1998 (1) TMI 10 - HC - Income Tax

Validity of notice issued under section 147(a) True and full disclosure of income - ITO failed to draw an inference that because of the entrustment of the initial manufacturing activity to contractors, the income derived from the industrial undertaking with reference to the backward area could be inflated and to that extent the income has to be estimated for confining the deduction to that profit which could be said to have been derived only from the backward area. Failing to draw that inference, blame cannot be put on the assessee, when at the time of assessment the list of contractors, the quantity of beedies manufactured and the amount paid has been disclosed by the assessee - notice under section 147(a) are quashed

Summary

Issues:
Jurisdiction to issue notices under section 148 of the Income-tax Act for assessment years 1979-80 to 1984-85 based on alleged failure to disclose fully and truly all material facts.

Analysis:
The petitioner sought a writ of prohibition against the respondents regarding a notice issued under section 147(a) of the Income-tax Act for the assessment years 1979-80 to 1984-85. The petitioner, a company engaged in the manufacture and sale of beedies, claimed deduction under section 80HH of the Income-tax Act. The dispute arose when the Income-tax Officer and the Commissioner of Income-tax sought to amend and revise the assessment, alleging that part of the manufacturing activity was carried outside the backward area. The petitioner contended that the impugned notices lacked jurisdiction as all relevant facts had been disclosed before the assessment was made, and the claim had been considered in previous years' assessments.

In response, the Revenue argued that the information provided by the petitioner was insufficient to determine if any manufacturing activity occurred outside the backward area, justifying the reopening of the assessment under section 147(a). The court examined the provisions of section 80HH, which allow a deduction for profits from industrial undertakings in backward areas, subject to certain conditions. The Revenue's argument was based on the premise that the profit declared by the petitioner may include income from activities outside the backward area, leading to an inflated deduction claim.

The court referred to section 80HH(7), which permits the Assessing Officer to estimate profits if the business arrangement inflates profits. It emphasized that the duty of the assessee is to disclose primary facts, and it is the Assessing Officer's responsibility to draw correct inferences. The court cited precedents to establish that a mere change of opinion by the Income-tax Officer does not justify reopening assessments if the assessee has made a full and true disclosure of primary facts.

Consequently, the court held that the Income-tax Officer failed to draw the necessary inference regarding the alleged inflation of profits due to subcontracting manufacturing activities. Since the petitioner had disclosed relevant information, and the Income-tax Officer could not specify additional data required for a correct inference, the court quashed the impugned notices. The writ petition was allowed, and no costs were awarded.