2010 (6) TMI 372 - HC - Income Tax

Re-assessment Notice beyond 4 years - failure to disclose material facts necessary for assessment claim for deduction considered at time of assessment Reassessment proceedings on ground of exceeding on ground of excessive deductions Not valid

Issues Involved:
1. Reopening of assessment under Section 147 of the Income-tax Act, 1961.
2. Full and true disclosure of material facts by the assessee.
3. Validity of reasons provided by the Assessing Officer for reopening the assessment.
4. Compliance with the Supreme Court's directions in GKN Driveshaft (India) Ltd. v. ITO.

Detailed Analysis:

1. Reopening of Assessment under Section 147:
The dispute centers on a notice issued by the first respondent on March 18, 2009, seeking to reopen the assessment for the assessment year 2002-03 under Section 147 of the Income-tax Act, 1961. The notice was issued beyond a period of four years from the end of the relevant assessment year.

2. Full and True Disclosure of Material Facts:
The assessee filed a return of income on October 30, 2002, declaring a loss and computing tax under Section 115JB. An order of assessment was passed on March 7, 2005. The assessee contended that there was a full disclosure of all material facts necessary for the assessment. The reopening of the assessment is after four years, and there was no failure to disclose fully and truly all material facts necessary for the assessment.

3. Validity of Reasons Provided by the Assessing Officer:
The Assessing Officer provided four reasons for reopening the assessment:

First Reason: Market Development and Sales Support Expenses
- The assessee engaged a wholly owned subsidiary for market development and sales support in the US, remunerated on a cost-plus basis. Expenses amounting to Rs. 218.54 million were treated as deferred over two years. The assessee claimed a deduction of Rs. 21.85 crores, which the Assessing Officer argued should have been treated as capital expenditure.
- The court found that the assessee had made a full and true disclosure of all material facts during the assessment proceedings. The notice to reopen the assessment was based entirely on the assessment records without any new material. The principle from Cartini India Ltd. v. Addl. CIT was applied, stating that reopening based on the same material to take another view is not permissible.

Second Reason: Loss on Sale of Long-term Investments
- The Assessing Officer noted a discrepancy in the loss on sale of long-term investments, which was Rs. 2.04 million, while only Rs. 1.85 million was added back to the income.
- The court observed that the statement of total income included an addition of Rs. 1.85 million, representing the netting off of the loss against the profit on the sale of current investments. The court held that the reasons for reopening must be based on the reasons initially provided by the Assessing Officer, and new grounds cannot be introduced during the proceedings.

Third Reason: Prior Period Expenses
- An amount of Rs. 31.32 lakhs was debited to the profit and loss account as prior period expenses, which the Assessing Officer argued should not be allowable.
- The court noted that the assessee had disclosed these expenses in accordance with the Institute of Chartered Accountants of India's guidelines. The assessee had fulfilled its obligation under Section 139 by furnishing the audit report under Section 44AB, and the disclosures made could not be considered as merely producing books of account.

Fourth Reason: Interest on Fixed Loan
- The assessee debited Rs. 12.68 crores on account of interest on a fixed loan to the profit and loss account, which was not capitalized. The Assessing Officer noted that Rs. 2.18 crores were capitalized in the previous year 2000-01.
- The court found that the assessee had disclosed the interest expenses and provided explanations in its objections to the reopening. The Assessing Officer did not consider these explanations while disposing of the objections.

4. Compliance with the Supreme Court's Directions in GKN Driveshaft (India) Ltd. v. ITO:
The petitioner filed objections to the reopening of the assessment, which were not disposed of before the reassessment order was passed. The Division Bench observed that the Assessing Officer had not complied with the Supreme Court's directions in GKN Driveshaft (India) Ltd. v. ITO, leading to the setting aside of the reassessment order.

Conclusion:
The court concluded that the Revenue failed to establish that there was a failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. Consequently, the reopening of the assessment beyond four years was invalid. The petition was allowed, and the notice dated March 18, 2009, was set aside. There was no order as to costs.

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