2003 (7) TMI 35 - HC - Income Tax

Reassessment notice challenge to validity of notice - Assessing Officer has sought to reopen the assessment on certain erroneous assumptions - the assessee has not even received cash subsidy of Rs. 20 lakhs during the accounting year ending March 31,1997, relevant to the assessment year in question and, therefore, there was no question of utilising the said amount to reduce the cost of the assets as suggested by the Assessing Officer in his reasons - there was no question of escapement of income from the assessment - Further, the petitioner had not claimed any deduction under section 36(1)(iii) during the assessment year in question for the interest which was capitalized and, therefore, the question of disallowance did not arise. In the circumstances, we are not inclined to dismiss the petition.

Issues Involved:
1. Validity of the notice issued under section 148 of the Income-tax Act, 1961.
2. Failure to disclose fully and truly all material facts necessary for assessment.
3. Premature filing of the writ petition.

Detailed Analysis:

1. Validity of the Notice Issued Under Section 148 of the Income-tax Act, 1961:

The petitioner challenged the notice dated January 22, 2003, issued under section 148 for the assessment year 1997-98. The Assessing Officer believed that the petitioner's income chargeable to tax had escaped assessment due to three reasons: (a) interest expenditure related to capital work-in-progress should have been capitalized; (b) subsidy of Rs. 20 lakhs received by the petitioner should have been taxed as revenue receipts; and (c) provident fund amount of Rs. 3.42 lakhs was wrongly allowed. The court found that the reasons given by the Assessing Officer did not indicate a failure on the part of the petitioner to disclose fully and truly all material facts necessary for assessment. The court noted that the reopening was sought beyond four years from the end of the assessment year, and as per the proviso to section 147, such action could only be taken if there was a failure to disclose material facts.

2. Failure to Disclose Fully and Truly All Material Facts Necessary for Assessment:

The petitioner argued that the notice was based on the case records and did not show any failure to disclose material facts. The court agreed, noting that the Assessing Officer's reasons merely stated that certain issues needed to be looked into. Specifically, the court highlighted that the subsidy of Rs. 20 lakhs was received in the previous accounting year, not the year under question, and the provident fund payment was correctly allowed under section 43B. Regarding the interest expenditure, the court found that the petitioner had not claimed any deduction under section 36(1)(iii) for the interest, and thus, the question of disallowance did not arise. The court concluded that there was no clear prima facie finding of failure to disclose material facts by the petitioner.

3. Premature Filing of the Writ Petition:

The Department contended that the petition was premature, as the petitioner had not filed a return pursuant to the notice under section 148, nor sought reasons as required by the Supreme Court's judgment in GKN Driveshafts (India) Ltd. v. ITO. The court acknowledged that typically, the proper course of action for the noticee was to file a return and seek reasons, followed by filing objections to the issuance of the notice. However, in this case, the court decided not to dismiss the petition in limine due to the peculiar facts and the erroneous assumptions made by the Assessing Officer in the reasons for reopening the assessment.

Conclusion:

The court made the rule absolute in terms of prayer clause (a) with no order as to costs. The court emphasized that the judgment should not be interpreted to mean that assessees are entitled to reasons without filing a return pursuant to a notice under section 148. However, given the specific circumstances and the erroneous assumptions by the Assessing Officer, the court found it appropriate to allow the petition.

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