2025 (7) TMI 296 - AT - Income Tax

Reopening of assessment u/s 147 - reassessment beyond four years - reasons to believe - conditions precedent for reopening assessments - Addition of inflated purchase of Actor Rights of Sh. Amitabh Bachchan - HELD THAT - As perused the reasons recorded by the AO for reopening the assessment beyond four years. The reason recorded by the AO for reopening the case nowhere mentions that there is any failure on the part of the assessee to truly and fully disclose all material facts necessary for the assessment though the case has been reopened after four years. AO has not demonstrated that how the income has escaped the assessment particularly when the said expenditure of Rs. 60 Crores is found debited as expenditure as well as credited as the stock-in-trade in the Profit Loss Account. Such contra entries are therefore revenue neutral. Thus we find that the prime conditions for reopening of the case have not been met. The escapement of income has not been demonstrated having taken place by the AO and thus the issue of escapement of income is squarely covered by the decision of Givaudan Flavours India (P) Ltd 2011 (3) TMI 619 - ITAT MUMBAI In order to justify the initiation of reassessment it is sine qua non that there must be some income which escaped assessment. Since two basic conditions; viz failure on the part of the assessee to truly and fully disclose all material facts necessary for the assessment after the expiry of four years and quantification of escapement of income have not been clearly spelt out in the reasons recorded for reopening the assessment in this case. We therefore do not find any infirmity in the order of the Ld. CIT(A) in quashing the reopening of the assessment on jurisdictional grounds. Assessee appeal allowed.

The core legal questions considered by the Tribunal in this appeal are:

1. Whether the reassessment proceedings initiated under section 147 of the Income Tax Act, 1961, were valid and legally sustainable, particularly in light of the conditions precedent for reopening assessments beyond four years.

2. Whether the disallowance of Rs. 50 crores on account of alleged inflated purchase of actor rights was justified under the provisions of the Act.

3. Whether the Assessing Officer (AO) was justified in treating the payment of Rs. 60 crores to Lahiri Productions Ltd. as excessive, by relying on an arbitration award valuing the actor rights at Rs. 10 crores.

4. Whether the AO had jurisdiction and applied proper mind before reopening the assessment, including the adequacy and sufficiency of reasons recorded for reassessment.

Issue 1: Validity of Reassessment Proceedings under Section 147

The legal framework governing reassessment under section 147 requires the AO to have a reason to believe that income chargeable to tax has escaped assessment. Additionally, for reopening assessments beyond four years, the proviso to section 147 mandates that there must be a failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment.

Precedents relied upon include decisions where it was held that mere change of opinion by the AO or absence of fresh material cannot justify reopening. The Tribunal referred to the Mumbai Bench decision in Givaudan Flavours India (P) Ltd., which emphasized that escapement of income is a fundamental precondition for reassessment. The Court also cited several authoritative rulings, including those of the Hon'ble Supreme Court and Delhi High Court, reinforcing that reopening without fresh tangible material or failure to disclose material facts is illegal.

In this case, the AO's reasons for reopening did not demonstrate any failure by the assessee to disclose material facts, nor did it establish how income had escaped assessment. The payments in question were disclosed in the Profit & Loss Account and treated as stock-in-trade, rendering the transaction revenue neutral. The AO also failed to show any nexus between the information received from investigations into third-party transactions and the assessee's income escapement.

The Tribunal noted that the AO did not apply proper mind to the investigation material and initiated reassessment based on mere suspicion and without tangible evidence. Reliance was placed on rulings that held reopening based on fishing or roving inquiries or without application of mind is void ab initio.

Consequently, the Tribunal upheld the CIT(A)'s order quashing the reassessment on jurisdictional grounds, holding that the conditions precedent for reopening assessment were not satisfied.

Issue 2: Justification of Disallowance of Rs. 50 Crores on Account of Inflated Purchase of Actor Rights

The AO disallowed Rs. 50 crores paid in excess to Lahiri Productions Ltd., treating it as unreasonable and excessive based on an arbitration award valuing the actor rights at Rs. 10 crores. The AO's reasoning was that the assessee paid Rs. 60 crores, which was disproportionate to the valuation in the arbitration award dated 19.03.2003.

The assessee contended that the AO erred in relying solely on the arbitration award, which pertained to a dispute between Lahiri and AB Corp. Ltd. dated three years prior to the agreement with the assessee. The agreement between the assessee and Lahiri was entered into on 22.03.2003, and the payment was reflective of the market value at that time, especially considering the actor's enhanced market stature due to the success of "Kaun Banega Crorepati," where the actor commanded Rs. 1 crore per episode.

The AO did not provide a copy of the arbitration award to the assessee nor inquire into the circumstances of the award before making the disallowance. The Tribunal noted that the genuineness of the payment and parties was not disputed.

Legal precedents cited by the assessee established that the AO cannot substitute his commercial judgment for that of the businessman and cannot disallow expenditure merely on the ground of excessiveness unless statutory provisions such as section 40A(2)(a) apply, which are limited to related party transactions. Since Lahiri and the assessee were not related parties, such disallowance was impermissible.

Further, the Tribunal observed that the actor rights were subsequently sold for Rs. 65 crores, corroborating the reasonableness of the initial payment. Even if the disallowance were sustained, the amount was disclosed in closing stock, preventing double taxation.

Given these factors, the Tribunal found no merit in the AO's disallowance of Rs. 50 crores as excessive payment.

Issue 3: AO's Reliance on Arbitration Award and Application of Law

The AO's reliance on the arbitration award to value the actor rights was challenged on the ground that the award related to a dispute between third parties and was not binding on the assessee's contract. The Tribunal agreed with the assessee that the AO's approach was flawed because the arbitration award was dated three days prior to the agreement with the assessee and related to a different transaction.

The AO failed to consider the market conditions and the enhanced value of the actor's rights at the time of the agreement. The Tribunal noted the CIT(A)'s finding that the actor commanded Rs. 1 crore per episode, supporting the higher valuation.

Thus, the Tribunal held that the AO erred in using the arbitration award as the sole benchmark to question the payment made by the assessee.

Issue 4: Adequacy of Reasons Recorded and Jurisdictional Validity of Reopening

The AO's reasons for reopening did not specify any failure by the assessee to disclose material facts, a mandatory requirement for reopening after four years under the proviso to section 147. The reasons also failed to demonstrate how the payments to Lahiri and subsequent transactions involving third parties had any bearing on escapement of income in the hands of the assessee.

The Tribunal emphasized that the AO must record clear reasons demonstrating the nexus between the alleged escapement and the assessee's failure to disclose material facts. The absence of such reasons rendered the reopening invalid.

The Tribunal further relied on precedents holding that reopening based solely on information from investigation wings without application of mind or tangible evidence is impermissible. The AO's failure to apply mind to the investigation report and reliance on third-party transactions without establishing a direct link to the assessee's income escapement was held to be legally unsustainable.

Significant Holdings

"The prime conditions for reopening of the case have not been met. The escapement of income has not been demonstrated having taken place by the AO and thus the issue of 'escapement of income' is squarely covered by the decision of the Mumbai Bench of the Tribunal in the case of Givaudan Flavours India (P) Ltd."

"In order to justify the initiation of reassessment it is sine qua non that there must be some income which escaped assessment."

"The AO has not demonstrated that there is any failure on the part of the assessee to truly and fully disclose all material facts necessary for the assessment though the case has been reopened after four years."

"The payment made by the assessee was not excessive as the actor's right went very high during the relevant period due to success of 'Kaun Banega Crorepati'."

"The AO could not step into the shoes of the businessman to determine the reasonableness of the expenditure."

"Reopening done on the basis of report/information received from the investigation wing without application of mind or to undertake the roving and fishing enquiries by the AO was void-ab-initio."

In conclusion, the Tribunal dismissed the appeal of the Revenue, upholding the CIT(A)'s order that quashed the reassessment proceedings on jurisdictional grounds and disallowed the addition of Rs. 50 crores as excessive payment. The Tribunal declined to interfere with the findings that the reassessment was void and that the payment to Lahiri was genuine and not excessive under the law.

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