2025 (6) TMI 461 - AT - Income Tax

Reopening of assessment - Disallowance u/s. 14A r.w.r. 8D - HELD THAT - On appeal before this Tribunal 2016 (9) TMI 55 - ITAT AHMEDABAD deleted the addition on account of disallowance u/s. 14A since the assessee has not received any dividend income during this Asst. year following jurisdictional High Court judgement. Further we notice that there is no failure on the part of the assessee in disclosing the above income in the Return of Income therefore the reopening of assessment beyond four years is invalid in the eye of law as held by the Jurisdictional High Court in the case of CIT -Vs- Mohmed Juned Dadani 2013 (2) TMI 292 - GUJARAT HIGH COURT Amount received from NSEL is in the nature of income brought in the account of debtors in the guise of so called paper trade and which needs to be taxed in the hands of the assessee company - Assessee claimed that it had no transaction carried out with NSEL in the present asst year which is also accepted by the Special Auditor in his report u/s.142A of the Act. Whereas the figure of Rs. 244.98 crores was nothing but addition made in Assessee s own case for the Asst. Year 2011-12 in the regular Assessment Order passed. On appeal before this Tribunal vide Appellate Order 2022 (11) TMI 885 - ITAT AHMEDABAD deleted the above addition also. Therefore the income escaped as mentioned in the reason recorded by the Ld AO is not relating to the present Asst. year 2009-10 the same is invalid in the eyes of law and the reassessment is liable to be quashed. Whether the AO can proceed with assessing any other escaped income when NO addition is made on account of the reasons recorded by the AO for reassessment ? - This issue is also no more res-integra by judgements of various High Courts more particularly jurisdictional High Court in the case of Mohmed Juned Dadani 2013 (2) TMI 292 - GUJARAT HIGH COURT wherein it was held that when the ground on which reopening of assessment and no addition was made by the Ld AO he could not make additions on some other grounds which did not form part of reasons recorded. We do not find any infirmity in the order passed by CIT A quashing the reassessment order as without jurisdiction. Therefore the new not forming part of reasons recorded addition made u/s. 43(5) r.w.s. 73 and section 40A(2)(b) is liable to deleted. Thus the grounds raised by the Revenue on merits of the case does not require adjudication since the very reassessment itself is held invalid in the eyes of law. Decided against revenue.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal include:

- Whether the reopening of assessment under Section 147 read with Section 148 of the Income Tax Act, 1961, beyond four years from the end of the relevant assessment year, was valid in the absence of failure on the part of the assessee to disclose truly and fully all material facts necessary for assessment.

- Whether the reassessment notice issued for disallowance under Section 14A read with Rule 8D, involving re-computation of disallowance already considered and deleted by the Tribunal, was valid or amounted to a mere change of opinion.

- Whether the addition of income related to alleged transactions with National Stock Exchange Ltd. (NSEL) amounting to Rs. 244.98 crores, which pertained to a different assessment year (AY 2011-12), could form a valid basis for reopening assessment for AY 2009-10.

- Whether the Assessing Officer (AO) could make additions on grounds not forming part of the reasons recorded for reopening the assessment, especially when no addition was made on the grounds recorded.

- Whether the disallowance of Rs. 13,89,08,810/- under Section 43(5) read with Section 73 and Section 40A(2)(b) of the Act in the reassessment order was sustainable in law.

- Whether the special audit under Section 142(2A) was justified considering the complexity and nature of the accounts.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of Reopening of Assessment beyond Four Years on Disallowance under Section 14A

Relevant Legal Framework and Precedents: Section 147 of the Income Tax Act allows reopening of assessment if the AO has reason to believe that income chargeable to tax has escaped assessment. Explanation 3 to Section 147 clarifies that the AO may assess or reassess income on any issue which comes to his notice subsequently, notwithstanding that the reason for such issue has not been included in the reasons recorded under Section 148(2). However, reopening beyond four years requires the AO to establish failure on the part of the assessee to disclose truly and fully all material facts necessary for assessment.

Judicial precedents relied upon include the Gujarat High Court decision in CIT vs. Mohmed Juned Dadani and the Bombay High Court decision in CIT vs. Jet Airways Ind Ltd., which emphasize that reopening beyond four years without such failure amounts to invalid reassessment.

Court's Interpretation and Reasoning: The Tribunal observed that the disallowance under Section 14A was originally made in the assessment order dated 29-12-2011 and subsequently deleted by the Tribunal in appeal, as the assessee had not earned any exempt income during the year. The reassessment notice issued on 09-03-2015 for re-computation of disallowance under Section 14A was beyond four years and did not disclose any new material or failure on the part of the assessee to disclose material facts. The reassessment was thus held to be a mere change of opinion, which is impermissible.

Key Evidence and Findings: The original assessment order, appellate order deleting the disallowance, and the absence of any new material or failure to disclose facts by the assessee.

Application of Law to Facts: Since the reassessment was initiated beyond four years without any failure to disclose material facts, and the issue was already adjudicated, the reopening was invalid.

Treatment of Competing Arguments: Revenue argued for sustaining the reassessment, but failed to produce any new material or legal basis supporting reopening beyond four years. The Tribunal relied on judicial precedents to reject Revenue's contention.

Conclusion: Reopening of assessment on the issue of disallowance under Section 14A beyond four years was invalid and the reassessment order on this ground was quashed.

Issue 2: Validity of Reopening Based on Alleged NSEL Transactions for Rs. 244.98 Crores

Relevant Legal Framework and Precedents: The reopening must be based on reasons recorded which pertain to the relevant assessment year and must not be factually incorrect or non-existent. The AO cannot base reopening on additions made in a different assessment year.

Court's Interpretation and Reasoning: The Tribunal found that the alleged income from NSEL transactions related to AY 2011-12 and not AY 2009-10. The Special Auditor's report under Section 142(2A) confirmed that no such transactions were carried out by the assessee in AY 2009-10. The figure of Rs. 244.98 crores was an addition made in AY 2011-12 which was deleted on appeal. Hence, the reasons recorded for reopening were factually incorrect and non-existent for AY 2009-10.

Key Evidence and Findings: Special Auditor's report, appellate orders deleting additions for AY 2011-12, and assessment records showing no NSEL transactions in AY 2009-10.

Application of Law to Facts: Since the reasons recorded for reopening were factually incorrect and pertained to a different year, the reopening was invalid.

Treatment of Competing Arguments: Revenue contended discrepancies in the Special Auditor's report but failed to establish any valid reason for reopening. The Tribunal rejected this contention.

Conclusion: Reassessment based on alleged NSEL transactions for AY 2009-10 was invalid and the reassessment order was quashed.

Issue 3: Power of AO to Make Additions Beyond Reasons Recorded When No Addition Made on Recorded Grounds

Relevant Legal Framework and Precedents: Section 147 and Explanation 3 thereto allow AO to assess or reassess income on issues not included in reasons recorded. However, judicial precedents, including the Gujarat High Court in Mohmed Juned Dadani, clarify that if the foundational reason for reopening fails (i.e., no addition is made on the reasons recorded), AO cannot make additions on other grounds not forming part of reasons recorded.

Court's Interpretation and Reasoning: The Tribunal held that since no addition was made on the grounds recorded for reopening, the AO could not proceed to make additions on other grounds such as disallowance under Section 43(5) read with Section 73 and Section 40A(2)(b). The reassessment order making such additions was therefore without jurisdiction.

Key Evidence and Findings: Assessment and reassessment orders showing no additions on reasons recorded but additions on other grounds.

Application of Law to Facts: The AO's action was beyond the scope of the reasons recorded and thus invalid.

Treatment of Competing Arguments: Revenue argued for sustaining additions but did not contest the jurisdictional principle. The Tribunal relied on settled law to dismiss Revenue's claim.

Conclusion: Additions made beyond reasons recorded, when no addition is made on recorded grounds, are invalid.

Issue 4: Disallowance of Rs. 13,89,08,810/- under Section 43(5) read with Section 73 and Section 40A(2)(b)

Relevant Legal Framework and Precedents: Section 43(5) and Section 73 relate to speculative transactions and losses therefrom, while Section 40A(2)(b) deals with disallowance of certain payments. The validity of such disallowance depends on the facts and whether the reassessment itself is valid.

Court's Interpretation and Reasoning: Since the reassessment order was quashed for lack of jurisdiction, the Tribunal did not adjudicate on the merits of this disallowance. The Cross Objection by the assessee challenged this disallowance as a genuine business loss and contended that the special audit was unwarranted.

Key Evidence and Findings: The reassessment order making the disallowance and the absence of valid reopening.

Application of Law to Facts: The disallowance cannot survive if the reassessment order is invalid.

Treatment of Competing Arguments: Revenue sought to sustain the disallowance, but the Tribunal held that merits need not be considered given invalid reassessment.

Conclusion: Disallowance under these sections is deleted due to invalid reassessment.

Issue 5: Justification of Special Audit under Section 142(2A)

Relevant Legal Framework and Precedents: Section 142(2A) empowers AO to direct special audit where accounts are complex or require detailed scrutiny.

Court's Interpretation and Reasoning: The assessee contended that the AO erred in ordering special audit without satisfying the complexity of accounts, which had remained consistent over years. The Tribunal did not specifically adjudicate this issue but allowed the Cross Objection supporting the assessee's stance.

Key Evidence and Findings: Nature and complexity of accounts as per assessee's submissions.

Application of Law to Facts: No specific findings recorded, but the allowance of Cross Objection indicates acceptance of assessee's contention.

Treatment of Competing Arguments: Revenue did not contest this point effectively.

Conclusion: The special audit direction was not sustained.

3. SIGNIFICANT HOLDINGS

- "If the very foundation of the reopening is knocked out, any further proceeding in respect to such assessment naturally would not survive."

- "Explanation 3 to Section 147 of the Act thus does not in any manner, even purport to expand the powers of the Assessing Officer under Section 147 of the Act."

- "Reopening beyond four years from the end of the relevant assessment year requires the condition that income chargeable to tax has escaped assessment for the reason of the failure on the part of the assessee to disclose truly and fully all material facts."

- "When the ground on which reopening of assessment and no addition was made by the Ld AO, he could not make additions on some other grounds which did not form part of reasons recorded by him."

- "Reassessment on non-existent and factually incorrect reasons is not permissible and such proceedings deserves to be quashed."

- The Tribunal finally held that the reassessment order was invalid and quashed the same, thereby dismissing the Revenue's appeal and allowing the assessee's Cross Objection.