2007 (7) TMI 209 - HC - Income Tax

Income escaped assessment - Validity of notice issued u/s 148 - EOU/STP units engaged in the business of export of software - on-site projects at customer s site abroad and off-shore projects, executed from India - return of income for the assessment year 1999-00 - declaring loss - HELD THAT - It would be clear from the reason given that the respondent No.1 proceeded on the presumption that the law applicable was the law after the amendment and not the law in respect of which the petitioner has filed the return of income for the year 1999-00. This by itself clearly demonstrates that there was total non application of mind on the part of the respondent No.1 and consequently, the notice based on that reason would amount to non application of mind. So far as the second contention is concerned, the learned counsel has drawn our attention firstly to the provisions of section 4 of the Act which sets out that any Act enacted by the Income Tax shall be charged for any assessment year at any rate or rates, income tax at that rate or those rates shall be be charged for that year in accordance with and subject to the provisions, including the provisions for the levy of additional income tax in respect of the total income of the previous year of every person. Our attention is invited to section 2(45). Total income means the total amount of income referred to in section 5, computed in the manner laid down in this Act. Next, our attention is invited to what is gross total income under section 80B(5). The gross total income has been described to be the total income computed in accordance with the provisions of the Act before making any deduction under the relevant Chapter. A perusal of section 10A(1) at it stood at the relevant time clearly sets out that subject to the provisions of this section, any profits and gains derived by an assessee from an industrial undertaking to which the section applies shall not be included in the total income of the assessee. In other words, it is clear that the income derived from an industrial undertaking by the assessee to which section 10A applies could not be included in the total income of the assessee. Once that is the case, the petitioner was right in filing the income by excluding the income of income in terms of section 10A. Thus, the petition has to be allowed on both the counts.

Summary

Issues:
1. Validity of notice under section 148 of the Income Tax Act for reopening the assessment for the assessment year 1999-00.
2. Whether the respondent had sufficient reason to believe that income had escaped assessment.

Analysis:

Issue 1: Validity of Notice under Section 148
The petitioner, a software development company, filed a return of loss for the assessment year 1999-00, which was accepted under section 143(1)(a) of the Income Tax Act. Subsequently, the respondent issued a notice under section 148 in 2006, stating that income had escaped assessment. The petitioner objected to the notice, citing that the reasons provided were based on provisions of law applicable after the assessment year in question. The respondent's reliance on post-amendment laws and a specific judgment was deemed incorrect, indicating a lack of application of mind. The court concluded that the notice was issued on non-existing reasons and thus, invalid.

Issue 2: Sufficiency of Reason to Believe Income Escaped Assessment
The respondent's reason to believe that income had escaped assessment was primarily based on misinterpretation of applicable laws and a specific judgment. The court analyzed the relevant provisions of the Income Tax Act, emphasizing that income from an industrial undertaking covered under section 10A should not be included in the total income of the assessee. The court differentiated the cited judgment from the current case, highlighting that it did not address the specific issue of setting off losses against profits as per section 10A. Consequently, the court found that the reasons provided by the respondent did not constitute a valid basis to believe that income had escaped assessment. The court ruled in favor of the petitioner, allowing the petition and quashing the notice under section 148.

In conclusion, the High Court of Bombay held that the notice issued under section 148 for reopening the assessment for the assessment year 1999-00 was invalid due to incorrect reasons provided by the respondent. The court emphasized the importance of a valid reason to believe that income had escaped assessment, which was lacking in this case. The judgment highlighted the necessity for proper application of relevant laws and precedents in such matters to ensure the legality and validity of assessment procedures.