1996 (7) TMI 132 - HC - Income Tax

Accounting Year, Alternate Remedy, Assessment Notice, Failure To Disclose Material Facts, High Court, Notice Of Reassessment

Summary

Issues Involved:
1. Validity of the notice issued under section 148 of the Income-tax Act, 1961.
2. Justification for reopening the assessment based on the alleged undisclosed investment in shares.
3. Justification for reopening the assessment based on the claim of interest on uninstalled machinery as revenue expenditure.

Issue-wise Detailed Analysis:

1. Validity of the Notice Issued Under Section 148 of the Income-tax Act, 1961:
The petitioner, a public limited company, filed a return for the assessment year 1993-94. The Assessing Officer initially accepted the return without adjustments. However, a notice under section 148 was later issued, stating that income chargeable to tax had escaped assessment. The petitioner requested the reasons for this notice, which were eventually provided in an affidavit.

2. Justification for Reopening the Assessment Based on the Alleged Undisclosed Investment in Shares:
The first reason for reopening the assessment was the alleged purchase of 1,25,000 shares of Reliance Industries Ltd. worth Rs. 3.27 crores on March 20, 1993. However, it was clarified that the investment was actually made on August 14, 1993, during the assessment year 1994-95, not 1993-94. This discrepancy was due to a typographical error, making the reason for reopening the assessment untenable.

3. Justification for Reopening the Assessment Based on the Claim of Interest on Uninstalled Machinery as Revenue Expenditure:
The second reason for reopening was the claim of Rs. 1.25 crores as interest on uninstalled machinery, which the Assessing Officer believed should have been capitalized. The petitioner argued that there was no new business, merely modernization of existing operations. The court noted that the new air-jet looms were for manufacturing wider fabrics, not a new business. The court referenced several cases to support the notion that modernization within the same business does not constitute a new business.

In CIT v. Prithvi Insurance Co. Ltd., the Supreme Court held that different lines of business could be considered the same business if there was inter-connection, interlacing, interdependence, and unity. Similarly, in Standard Refinery and Distillery Ltd. v. CIT, it was held that share transactions and manufacturing constituted the same business due to common management and funds. The court also cited CIT v. Alembic Glass Industries Ltd., where the establishment of a new unit was considered part of the existing business.

The court concluded that the petitioner's purchase of new machinery for manufacturing wider fabrics did not constitute a new business. Therefore, the claim of interest as revenue expenditure was justified.

Conclusion:
The court found both reasons for reopening the assessment to be invalid. The notice under section 148 and subsequent proceedings were quashed. The court emphasized its duty to intervene in cases of executive authority acting without jurisdiction, referencing Calcutta Discount Co. Ltd. v. ITO. The application was allowed, and the rule was made absolute with no order as to costs.