Validity of reassessment if AO reopened assessment on one issue but did not make addition thereunder

Short Overview  Where no addition was made on the issue for which the assessment was reopened, it was not open to AO to make independent addition for which he had not recorded reason to believe for issuing notice under section 148 and there was no error in the action of AO in not travelling to other issues for making addition once no addition was made on the issue for which assessment was reopened, therefore, PCIT clearly erred in invoking revision jurisdiction on an issue, which AO could not have examined in reassessment proceedings.

The return of assessee was processed under section 143(1) and assessment was reopened on the ground that there was misuse of Client Code Modification. Consequently, notice under section 148 was issued. Order under section 143(3) r.w.s. 147 was passed without any addition. Thereafter, PCIT invoked the provisions of section 263 on the ground that AO had failed to examine interest expenditure claimed in the P&L Account. PCIT observed that assessee did not have its own capital, therefore, the loan was given from borrowed funds. PCIT further observed that assessee had not shown any interest from borrowed money, as such, interest expenditure debited to the P&L Account was required to be disallowed in proportion to money borrowed but not used for business purpose. 

It Is held that A perusal of the assessment order shows that assessment was reopened to examine misuse of Client Code Modification for tax evasion. No addition was made by AO in respect of the issue for which the assessment was reopened. It is a well settled law that where no addition is made on the issue for which assessment is reopened, it was not open to AO to make independent addition for which he had not recorded reason to believe for issuing notice under section 148. There was no error in action of AO in not travelling to other issues for making addition once no addition was made on the issue for which assessment was reopened. Therefore, PCIT clearly erred in invoking revisional jurisdiction on an issue, which AO could not have examined in reassessment proceedings.

 

Decision: In assessee’s favour.                     

 

Relied: CIT v. Sun Engineering Works Pvt. Limited (1992) 198 ITR 297 (SC) : 1992 TaxPub(DT) 1434 (SC)

CIT v. Jet Airways (I) Ltd. (2011) 331 ITR 236 (Bom) : 2011 TaxPub(DT) 0218 (Bom-HC)

CIT v. Paul Brothers (1995) 216 ITR 548 (Bom) : 1995 TaxPub(DT) 0140 (Bom-HC).

 

 

 

IN THE ITAT, MUMBAI BENCH

SANJAY ARORA, A.M. & VIKAS AWASTHY, J.M.

Nilesh Ajit Kumar Jain v. ITO

ITA No. 3488/Mum/2019

27 July, 2020

Appellant by: Ketan L. Vajani

Respondent by: Rahul Raman

Vikas Awasthy, JM

This appeal by the Revenue is directed against the order of Principal Commissioner of Income Tax-1, Nasik (in short ‘the PCIT’) dated 28-3-2019 passed under section 263 of the Income Tax Act, 1961 (in short ‘ the Act’).

2. Shri Ketan L. Vajnani, appearing on behalf of the assessee submitted that assessee had filed return of income for the impugned assessment year on 23-9-2008 declaring total income of Rs. 16,44,220. The return of the assessee was processed under section 143(1) of the Act. Thereafter, assessment was reopened on the ground that there was misuse of Client Code Modification. Consequently, notice under section 148 of the Act was issued to the assessee on 31-3-2016. Order under section 143(3) r.w.s. 147 of the Act was passed on 2-5-2016 without any addition. Thereafter, the PCIT invoked the provisions of section 263 of the Act on the ground that assessing officer has failed to examine interest expenditure amounting to Rs. 4,94,882 claimed in the P&L Account. The PCIT observed that the assessee did not have its own capital, therefore, the loan was given from borrowed funds. The PCIT further observed that the assessee has not shown any interest from borrowed money, as such, interest expenditure debited to the P&L Account was required to be disallowed in proportion to money borrowed but not used for business purpose. The learned Authorized Representative of the assessee contended that the scope of examination in reassessment proceedings available to the assessing officer was limited to examine misuse of client code modification. Since, no addition was made by the assessing officer, for which assessment was reopened, the assessing officer could not have travelled to other issues. To buttress his arguments the learned Authorized Representative of the assessee relied on the decision of the Hon’ble Bombay High Court in the case of CIT v. Jet Airways (India) Limited reported as (2011) 331 ITR 236 (Bom) : 2011 TaxPub(DT) 0218 (Bom-HC).

The learned Authorized Representative of the assessee further contended that since the assessment order was passed in conformity with the binding decision of the Hon’ble Jurisdictional High Court, the PCIT was not justified in invoking the provisions of section 263 of the Act. In support of his contention, the learned Authorized Representative placed reliance on the decision rendered in the case of CIT v. Paul Brothers reported as (1995) 216 ITR 548 (Bom) : 1995 TaxPub(DT) 0140 (Bom-HC).

3. On the other hand, Shri Rahul Raman, representing the Department vehemently defended the impugned order. The learned Departmental Representative submitted that in reassessment proceedings, the assessing officer has failed to examine interest expenditure claimed by the assessee.

The balance sheet of the assessee as on 31-3-2009 shows loan of Rs. 46.36 lacs taken by the assessee and at the same time the assessee has advanced loan of Rs. 25.94 lacs. Own interest free funds of the assessee in the form of capital or reserves were not sufficient to advance the loans.

4. We have heard the submissions made by rival sides and have perused the impugned order and the assessment order passed under section 143(3) r.w.s. 147 of the Act. A perusal of the assessment order shows that the assessment was reopened to examine misuse of Client Code Modification for tax evasion. No addition was made by the assessing officer in respect of the issue for which the assessment was reopened. It is a well settled law that where no addition is made on the issue for which the assessment is reopened, it is not open to the assessing officer to make independent addition for which he had not recorded reason to believe for issuing notice u/s 148 of the Act.

The Hon’ble Jurisdictional High Court in the case of CIT v. Jet Airways (India) Ltd. (supra) has elucidated this principle. The relevant extract of the findings of the Hon’ble Court on this issue reads as under :–

“16. Explanation 3 lifts the embargo, which was inserted by judicial interpretation, on the making of an assessment or reassessment on grounds other than those on the basis of which a notice was issued under section 148 setting out the reasons for the belief that income had escaped assessment. Those judicial decisions had held that when the assessment was sought to be reopened on the ground that income had escaped assessment on a certain issue, the assessing officer could not make an assessment or reassessment on another issue which came to his notice during the proceedings. This interpretation will no longer hold the field after the insertion of Explanation 3 by the Finance Act (No. 2) of 2009. However, Explanation 3 does not and cannot override the necessity of fulfilling the conditions set out in the substantive part of section 147. An Explanation to a statutory provision is intended to explain its contents and cannot be construed to override it or render the substance and core nugatory. Section 147 has this effect that the assessing officer has to assess or reassess the income (“such income”) which escaped assessment and which was the basis of the formation of belief and if he does so, he can also assess or reassess any other income which has escaped assessment and which, comes to his notice during the course of the proceedings. However, if after issuing a notice under section 148, he accepted the contention of the assessee and holds that the income which he has initially formed a reason to believe had escaped assessment, has as a matter of fact not escaped assessment, it is not open to him independently to assess some other income. If he intends to do so, a fresh notice under section 148 would be necessary, the legality of which would be tested in the event of a challenge by the assessee.

(Emphasized by us.)

The Hon’ble High Court while passing the aforesaid judgment also considered the decision of Hon’ble Supreme Court of India in the case of CIT v. Sun Engineering Works (P) Ltd. reported as (1992) 198 ITR 297 (SC) : 1992 TaxPub(DT) 1434 (SC), wherein, the Hon’ble Apex Court interpreted the provisions of section 147 as they stood prior to the amendment on 1-4-1989.

5. Thus, in view of the settled legal position, we find no error in the action of assessing officer in not travelling to other issues for making addition once no addition was made on the issue for which assessment was reopened. The PCIT clearly erred in invoking revisional jurisdiction on an issue, which the assessing officer could not have examined in reassessment proceedings.

6. We find merit in the appeal of the assessee. Accordingly, the impugned order is set-aside and the appeal of assessee is allowed.

7. In the result, appeal of assessee is allowed.

8. This appeal was heard on 5-3-2020. As per Rule 34(5) of the Income Tax (Appellate Tribunal) Rules, 1963, (ITAT Rules, 1963), the order was required to be “ordinarily” pronounced within a period of 90 days from the date of conclusion of the hearing of appeal. The instant appeal was heard prior to the lockdown declared by the Hon’ble Prime Minister on 24-03-2020 in view of COVID-19 pandemic. The lockdown was forced due to extra ordinary circumstances caused by world wide spread of COVID-19. Thereafter, the lockdown was extended from time to time. Therefore, the pronouncement of order beyond the period of 90 days from the date of hearing is not under “ordinary” circumstances. The Co-ordinate Bench of the Tribunal in the case of DCIT v. JSW Ltd., ITA No.6264/Mum/2018 for assessment year 2013-14 decided on 14-5-2020 : 2020 TaxPub(DT) 2142 (Mum-Trib), under identical circumstances, after considering the provisions of Rule 34(5) of the ITAT Rules, 1963, judgements rendered By Hon’ble Apex Court and the Hon’ble Bombay High Court on the issue of time limit for pronouncement of orders by the Tribunal and the circumstances leading to lockdown held :–

“10. In the light of the above discussions, we are of the considered view that rather than taking a pedantic view of the rule requiring pronouncement of orders within 90 days, disregarding the important fact that the entire country was in lockdown, we should compute the period of 90 days by excluding at least the period during which the lockdown was in force. We must factor ground realities in mind while interpreting the time limit for the pronouncement of the order. Law is not brooding omnipotence in the sky. It is a pragmatic tool of the social order. The tenets of law being enacted on the basis of pragmatism, and that is how the law is required to interpreted. The interpretation so assigned by us is not only inconsonance with the letter and spirit of rule 34(5) but is also a pragmatic approach at a time when a disaster, notified under the Disaster Management Act 2005, is causing unprecedented disruption in the functioning of our justice delivery system. Undoubtedly, in the case of Otters Club v. DIT (2017) 392 ITR 244 (Bom) : 2017 TaxPub(DT) 0689 (Bom-HC), Hon’ble Bombay High Court did not approve an order being passed by the Tribunal beyond a period of 90 days, but then in the present situation Hon’ble Bombay High Court itself has, vide judgment dated 15-4-2020, held that directed “while calculating the time for disposal of matters made timebound by this Court, the period for which the Order, dated 26-3-2020 continues to operate shall be added and time shall stand extended accordingly”.

The extraordinary steps taken suo motu by Hon’ble jurisdictional High Court and Hon’ble Supreme Court also indicate that this period of lockdown cannot be treated as an ordinary period during which the normal time limits are to remain in force. In our considered view, even without the words “ordinarily”, in the light of the above analysis of the legal position, the period during which ITA No. 6103 and lockout was in force is to excluded for the purpose of time limits set out in rule 34(5) of the Appellate Tribunal Rules, 1963. Viewed thus, the exception, to 90-day time-limit for pronouncement of orders, inherent in rule 34(5)(c), with respect to the pronouncement of orders within ninety days, clearly comes into play in the present case. Of course, there is no, and there cannot be any, bar on the discretion of the benches to refix the matters for clarifications because of considerable time lag between the point of time when the hearing is concluded and the point of time when the order thereon is being finalized, but then, in our considered view, no such exercise was required to be carried out on the facts of this case.”

Thus, in light of above facts and the decision of coordinate Bench, the present order is pronounced beyond the period of 90 days.

9. The appeal of the assesse is allowed. Order pronounced under Rule 34(4) of the Income Tax (Appellate Tribunal) Rules, 1962, by placing the details on the notice board.