2025 (6) TMI 2005 - AT - Income Tax

Reopening of assessment u/s 147 - reasons to believe for initiating reopening proceedings - Change of opinion - original assessment proceedings u/s.143(3) - conceptual difference between power to review and power to reassess HELD THAT - The exercise undertaken by the Ld. AO by recording the stated reasons to believe for initiating reopening proceedings u/s.147 of the Act it is nothing but a mere change of opinion. It is a settled position in law that the change of opinion cannot be per-sea reason to reopen. There is conceptual difference between power to review and power to reassesseee. AO has no power to review. Reassessment has to be based on fulfilment of certain conditions and the concept of change of opinion is an inbuilt test to check abuse of power by the Ld. AO. He has the power to reopen provided there is tangible material to come to conclusion that there is escapement of income from assessment. Assessee had made all the appropriate disclosures and complied with reporting requirement in its audited financial statements in terms of mandatory accounting standards which have not been controverted. On this aspect of position of law in the case of CIT vs. Kelvinator of India Ltd. 2010 (1) TMI 11 - SUPREME COURT had examined the question whether change of opinion can justify reopening of an assessment. Hon ble Court concluded that after 01.04.1989 Ld. AO has power to reopen provided there is tangible material to come to conclusion that there is escapement of income from assessment. Reasons must have live link with the formation of belief and that concept of change of opinion must be treated as inbuilt test to check abuse of power by AO. Accordingly in the present case since there is no new tangible material brought on record by the Ld. AO for the purpose of invoking the reassessment proceedings and passing the reassessment order thereafter such an exercise tantamount to change of opinion making the entire proceedings as well as the impugned reassessment order liable to be quashed. Appeal of the assessee is allowed.

Summary

The core legal questions considered in this judgment are:

1. Whether the reopening of the assessment under section 147 of the Income-tax Act, 1961 was valid and justified, or whether it amounted to an impermissible change of opinion by the Assessing Officer (AO) without any new tangible material.

2. Whether the reassessment order passed by the AO was legally sustainable, considering procedural aspects such as proper service of notices and opportunity of hearing to the assessee, in accordance with principles of natural justice.

3. Whether the addition of Rs. 5,09,65,000/- on account of provision for expected loss in closing work in progress (WIP) was justified under the Income-tax Act, particularly in light of the accounting standards followed by the assessee and the treatment of such provisions as contingent liabilities.

4. Whether the delay in filing the appeal before the Tribunal should be condoned.

Issue-wise Detailed Analysis

Validity of Reopening under Section 147

The legal framework governing reopening of assessments under section 147 requires that the AO must have "reasons to believe" that income has escaped assessment. The reopening cannot be based merely on a change of opinion. The Supreme Court in CIT vs. Kelvinator of India Ltd. clarified that post 1.4.1989, reopening is permissible only if there is tangible material to justify escapement of income, and the reasons recorded must have a live link with the formation of belief.

In this case, the AO recorded reasons to believe that the provision for expected loss of Rs. 5,09,65,000/- deducted from closing WIP was not incurred and was not added back to income, thus constituting escapement. However, the assessee had already disclosed this provision and related loss in the original assessment proceedings under section 143(3). The AO relied on the same material that was considered and accepted earlier, without bringing any new tangible evidence.

The Court examined the order sheet entries and submissions made during the original assessment, which showed that the assessee had furnished detailed information regarding the loss on the ONGC project and the accounting treatment thereof. The audited financial statements disclosed the provision in compliance with Accounting Standard AS-7, which mandates recognition of expected losses on construction contracts using the percentage completion method.

Since no new tangible material was brought on record by the AO to justify reopening, the Court held that the reassessment was based on a mere change of opinion, which is impermissible. The reopening was therefore invalid and liable to be quashed.

Procedural Compliance and Principles of Natural Justice

The assessee contended that notices were not properly served due to a change of address, resulting in ex-parte completion of reassessment under section 144. The CIT(A) had confirmed the reassessment order despite these procedural lapses.

The Court noted the assessee's explanation and evidence showing that the change of address was communicated but notices were sent to the old address, leading to no response. This procedural irregularity violated principles of natural justice by depriving the assessee of a proper opportunity to be heard.

Though the Court did not delve deeply into this issue due to the ultimate decision on reopening validity, it implicitly recognized the procedural infirmity as part of the grounds for appeal.

Merits of Addition on Provision for Expected Loss

The AO disallowed the provision for expected loss of Rs. 5,09,65,000/- made by the assessee on the basis that it was a contingent liability and not an actual incurred loss, thus not allowable under section 37(i) of the Act.

The assessee argued that the provision was made in accordance with AS-7 (Accounting for Construction Contracts), which requires recognition of expected losses as soon as they can be estimated with reasonable accuracy. The provision was reflected in the audited financial statements and was a true and fair representation of the financial position.

It was also pointed out that the provision was reversed in the subsequent assessment year, making the transaction revenue neutral. Additionally, the same issue was under appeal for the subsequent year.

The Court refrained from adjudicating on the merits of this addition, holding that since the reassessment itself was invalid, the merits became academic.

Condonation of Delay in Filing Appeal

The appeal before the Tribunal was filed with a delay of 10 days. The assessee submitted an application with sufficient cause explaining the reasons for the delay.

The Court found the explanation satisfactory and condoned the delay, allowing the appeal to be heard on merits.

Significant Holdings

The Court held that:

"In the given set of facts and circumstances as evident from the corroborative material placed on record, the exercise undertaken by the Ld. AO by recording the stated reasons to believe for initiating reopening proceedings u/s.147 of the Act, it is nothing, but a mere change of opinion. It is a settled position in law that the change of opinion cannot be per-se-a reason to reopen."

Further, the Court emphasized the principle that reopening requires tangible new material and that the AO's power to reopen is not a power to review the original assessment.

Accordingly, the Court quashed the reassessment proceedings and the impugned order, ruling in favour of the assessee on the legal issue of validity of reopening. The merits of the case were not examined as they were rendered academic by this finding.