Reopening for escaped FDR income upheld as profits were estimated only on contract income

Reopening for escaped FDR income upheld when in original assessment profits was estimated only on contract income ignoring interest income

ABCAUS Case Law Citation:
ABCAUS 3140 (2019) (09) ITAT

Important case law relied upon by the parties:
ACIT vs. Rajesh Jhaveri Stock Brokers P. Ltd.’ 2007 291 ITR 500
Raymond Woolen Mills Ltd. Vs. ITO’ (1999) 236 ITR 34 (SC)
Anand Prakash Agrawal vs. CIT’ 121 DTR 227
CIT vs. United Racing & Blood Stock Breeders Pvt. Ltd. 131 DTR 344
M/s Larson & Turbo Ltd. vs. State of Jharkhand (S.C.)
CIT vs. Popular Vehicles & Services Ltd.
A.L.A. Firm vs. Commissioner of Income Tax 1991 SCR (1) 624, 1991 SCC (2) 558 (SC)

In the instant case, the appeal emanated from the order of the Commissioner of Income Tax (Appeals) wherein assessee had inter alia challenged the re-opening of the case u/s 147 of Income Tax Act, 1961 (the Act) invalid as mere a change of opinion.

The Assessing Officer (AO) had framed original assessment u/s 143(3) by estimating profit. The AO rejected the books of accounts of the assessee u/s 145(3) of the Act and assessed income of the assessee only on total contract receipt (on percentage basis) of work done by self and subcontract. However, apart from contract receipt the assessee firm also had shown FDR interest income grouped under the head ‘other income’ in the audited Profit and Loss account.

While arriving at the income of the assessee, the amount of FDR interest was not included in the Contract receipt by the Assessing Officer and also not added in his income during assessment order. It was only subsequently the AO noticed that the assessee’s interest income from FDRs had escaped assessment within the meaning of section 147 of the Act.

Accordingly, the AO recorded his satisfaction on the escapement of the assessee’s income from other sources and reopened the assessee’s case u/s 147 of the Act by way of issue of notice u/s 148 of the Act.

The reassessment was completed by the AO by making an addition under the head income from other sources against interest income from FDRs.

The CIT(A) rejected the legal ground of the assessee by observing that the Hon’ble High Court had held that sufficiency of correctness of the material is not a thing to be considered at the stage of reopening of proceedings u/s 147. Accordingly, the CIT(A) upheld validity of the reopening of assessment by the AO.

Reopening for escaped FDR income upheld as profits were estimated only on contract income

The Tribunal found that perusal of the computation of original assessment order passed u/s 143(3) of the Act, there was no reference made regarding the other income earned by the assessee on account of interest on FDR’s either in the notices issued by the AO or the compliance and written submission furnished by the assessee during the course of original assessment proceedings.

The Tribunal noted that the Hon’ble Supreme Court had held that:

“…….. The result of these decisions is that the statute does not require that the information must be extraneous to the record. It is enough if the material, on the basis of which the reassessment proceedings are sought to be initiated, came to the notice of the Income-tax Officer subsequent to the original assessment. If the Income-tax Officer had considered and formed an opinion on the said material in the original assessment itself, then he would be powerless to start the proceedings for the reassessment. Where, however, the Income-tax Officer had not considered the material and subsequently come by the material from the record itself, then such a case would fall within the scope of section 147(b) of the Act.

When he subsequently became aware of the decision, he initiated proceedings under S. 147(b). The material which constituted information and on the basis of which the assessment was reopened was the decision in Ramachari. This material was not considered at the time of the original assessment. Though it was a decision of 1961 and the I.T.O. could have known of it had he been diligent, the obvious fact is that he was not aware of the existence of the decision then and, when he came to know about it, he rightly initiated proceedings for assessment.”

The Tribunal also observed that in a similar case, the Hon’ble High Court had rejected the argument of the assessee that when the claim was allowed in the original assessment any proposal for subsequent disallowance of relief granted originally in the assessment either fully or partially should be taken as on account of change of opinion. The Hon’ble High Court did not accept the argument because the Assessing Officer had not discussed the matter in the regular assessment but allowed deduction in terms of the claim made in the returns.

The Hon’ble High Court held that there is no embargo in section 147 against the Assessing Officer re-examining the assessment file and re-appreciating the evidence, and accounts in support of the claim and arriving at a conclusion which may attract section 147.

The Hon’ble High Court stated that there is no presumption anywhere in the provisions of the Act to the effect that every regular assessment completed is after due consideration of every claim under the provisions of the Act. On the other hand, the scope of Explanation 2 to section 147 is such that the Assessing Officer is free to re- examine the correctness of a regular assessment and decide whether the tax assessed, rate applied, relief and allowances granted, etc., are in terms of the provisions of the Act and if not to revise the assessment in terms of section 147 of the Act.

The Hon’ble High Court pointed out that the scope of the section after amendment is large enough to cover situations whereby deductions have been wrongly or excessively granted, the Tribunal has no authority to restrict the powers of the Assessing Officer by holding that change of opinion is not a ground to reopen the assessment under section 147 of the Act.

Even the Hon’ble High held that there is no difference between the proceedings completed under section 143(1) and the regular assessment under section 143(3) of the Act, if income chargeable to tax has escaped assessment within the meaning of Explanation 2 to section 147 of the Act.

The Tribunal also noted that the Hon’ble Apex Court had clarified that at the initial stage, what is required is reason to believe but not to establish the fact of escapement of income and such formation of believe by the AO is within realm of subject to satisfaction.

In another case the Hon’ble Supreme Court held that at the time of reopening assessment proceedings u/s 147, what is to be only seen is whether there was prima facie material on the basis of which the department could reopen the case. The sufficiency and correctness of the material is not a thing to be considered as this stage.

Accordingly the Tribunal held that there was no sufficient material to establish that there was change of opinion on the part of the AO while recording reasons to believe u/s 147 of the Act.

The Tribunal also approved the ‘reason to believe’ and following the Hon’ble Apex Court on the reopening of the assessment u/s 147 of the Act, upheld the order of the CIT(A).

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