RAJU MANILAL SHAH,MUMBAI vs. ITO WD 13(1)(1), MUMBAI

The captioned appeal filed by the assessee is directed against the order passed by the CIT(A)-28, Mumbai dated 11.11.2016, for previous year relevant to assessment year 2010-11, which in turn, arises out of an order passed by the Assessing Officer under Section 143(3) r.w.s. 147 of the Income Tax Act, 1961 (in short ‘the Act’) dated 27.03.2014.

In this appeal, assessee has raised the following Grounds of appeal :-

The CIT(A) ought to have held that since the objections to initiation of action u/s. 147 of the Act were not disposed off by passing a speaking order as mandated in GKN Driveshaft (India) Ltd. v. ITO [259 ITR 19 (SC)], the consequent order passed u/s. 143(3) r.w.s. 147 of the Act was illegal and bad in law.

Before us, the learned Representative for the assessee challenged the reopening on the ground that the reasons recorded by the Assessing Officer were 4 Shri Raju Shah factually incorrect and the reassessment based on the said reasons is bad in law and void ab initio. The learned Representative pointed out that the reasons for reopening states that the assessee has set-off the losses pertaining to assessment years 2008-09 and 2009-10 against his income for the current year and return of income for the said years were filed beyond the due date; and, as such, the set-off of losses is not allowed to the assessee in terms of Section 74 of the Act. Therefore, the Assessing Officer had reason to believe that income chargeable to tax has escaped assessment to the extent of losses set-off by the assessee. The learned Representative submitted before us copy of return of income for assessment year 2010-11 and submitted that losses set-off by the assessee pertained to assessment years 2005-06, 2006-07 and 2007-08 for which returns of income were filed by the assessee well within the due date and as such, the brought forward losses of those years were rightly set-off by the assessee in accordance with the provisions of Section 74 of the Act. Thus, all the brought forward losses and depreciation pertained to years prior to assessment year 2008-09. Further, the learned Representative submitted the copy of assessment order for assessment year 2005-06 wherein it is stated that return of income for the said year was filed on 31.010.2005, i.e. before the due date. Further, copy of assessment order for assessment year 2007-08 was also submitted, wherein also it was mentioned that the return for the said year was filed on time. It was also stated in the assessment order that business loss incurred by the assessee was allowed to be carried forward. Our attention was also drawn to the assessment order for assessment years 2008-09 and 2009-10 wherein the Assessing Officer has produced the chart depicting the losses of assessment years 2005-06 to 2007- 08 as allowed to be carried forward. Thus, it was argued that the losses set-off by 5 Shri Raju Shah Assessing Officer himself in the assessment order for previous year; and, as such, there is no contravention of the provisions of Section 74 of the Act. Thus, there was no escapement of income as alleged by the Assessing Officer in the reasons for reopening and as such, the reopening is void ab initio and bad in law.

On merits, the learned Representative submitted that during the year under consideration, assessee sold business assets in the form of immovable properties and the gain arising from the sale of business assets was adjusted against the brought forward business losses. In the course of reassessment proceeding, the Assessing Officer held that the gains arising from sale of immovable properties was in the nature of Capital Gains and the same cannot be adjusted against the brought forward business losses as the brought forward business losses can be adjusted against only business income of the assessee. The learned Representative submitted that the assets were used for the purpose of business of the assessee. Thus, he argued that the gains arising from sale of business asset was rightly set-off by the assessee against the brought forward business losses of the assessee.

On the other hand, the ld. DR relied on the orders of lower authorities to contest that the reopening was rightly done. He also relied on the decision of Hon’ble Supreme Court in the case of Home Finders Housing Ltd. vs. ITO, [2018] 94 taxmann.com 84 to contest that merely because reason for reopening were not disposed off, the same will not render the reassessment proceedings invalid.

We have carefully considered the rival submissions and perused the material on record. Firstly, we shall deal with the challenge to reassessment. In this regard, we find that the reasons for reopening clearly states that assessee has set-off the losses pertaining to assessment years 2008-09 and 2009-10 against the income of the current year, however returns of income for assessment years 2008-09 and 2009-10 were filed belatedly; and, as such, the same were not eligible to be carried forward and set-off as per Section 74 of the Act. The assessee has thus contravened the provisions of Section 74 of the Act while setting off the losses and, therefore, he had reason to believe that the income to the extent of business losses set-off has escaped assessment. As pointed out by the learned Representative, the assessee had not set-off the losses for assessment years 2008-09 and 2009-10 but losses of the year prior to assessment year 2008-09 were set-off against the income of the assessee for the current year. Further, the learned Representative submitted that the returns of income for assessment years 2005-06, 2006-07 and 2007-08 were filed before the due date. The copies of the assessment order for assessment years 2005-06 and 2007-08 and for assessment years 2008-09 and 2009-10 have been referred to establish that the losses set-off by the assessee were eligible for set-off and this fact was stated in the assessment order of these years. Thus, the reasons for reopening were factually incorrect and reopening based on factually incorrect reasons is bad in law and void ab initio.

The learned DR has not controverted the above factual matrix. We thus find that the reasons recorded by the Assessing Officer were, in fact, incorrect. It is a trite law that the power of reopening is an extraordinary power and cannot be exercised in a routine manner at the whims and fancy of the Assessing Officer. The Assessing Officer shall exercise utmost care while exercising his powers under Section 147 of the Act. The section lays down the requirement to record the reasons for reopening before reopening the assessment. Such reasons should have nexus with the escapement of income and should clearly spell out the manner and the quantum of income that has escaped assessment. We thus hold that the reopening based on incorrect reasons is not permissible; and, as it goes to the root of the matter, we hold that the reassessment proceedings are void ab initio and bad in law. We accordingly set-aside the order passed by the Assessing Officer under Section 143 r.w.s. 147 of the Act.

As regards reliance by learned DR on the decision of Hon’ble Supreme Court in the case of Home Finders Housing Ltd. (supra) we find that the learned Representative before us has not challenged the reopening on this ground and, therefore, the decision cited by the learned DR is not relevant.

It is also pertinent to mention here that the issue on which the case of the assessee was reopened was different from the issue on which the addition has been made. It is also pertinent here to refer to the decision of the Hon’ble Bombay High Court in the case of CIT vs. Jet Airways (I) Ltd., [2011] 331 ITR 0236 wherein it was held that Assessing Officer may assess or reassess the income in 8 Shri Raju Shah respect of any issue which comes to his notice subsequently in the course of the proceedings though the reasons for such issue were not included in the notice; however, if after issuing a notice under Section 148, the Assessing Officer accepts 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. Thus, on this parity of reasoning also, we hold that reassessment and addition made pursuant to said reopening is bad in law and the same should be deleted.

Since we have held the initiation of reassessment proceeding as bereft of validity, the entire assessment order stands quashed, as such all other issues raised in this appeal, relating to merits of the addition, are rendered academic.

In the result, appeal of the assessee is allowed, as above.