2011 (4) TMI 823 - HC - Income Tax

Reopening of Assessment - set off of such carried forward depreciation against short term capital gain - Held that - AO has reopened the assessment under an honest belief that income chargeable to tax has indeed escaped assessment, however, if such honest belief is entertained on an erroneous interpretation of the relevant statutory provisions, the assessee should not be required to face the rigours of reassessment merely because the Assessing Officer entertains an honest belief - Such honest belief should be based upon the material on record and should, in fact, give rise to the belief that income has escaped assessment - Therefore, it is not possible to state that any income chargeable to tax has escaped assessment as is sought to be contended on behalf of the respondent Assessing Officer who has reopened the assessment on the ground that the unabsorbed depreciation for assessment years 1993-94 to 1996-97 could not be set off against short term capital gain in the year under consideration - The reopening by the AO is based upon an erroneous interpretation of the provisions of sub-section (2) of section 32 and in fact no income chargeable to tax can be stated to have escaped assessment - thus the very assumption of jurisdiction by the AO under section 147 is, therefore, invalid - In favour of assessee.

Issues Involved:
1. Validity of the notice issued under Section 148 of the Income-tax Act, 1961 for reopening the assessment.
2. Interpretation of Section 32(2) of the Income-tax Act, 1961 regarding the set-off of unabsorbed depreciation.
3. Jurisdiction of the Assessing Officer under Section 147 of the Income-tax Act, 1961.
4. Binding nature of CBDT Circulars and Finance Minister's Speech on revenue authorities.

Detailed Analysis:

1. Validity of the Notice Issued Under Section 148:
The petitioner challenged the notice dated 28-3-2000 issued by the respondent under Section 148 of the Income-tax Act, 1961, for reopening the assessment for the assessment year 1997-98. The petitioner contended that the assumption of jurisdiction by the Assessing Officer under Section 147 was invalid as no income had escaped assessment. The Court noted that the assessment was initially made under Section 143(1) and the only requirement for reopening under Section 147 was that the Assessing Officer should have "reason to believe" that income chargeable to tax had escaped assessment. The Court emphasized that the sufficiency of the reasons is not for the Court to judge but the belief should be bona fide and based on specific information. It was found that the Assessing Officer's belief was based on an erroneous interpretation of the relevant statutory provisions, making the assumption of jurisdiction invalid.

2. Interpretation of Section 32(2) of the Income-tax Act, 1961:
The core issue was the interpretation of Section 32(2) as it stood before and after its amendment by the Finance (No. 2) Act, 1996, effective from 1-4-1997. The petitioner argued that the unabsorbed depreciation of earlier years (1993-94 to 1996-97) formed part of the depreciation allowance for the assessment year 1997-98 and could be set off against short-term capital gains. The Court examined the provisions and concluded that under the old Section 32(2), unabsorbed depreciation was carried forward and deemed to be part of the allowance for the following year. Therefore, for the assessment year 1997-98, the unabsorbed depreciation from earlier years was part of the depreciation allowance for that year and could be set off against income under any head, including short-term capital gains.

3. Jurisdiction of the Assessing Officer Under Section 147:
The respondent argued that since the assessment was made under Section 143(1), there was no opinion expressed by the Assessing Officer, and hence, the reopening did not involve a change of opinion. The Court agreed that in cases of reopening assessments made under Section 143(1), the question of change of opinion does not arise. However, the Court found that the Assessing Officer's belief that income had escaped assessment was based on a misconception of the law, specifically the interpretation of Section 32(2). Therefore, the reopening of the assessment was invalid as it was based on an erroneous legal premise.

4. Binding Nature of CBDT Circulars and Finance Minister's Speech:
The petitioner relied on the Finance Minister's Budget Speech and CBDT Circular No. 762, which clarified that the unabsorbed depreciation brought forward as on 1-4-1997 could be set off against any head of income for the assessment year 1997-98 and the subsequent seven years. The Court held that these clarifications were consistent with the statutory provisions and binding on the revenue authorities. The Court emphasized that the Assessing Officer could not take a stand contrary to the CBDT Circular, which explained the legislative intent and the correct interpretation of Section 32(2).

Conclusion:
The Court concluded that the reopening of the assessment was based on an erroneous interpretation of Section 32(2) and that no income had escaped assessment. Therefore, the assumption of jurisdiction by the Assessing Officer under Section 147 was invalid, and the notice issued under Section 148 was quashed. The petition was allowed, and the rule was made absolute with no order as to costs.

← Previous Next →