2007 (2) TMI 173 - HC - Income Tax

Challenge the notice issued u/s 148 - reopening of the assessment - claiming depreciation on the goodwill - full and true disclosure of material facts - HELD THAT - It is seen that the petitioner had agreed to purchase Baramati unit as a going concern on as is where is basis for Rs. 23 crores plus goodwill amounting to Rs. 4.30 crores with effect from the specified transfer date, that is from March 31, 1998. It is recorded in the agreement that if any of the conditions precedent are not fulfilled, the transfer date shall be shifted to April 30, 1998. It is not known as to whether the transfer date was shifted to April 30, 1998, on account of non-fulfilment of the conditions precedent set out in the agreement. In any event, in the tax audit report relating to the financial year April 1, 1998, to March 31, 1999 (assessment year 1999-2000), the goodwill at Rs. 4.30 crores is shown in the opening block of fixed assets, which obviously means that the goodwill was acquired prior to April 1, 1998, and accordingly in the tax audit report for the assessment year 1999-2000, no depreciation is claimed on the goodwill. Thus, there were mutual contradictions in the tax audit report and the return of income filed by the petitioner regarding the date of acquisition of the goodwill. In these circumstances, we find it difficult to accept the contention that the petitioner had made full and true disclosure of material facts. In view of this apparent contradiction in the material facts, it is difficult to hold that in the assessment order passed u/s 143(3) of the Act, a conscious decision was taken to the effect that the goodwill was acquired after April 1, 1998. As stated earlier in the absence of any finding recorded by the Assessing Officer to the effect that in spite of the fact that the tax audit report shows that the goodwill was acquired prior to April 1, 1998, in the facts of the present case the goodwill must be held to be acquired after April 1, 1998, it is difficult to hold that a conscious decision was taken in the matter by the Assessing Officer. In our opinion mutual inconsistencies in the tax audit report and the return of income which were not noticed by the Assessing Officer at the time of assessment u/s 143(3) of the Act is sufficient reason to reopen the assessment. Thus, reopening of the assessment proceedings for the assessment year 1999-2000 initiated by the Assessing Officer cannot be faulted. Accordingly, the petition fails.

Issues Involved:
1. Validity of the notice issued under section 148 of the Income-tax Act, 1961.
2. Whether there was full and true disclosure of material facts by the petitioner.
3. Whether the reopening of the assessment constitutes a change of opinion.
4. Allowability of depreciation on goodwill under section 32(1)(ii) of the Income-tax Act, 1961.

Detailed Analysis:

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

The petitioner challenged the notice dated October 26, 2005, issued under section 148 of the Income-tax Act, 1961, and the subsequent order dated July 28, 2006, by the Assessing Officer rejecting the objections to reopening the assessment for the year 1999-2000. The petitioner argued that the notice issued beyond four years from the end of the relevant assessment year is without jurisdiction, as all material facts were disclosed during the original assessment. The court, however, found that there were mutual contradictions in the tax audit report and the return of income regarding the date of acquisition of the goodwill, which justified the reopening of the assessment.

2. Whether There Was Full and True Disclosure of Material Facts by the Petitioner:

The petitioner contended that all relevant material regarding the claim for depreciation on goodwill was disclosed during the original assessment proceedings. The court noted that although the petitioner claimed the goodwill was acquired on April 1, 1998, the tax audit report showed it in the opening block of fixed assets for the financial year 1998-1999, indicating acquisition before April 1, 1998. The court concluded that due to these inconsistencies, it could not be said that there was a full and true disclosure of material facts by the petitioner.

3. Whether the Reopening of the Assessment Constitutes a Change of Opinion:

The petitioner argued that the reopening of the assessment was based on a mere change of opinion, as the Assessing Officer had already considered and allowed the claim for depreciation on goodwill during the original assessment. The court held that the original assessment order did not discuss the discrepancies between the tax audit report and the return of income regarding the date of acquisition of the goodwill. Therefore, it could not be concluded that a conscious decision was taken by the Assessing Officer, and the reopening of the assessment was justified.

4. Allowability of Depreciation on Goodwill Under Section 32(1)(ii) of the Income-tax Act, 1961:

The petitioner claimed depreciation on goodwill, asserting it was acquired and put to use during the relevant year. The court examined the provisions of section 32(1)(ii), which allows depreciation on intangible assets acquired after April 1, 1998. The court noted that the agreement for the purchase of the Baramati unit, including goodwill, was dated March 30, 1998, and the goodwill was shown in the opening block of fixed assets for the financial year 1998-1999. Thus, the court found that the goodwill was acquired before April 1, 1998, making the depreciation claim invalid under section 32(1)(ii).

Conclusion:

The court dismissed the petition, upholding the notice issued under section 148 and the reopening of the assessment. It concluded that there was no full and true disclosure of material facts by the petitioner, and the reopening was not based on a mere change of opinion. The court also determined that depreciation on goodwill was not allowable under section 32(1)(ii) as the goodwill was acquired before April 1, 1998. The rule was discharged with no order as to costs.

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