2004 (11) TMI 32 - HC - Income Tax

Validity of notices issued u/s 148 - pronouncement by the Supreme Court - assessing authority has furnished reasons and the petitioner has also filed the return. The reasons furnished by the assessing authority do not on their face value hold good for reopening the concluded assessments in view of the subsequent pronouncement by the Supreme Court. The said pronouncement shall be deemed to be operative by fiction of law on the date of assumption of jurisdiction by the assessing authority and the day on which he formed the belief that the income has escaped to assessment - proceedings under section 147 under law cannot be sustained - reassessment notices are totally without jurisdiction hence quashed.

Summary

Issues:
Challenging the validity of reassessment notices under section 148 of the Income-tax Act, 1961 for the assessment years 1995-96, 1996-97, and 1997-98.

Analysis:
The petitioner, a regional rural bank, filed income tax returns for the mentioned assessment years, which were accepted by the Income-tax Department. The assessing authority granted exemption from tax on income accrued from investments, treating it as income attributable to banking business under section 80P of the Act. Subsequently, reassessment notices were issued to reopen the assessments based on the belief that investment income had escaped assessment due to excess deduction under section 80P. The petitioner contended that the reassessment notices were arbitrary and lacked jurisdiction, citing a Supreme Court judgment overruling the earlier interpretation of section 80P.

The Department argued that the reassessment notices were valid when issued as they were in line with the prevailing law interpreted by the Supreme Court at that time. However, the Supreme Court later overruled its previous judgment, clarifying that income derived from funds placed with banks for banking business is exempt under section 80P. The Department's argument that only income from banking business is exempt was refuted based on the new legal position. The court agreed that the foundation for the reassessment notices had disappeared, rendering them without jurisdiction.

Citing legal principles, the court emphasized that the interpretation of law by a court operates retrospectively from the date of enforcement of the provision. The Department's reliance on previous judgments to support the validity of reassessment notices was countered by highlighting a Division Bench decision stating that proceedings based on notices that lose their foundation due to legal developments cannot continue. The court rejected the argument that subsequent developments could salvage the reassessment notices, emphasizing the binding nature of the Supreme Court's interpretation of the law.

In conclusion, the court held that the reassessment notices for the mentioned assessment years were devoid of jurisdiction and quashed them. The writ petition was allowed, and the reassessment notices were annulled, with no order as to costs.