2006 (9) TMI 132 - HC - Income Tax

Notices issued under section 148 - We may note that AO has recorded an additional ground for reopening the assessment, namely, excess depreciation has been allowed on account of failure to deduct the capital subsidy from the written down value of fixed assets while claiming depreciation - The assessee in its objection to the reopening of the assessment has clearly stated that the capital subsidy received has in fact been deducted from the W.D.V. of fixed assets while claiming depreciation. It appears that the explanation given by the assessee is accepted by the Revenue, because, neither in the order rejecting the objections raised by the assessee, nor in the affidavit in reply and not even before this court, the Revenue has pressed the ground for reopening the assessment on account of excess depreciation. Thus, the only ground on which the assessments are sought to be reopened in all the years is that the expenditure/loss incurred at the Bombay office cannot be allowed as there is hardly any activity from the Bombay office of the assessee. In our opinion, the reopening of the assessments based on the above ground which is totally vague and devoid of any substance cannot be the basis for reopening the assessments. Notices are quashed

Summary

Issues:
Challenging notices issued under section 148 of the Income-tax Act, 1961 for reopening assessments for multiple assessment years based on disallowance of expenditure incurred at the administrative office.

Analysis:
The judgment delivered by the High Court of BOMBAY pertained to petitions challenging notices issued under section 148 of the Income-tax Act, 1961 for reopening assessments for various assessment years. The petitioners, a Hindu undivided family engaged in cotton ginning and pressing business, objected to the reopening based on disallowance of expenditure incurred at their Bombay office. The Assessing Officer sought to reopen assessments for years 1997-98, 1999-2000, 2000-01, and 2002-03, claiming that there was hardly any activity from the Bombay office, leading to under-assessment. The petitioners contended that the issue had been previously adjudicated and allowed in regular assessment orders. The Assessing Officer rejected their objections, prompting the petitions challenging the notices.

The petitioners argued that the reopening based on the lack of activity at the Bombay office was erroneous and contrary to the historical assessment records. They highlighted that the expenditure at the Bombay office had been consistently allowed in past assessments, emphasizing that the Assessing Officer could not reopen assessments based on a change of opinion without concrete evidence of erroneous allowance. The respondents, however, defended the notices, citing the disallowance in the 2001-02 assessment, even though it was later overturned by the Commissioner of Income-tax (Appeals).

The High Court analyzed the "reason to believe" requirement for reopening assessments under section 148, emphasizing the necessity of real, non-vague material or information indicating income escapement. It noted that the Assessing Officer's grounds for reopening, citing minimal activity at the Bombay office, lacked substance as the historical allowance of such expenditure was well-established. The court found the reasons for reopening assessments to be based on a mere change of opinion without any material to support income escapement, thereby quashing the notices issued under section 148 for all assessment years.

Additionally, the court addressed an additional ground for reopening the assessment for 2002-03 related to excess depreciation, which was refuted by the assessee with an explanation accepted by the Revenue. As the Revenue did not press this ground during the proceedings, the court concluded that the sole basis for reopening assessments, i.e., the disallowance of expenditure at the Bombay office, lacked substance and was insufficient to justify the reopening.

In conclusion, the High Court allowed all petitions by setting aside the notices issued under section 148 of the Income-tax Act, 1961, emphasizing the necessity of concrete material or information to support reopening assessments and rejecting the notion of reopening based on a mere change of opinion without valid grounds.