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2011 (1) TMI 1160 - HC - Income TaxReopening of the assessment - assessees are directors of the company holding more than 10 per cent share and therefore in terms of s. 2(22)(e) any amount paid by the company to such directors constitutes deemed dividend and is liable to tax - directors had not filed returns. They filed returns only after the proceedings were initiated under s. 147. Though they disclosed this income in the return Held that - assessee is liable to pay tax if the said payment is made out of the accumulated profit of the company AO was justified in initiating proceedings under s. 147 of the Act for reopening the assessment to bring to tax income that has escaped assessment decision in favour of the Revenue and against the assessee
Issues Involved:
1. Validity of proceedings initiated under Section 147 of the Income Tax Act after block assessment. 2. Whether reopening of the assessment on the basis of change of opinion is valid. Detailed Analysis: Point No. 1: Validity of Proceedings Initiated Under Section 147 After Block Assessment The court examined whether the proceedings under Section 147 of the Income Tax Act, 1961, can be initiated after a block assessment has been made under Chapter XIV-B. The respondent-assessees, who were directors in a company, had not filed their returns for the assessment year 1995-96. Following a search, proceedings were initiated under Section 158BC, and the assessees filed their returns, which were assessed. Subsequently, the Assessing Officer (AO) initiated proceedings under Section 147 on the grounds that loans received by the assessees from the company had escaped assessment. The court clarified that Section 147 allows the AO to reassess income that has escaped assessment, regardless of whether the initial assessment was done under Chapter XIV-B or any other chapter. The language of Section 147 does not distinguish between different types of assessments. Therefore, the court found that there is no prohibition against reopening an assessment done under Chapter XIV-B. The first substantial question of law was answered in favor of the Revenue, affirming that the proceedings under Section 147 were valid. Point No. 2: Reopening of Assessment on the Basis of Change of Opinion The assessees contended that the AO had already considered the issue of deemed dividend during the block assessment proceedings and had chosen not to tax the amount. They argued that reopening the assessment under Section 147 on the same grounds would constitute a mere change of opinion, which is not permissible. The court referred to the Supreme Court's judgment in CIT vs. Kelvinator of India Ltd., which held that the AO must have tangible material to justify the reopening of an assessment and that a mere change of opinion does not constitute a valid reason for such action. The court also reviewed other relevant judgments, emphasizing that while the concept of "change of opinion" is not explicitly mentioned in the amended Section 147, it remains a crucial principle to prevent arbitrary reassessments. In this case, the court found that the AO had not formed any opinion regarding the taxability of the loan during the block assessment. The AO's failure to assess the loan as income was due to an oversight or mistake. Upon realizing this mistake, the AO initiated proceedings under Section 147, which the court deemed appropriate. The second substantial question of law was answered in favor of the Revenue, indicating that the reopening of the assessment was justified. Conclusion and Remand The court noted that the Tribunal had not addressed the merits of the case, specifically whether the payment constituted a loan out of accumulated profits, which would be liable to tax under Section 2(22)(e). The Tribunal had solely focused on the procedural aspect, setting aside the AO's order based on the perceived change of opinion. Given this oversight, the court remanded the matter back to the Tribunal for a detailed examination of the merits. The appeals were allowed, and the Tribunal was directed to reconsider the case in accordance with the law. Order: 1. Appeals are allowed. 2. Substantial questions of law are answered in favor of the Revenue. 3. The impugned order passed by the Tribunal is set aside, and the matter is remanded back to the Tribunal for consideration on merits. 4. Parties to bear their own costs.
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