Limitation period for reassessment u/s 150(1) when assessment is made in wrong hands

Limitation for reassessment u/s 150(1) has to be counted on the date of assessment order passed by the AO assessing the income in the wrong hands – ITAT

This appeal by the assessee was directed against the order of CIT (A) upholding the legality of the reassessment made u/s 147/148 by the Assessing Officer (AO) by invoking Section 150(1) of the Income Tax Act, 1961 (the Act) when the finding or direction passed by CIT(A) was not related to the assessee but to a third party.

ABCAUS Case Law Citation
ABCAUS 2352 ( 2018) 05 ITAT

The assessee was a partnership firm. The assessee firm purchased land in open auction. Subsequently, the two partners of the assessee firm released their right in favour of the third partner. The AO initiated the proceedings under section 148 against one partner of the firm and proposed to assess the income which escaped assessment on account of the transaction of releasing the rights in the said land.

Thereafter, the AO assessed the total income of the said partner while passing the assessment order under section 143(3) read with section 147 of the Act by making an addition under section 50C of the Act.

The Partner challenged the action of the AO by filing appeal before CIT (A). A similar appeal was also filed by another partner against the order passed by the AO in his case. The CIT(A) held that the said release deed in substance was a Sale Deed wherein the partnership firm has transferred the land and, therefore, the partner does not have any separate right in the land except the rights possessed on being a partner of the partnership firm.

On the basis of the said order passed by the CIT (A) in case of one partner, the AO issued a notice under section 148 to reopen the assessment of the assessee partnership firm.

According to the assessee the notice issued by the AO u/s 148 was barred by limitation provided under section 149 and further under section 150 of the Act.

It was contended that when the limitation for reopening the assessment in the case of the assessee had already expired when the AO passed the assessment in case of the partner, then the notice issued by the AO to the firm was barred by limitation.

The Revenue contended that the limitation had to be considered on the date of notice issued by the AO under section 148 in the case of the partner and not on the date when the assessment order was passed. It was submitted that the AO had taken a wrong decision of assessing the said income in the hands of the partner by issuing the notice under section 148 which was the relevant date for the purpose of computing the limitation. Referring to the provisions of section 150(1) of the Act, it was submitted that the AO has power to assess or reassess the income of a person based on the orders passed by the appellate authority and, therefore, the reopening of the assessment was well within the powers and jurisdiction of the AO.

The Tribunal observed that the AO had reopened the assessment by issuing notice under section 148 on 3 rd March, 2015 by recording the reasons that the CIT (A) in the case of its partner, had held that the capital gains, if any, would arise in the hands of the firm and not in the hands of the partner. Therefore, the notice issued under section 148 on 3rd March, 2015 is beyond the limitation period of 6 months provided under section 149 of the Act. However, since the reopening is based on the order of the CIT (A), therefore, the limitation was relaxed under section 150(1) of the Act subject to the restrictions provided under sub section (2) of section 150 of the Act.

The ITAT observed that the issue of limitation had been considered by the Tribunal as well as the various High Courts as relied on by the assessee.

The Tribunal opined that it is now settled proposition of law on the point that section 150(1) is an exception to the limitation provided under section 149 for the purpose of issuing a notice under section 148. However, the limitation relaxed under section 150(1) is also not unlimited but subject to the conditions and restrictions as provided under sub-section (2) of section 150 of the Act.

The Tribunal opined that the limitation, accordingly, has to be counted on the date of assessment order passed by the AO assessing the income in the wrong hands and, therefore, if the AO could have assessed the same income in the hands of the right person instead of a wrong hand then the limitation for reassessment of the said income is available to the AO irrespective of the time consumed in the appeal proceedings.

It was observed that on the instant case, the assessment order was passed by the AO in case of the partner on 27th February, 2014 and, therefore, the limitation has to be considered on the said date of passing the assessment order in the wrong hands i.e. 27th February, 2014. There was no dispute that as on 27th February, 2014 the AO could not reopen the assessment of the assessee being barred by limitation as provided under section 149 and, therefore, the relaxation provided under section 150(1) and (2) of the Act was only to the extent that if the AO could have assessed the same income in the hands of the right person as on the date of the order by which the income was wrongly assessed in the hands of other person.

The ITAT opined that since the limitation for reopening the assessment was not available when the assessment order was passed on 27th February, 2014, therefore the notice issued by the AO under section 148 is without the jurisdiction of the AO to initiate the proceedings for reopening of the assessment.

Following the earlier order of the Tribunal, it was held that the reopening was not permissible in the case of the assessee when the limitation was not available even on the date when the assessment order was passed in the case of partner. The limitation was saved if the same was available on the date when the assessment order was passed in the wrong hands and, therefore, the subsequent time period consumed in the proceedings before the first appellate authority and thereafter will not affect the power of the AO for reopening of the assessment.

In view of the above the Tribunal set aside the reopening of the assessment being void abinitio and consequently the reassessment was quashed.

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