2007 (2) TMI 192 - HC - Income Tax

Reopening of the assessment beyond four years - Validity of notice issued u/s 148 - Modvat credit - Valuation of the closing stock - HELD THAT - The valuation of opening stock read with section 145A the Assessing Officer in his order had denied the benefit of increase in value of opening stock which was further carried in appeal up to the Tribunal stage where the stand of the Department had been accepted. The additions made during the assessment proceedings had been upheld by the Tribunal. Thus there could not be any failure on part of the petitioner resulting in escapement of income. As per the new provisions of section 145A of the Income-tax Act 1961 the unutilised Modvat credit had to be included in the closing stock of raw material and work in progress whereas the excise duty paid on unsold finished goods had to be included in the inventory of finished goods. Therefore the decision of the CIT (A) and the subsequent decision of the Tribunal reversing the decision of the CIT (A) were only related to unutilised Modvat credit. Thus we fail to see any ground for reopening of the assessment for the assessment year 1999-2000 since the petitioner had very meticulously specified all the disclosures that were made in that assessment year. The reasons given by the Department for reopening the assessment u/s 148 of the Act do not disclose any failure on the part of the assessee to disclose fully and truly all material facts. Hence we hold in favour of the petitioner on this ground. Moreover the respondents had once held the notes in the balance-sheet of the petitioner to be a full and true disclosure but subsequently chose to alter their view. Hence we hold in favour of the petitioner on this ground.

Summary

Issues Involved:
1. Validity of the notice issued under section 148 of the Income-tax Act, 1961 for reopening the assessment.
2. Whether the petitioner failed to disclose fully and truly all material facts necessary for the assessment.
3. Jurisdiction and legality of the reassessment proceedings initiated beyond four years from the end of the relevant assessment year.
4. The sufficiency of reasons to believe that income had escaped assessment.

Issue-wise Detailed Analysis:

1. Validity of the Notice Issued under Section 148:
The petitioner challenged the notice dated March 13, 2006, issued under section 148 of the Income-tax Act, 1961, for the assessment year 1999-2000, arguing it was invalid, improper, without jurisdiction, time-barred, and without proper sanction under section 151 of the Act. The petitioner contended that the existence of a valid "reason to believe" is a sine qua non for exercising jurisdiction under section 147, which was not present in this case. The court held that the reasons recorded did not disclose any reason to believe that income had escaped assessment, making the notice invalid.

2. Disclosure of Material Facts:
The petitioner argued that all material facts were disclosed in the return of income and accompanying documents, including the excise duty paid, fraudulent invoicing by transporters, and the valuation of opening stock under section 145A. The court found that the petitioner had disclosed all material facts and there was no failure to disclose fully and truly all material facts necessary for the assessment. Therefore, the reassessment proceedings beyond four years could not be sustained.

3. Jurisdiction and Legality of Reassessment Proceedings:
The petitioner contended that the reassessment proceedings were initiated beyond four years from the end of the relevant assessment year, which is impermissible under the proviso to section 147 unless there is a failure to disclose material facts. The court agreed with the petitioner, stating that the reopening of the assessment beyond four years could not be sustained as there was no failure on the part of the petitioner to disclose material facts.

4. Sufficiency of Reasons to Believe Income had Escaped Assessment:
The petitioner argued that the reasons recorded for reopening the assessment did not provide a valid basis for believing that income had escaped assessment. The reasons included non-inclusion of excise duty in the closing stock, fraudulent invoicing by transporters, and the valuation of opening stock under section 145A. The court found that these reasons were not sufficient to form a belief that income had escaped assessment, as the petitioner had disclosed all relevant material facts and the issues were already dealt with during the original assessment and appellate proceedings.

Conclusion:
After considering all arguments and evidence, the court concluded that the petitioner had disclosed all material facts and there was no failure to disclose fully and truly all material facts. Therefore, the reopening of the assessment beyond four years from the end of the relevant assessment year could not be sustained. The court held in favor of the petitioner, making the rule absolute in terms of prayer clause (a) with costs. The notice under section 148 dated March 13, 2006, and the order rejecting the objections dated November 9, 2006, were quashed and set aside.