BY TIOL NEWS SERVICE

HYDERABAD, MAR 07, 2018: THE issue before the Bench in this case was whether assessment can be reopened merely because taxable income eluded assessment due to oversight or mistake by the AO and whether an AO could reopen an assessment based on the reasoning that the previous assessment was completed without considering relevant judgments. NO is the verdict. Thereupon, the High Court also held that an assessment reopened without there being any fresh material, would be tantamount to change of opinion, and so would lack jurisdiction.

Facts of the case

The assessee-company, engaged in manufacturing and trading in pig iron, opted for a public issue during the relevant AY. The issue was oversubscribed and the excess application money received was kept in short-term deposits in various banks. The funds invested earned an amount of interest. The assessee claimed an amount of deduction, being expense incurred on interest, advertisement, business promotion, printing and stationery, share application forms, traveling and other expenses. The AO treated interest income earned on the short-term deposit under the head 'income from other sources' & allowed deduction, being convinced that a nexus existed between the income earned & expenditure incurred. Subsequently after about four years, the AO reopened the assessment, proposing to disallow the expenses that had earlier been allowed. Such stance of the AO was based upon an audit objection. The same was upheld by the CIT(A) and the Tribunal. Hence the present appeal.

On hearing the matter, the High Court held that,

++ the assessment order rejected the plea of the assessee that reassessment proceedings cannot be initiated unless there is fresh material based on which the AO has a reason to believe that any part of the income escaped assessment. The AO relied upon the judgment in Kalyanji Mavji & Co. in coming to the conclusion that when there is a mistake in interpretation of a statute or law at the time of completion of original assessment, the same can be rectified by making reassessment. The AO committed a serious legal error in ignoring the judgments of the three-Judge Benches of the Supreme Court in Indian & Eastern Newspaper Society, New Delhi and A.L.A. Firm which did not accept the view in Kalyanji Mavji & Co . When it is not the case of the AO that the reassessment was necessitated on account of a fresh information, either w.r.t. the facts or law received by him, he is denuded of the jurisdiction to initiate reassessment proceedings merely because the previous assessment order was passed ignoring the existing judgments or materials. Non-noticing of the existing judgments squarely falls under the categories of oversight, inadvertence or mistake committed by the ITO and those reasons do not constitute a justifiable ground under Section 147(b) of the Act for initiating reassessment proceedings. As noted hereinbefore, the AO has misguided himself by placing reliance on the judgment in Kalyanji Mavji & Co. ignoring the subsequent judgments in Indian & Eastern Newspaper Society and A.L.A. Firm which did not approve the view in Kalyanji Mavji & Co. as regards category 2 therein. The AO also misunderstood the judgment in Maharaj Kumar Kamal Singh inasmuch as the facts in that case reveal that the AO has reopened the assessment based on the subsequent judgment of the Supreme Court which has set aside the judgment of the Patna High Court which formed the basis for the AO to pass the original assessment order. The AO in the instant case failed to notice that in the case before the Supreme Court the information relating to the judgment of the Supreme Court was received by the AO subsequent to the passing of the assessment order, unlike in the present case where the reassessment was made based on the judgments which admittedly existed when the original assessment order was passed. The CIT(A) and also the Income Tax Appellate Tribunal have mechanically upheld the order of the AO without proper appreciation of true scope and purport of Sections 147 and 148 of the Act with reference to the relevant case law. Hence the reassessment proceedings, on the facts of the case, was without jurisdiction.

(See 2018-TIOL-398-HC-AP-IT)