previously, assessment has been framed after scrutiny. In a case where the return is accepted u/s 143(1), the additional requirement that income chargeable to tax had escaped assessment on account of the failure on part of the assessee to disclose truly and fully all material facts, simply would not apply. In the present case therefore, the question is answered in favour of the Revenue. Resultantly, the conclusion, that the notice of reopening of assessment was invalid, is quashed since the Tribunal had not examined the additions made by AO.

(See 2017-TIOL-1885-HC-AHM-IT)