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I-T - Pre-existing circular cannot be a basis for reopening an assessment when, same has no relevance with issue in hand and was substituted by subsequent amendment: HC

By TIOL News Service

MUMBAI, JUNE 14, 2018: THE ISSUE IS - Whether a pre-existing circular can be considered as a 'new tangible material' for reopening an assessment even when, such a circular has no relevance with the issue in hand and was substituted by subsequent amendment. AND THE VERDICT IS NO.

Facts of the case:

The assessee company, engaged in the activity of mushroom farming, had returned income for the relevant AY. The case was selected for scrutiny. A notice was issued u/s 142(1) to the assessee to substantiate his claim. In reply, the assessee had submitted explanation regarding its activity. During the scrutiny assessment, the assessee stated that mushrooms were grown in a closed chamber. The assessee had also produced various certificates/letters issued by different Govt. disclosing its income from mushroom cultivation as agricultural income. Therefore, while accepting the contention of the assessee, the Asst. CIT passed the assessment order on 27 August 2015 u/s 143(3) by stating that the assessee was deriving an agricultural income, and its activity was agricultural activity.

However, on 28 September 2016, the AO found that income chargeable to tax had escaped assessment and thus, a notice was issued to the assessee u/s 148(1). Consequently, the sought for the reasons for issuance of such a notice. In reply, the Asst. CIT furnished reasons by stating that mushrooms were grown in wooden containers & bags inside closed chamber, using different layers of artificial soil filled in wooden trays and temperature controlled to a specific degree by closing the inlet and outlets of air to provide necessary humidity for cultivation of mushrooms, and hence, there was no connection with land. Thereafter, the Revenue stated that when there was no connection with land, the assessee's activity couldnot be called as agriculture. It was also pointed that the income arising from mushroom farming was not covered under Explanation 3 to Sec. 2(1A) and also not exempted u/s 10(1). Nevertheless, the assessee objected the reopening notice and submitted that it was merely a 'change of opinion' since, there was no discovery of new tangible material. Hence, there was no jurisdiction for the Revenue Authorities to proceed with the re-assessment. It was also contended by the assessee that the CBDT Circular no. 258 dated 14 June 1979 which was made basis of reopening the assessment, was not applicable as it lost its relevance after promulgation of Sec. 80JJA and in view of the subsequent circular dated 27 March 2009. Regardless with the assessee's contentions, the Asst. CIT passed the re-assessment order.

High Court held that,

++ the reopening of assessment is sought to be made within a period of four years. The Ss 147 and 148 deal with Section of reopening of assessment. Section 147 provides that if the AO has reason to believe that any income chargeable to tax has escaped assessment for any AY, he may, subject to the provisions of Ss 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recomputed the loss or the depreciation allowance or any other allowance, as the case may be, for the AY concerned. In respect of the reopening of assessment after period of four years, Sec. 147 states that no action shall be taken under this Section after the expiry of four years from the end of the relevant AY, unless any income chargeable to tax has escaped assessment for such AY by reason of the failure on the part of the assessee to make a return u/s 139 or in response to a notice issued under Ss 142(1) or 148 or to disclose fully and truly all material facts necessary for his assessment, for that AY. In the present case, reopening is sought before four years and therefore the proviso will not apply;

++ even though power of the AO to reopen an existing assessment and that it is wider within a period of four years, there are certain jurisdictional requirements that must exist before this power is exercised. The reintroduction of the phrase 'Reason to Believe' on the Statute book has been construed as a check on the arbitrary powers. The phrase 'Reason to Believe' cannot be considered as a mere change of opinion. The AO does not have power to Review on the basis of the same material which was available earlier. Ultimately, what is required for reopening the assessments is that there must be tangible material to come to the conclusion that there has been escapement of income from assessment. There cannot be a mere change of opinion on the part of the AO, but the Revenue must demonstrate that, subsequently some new information or material had been brought on record which was not available when the assessment order was passed earlier. If no fresh material was before the Revenue in the course of assessment subsequently, the Revenue cannot justify reopening of the assessment. This is the position of law as regard the jurisdiction of the AOs to reopen the assessment;

++ the issue whether the activity of the assessee is agriculture or not clearly arose before the AO. The AO considered the aspect of mushroom cultivation. The assessee had produced various certificates and letters including that of the Pollution Control Board stating that growing and processing tropical mushroom in Goa is not an agricultural activity. Based on this material the AO accepted the assessee's case and recording a categorical finding treated the income as an agricultural income. When the disputed reopening notice was served on the assessee and reasons were supplied, the Asst. Commissioner stated in the reasons that mushroom cultivation cannot be treated as agricultural activity as it has no connection with land. Apart from the comments on the manner of cultivation, as it can be seen from the reasons given, substantial emphasis was placed on Circular of the year 1979. When the assessee submitted his explanation to the Reasons, the assessee pointed out that there was no tangible material before the AO and what is sought to be done is 'mere change of opinion'. While rejecting the objections, the AO has only referred to the Circular dated 14 June 1979 again;

++ when the assessee had categorically asserted both in the reply to the reasons as well as in the present petition that the Circular dated 14 June 1979 has no relevance, the contention of the assessee that this Circular was issued in context of Sec. 80JJA which was in operation prior to insertion of explanation 3 to Sec. 2(1A) and it had no relevance, has not been dealt with by the AO at all, except stating that it cannot be ignored. If by subsequent amendments, the Circular had lost its efficacy and that it was substituted by another circular dated 27 March 2009, the same cannot be considered as new and tangible material. Whether the Circular has lost its relevance and is substituted by a subsequent Circular has not been explained in the order rejecting the reasons, neither in the affidavit of reply. How a pre-existing Circular amounts to discovery of new tangible material is also not explained;

++ therefore, what is before us is only a change of opinion of the AO, without any new material. The assessee had placed the material before the AO. The AO is supposed to apply law, including the Circulars, to the material placed before him. The AO took a particular view and the Asst. CIT has merely on a change of opinion sought to reopen the proceedings. Since the criteria for exercise of the jurisdiction are not met, the action of the Asst. CIT is without jurisdiction and will have to be set aside. Further, the Counsel for the Revenue has drawn our attention to the concluding paragraph of the disputed reopening order where the Asst CIT has observed that the Act provides a complete machinery for the assessment/reassessment of tax, imposition of penalty and for obtaining relief in respect of any improper order passed by the Revenue authorities. The law says that, it is mandatory, to first exhaust all avenues under the Act (which are equally effective) before filing a Writ Petition before the High Court, and no assessee can bypass the alternate remedies available under the Act and file WP to bring interim order, to short circuit and circumvent the statutory procedure in finalization of the 're-assessment' order. We believe that the stated observations made by the Asst CIT are highly objectionable and are bordering on contempt. We however, give him the benefit of doubt of being oblivious to law. We had, in fact, in an earlier Writ Petition No. 1000 of 2017, after noticing that the very same Asst CIT had passed series of order reopening assessments in ignorance of legal position, had requested the Counsel to furnish the compilation of judgments of re-assessment proceedings to the Commissioner to study the same. The position of law regarding the writ remedy is so settled, that it is understood even by the law students.

(See 2018-TIOL-1123-HC-MUM-IT)