Reassessment: S/s. 147 and 148: A. Y. 2008-09: Notice u/s. 148 not to be issued on hypothesis or contingency which may emerge in future: Notice issued on alternative basis for taxing income is not valid:

The assessee, a venture capital fund claimed that contributions by its investors in terms of the trust deed and contribution agreements constituted revocable transfers under the provisions of the Income-tax Act, 1961, and, hence, the income accruing to the venture capital fund was not liable to tax in the hands of the assessee but in the hands of the investors or contributors in proportion to their respective contributions. The Assessing Officer brought the income to tax on the basis that the status of the assessee was that of an association of persons. The Commissioner (Appeals) held that the income arising to the trust was taxable in the hands of the contributors and not in the hands of the assessee since there was a revocable transfer within the meaning of sections 61 to 63. The correctness of that determination was pending before the Tribunal. In the meanwhile, the Assessing Officer issued notice u/s. 148 on the ground that the income arising from the contributions made by the contributors to the venture capital fund was taxable in the hands of the body of contributors whose members being companies and individuals were an association of persons of the contributors if the provisions of sections 61 to 63 were attracted to the transactions between the contributors and the venture capital funds.

The Bombay High Court allowed the writ petition challenging the notice u/s. 148 and held as under:

“i) Recourse to section 148 cannot be founded in law on a hypothesis of what would be the position in future should an appeal before an appellate authority, being the Tribunal or the High Court, result in a particular outcome. The statute does not contemplate the reopening of the assessment u/s. 148 on such a hypothesis or a contingency which may emerge in the future.

 ii) The whole basis of the reopening was the hypothesis that if the provisions of sections 61 to 63 were attracted as had been claimed by the assessee and the income of Rs. 32.83 crore which had been claimed by the assessee to be exempt was treated as exempt, in that event an alternative basis for taxing the income in the hands of the association of persons of the contributors was sought to be set up. The entire exercise was only contingent on a future event and a consequence that may enure upon the decision of the Tribunal, if the Tribunal were to hold against the Revenue.

 iii) A reopening of an assessment u/s. 148 could not be justified on such a basis. “Has escaped assessment” indicates an event which has taken place. Tax legislation cannot be rewritten by the Revenue or the court by substituting the words “may escape assessment” in future.”

iv) Rule is accordingly made absolute by quashing and setting aside the notice of reopening dated 18-05-2012, issued u/s. 148 of the Act.”