2012 (2) TMI 193 - HC - Income Tax

Validity of re-opening of assessment beyond the period of four years of the end of the relevant A.Y. - Investment company reopened on ground that provision for diminution in the value of the unquoted investments was an unascertained liability and ought to be added back to Net Profit - Original order framed u/s 143(3) A.Y. 03-04 - Held that - In the absence of any specific provision in Section 115JB at the time when the original assessment was made and having regard to the debatable nature of the issue as to whether Clause (c) of Explanation 1 to Section 115JB would cover cases of amounts set aside for diminution in the value of investment, it can never be postulated that it was the duty of the assessee to have instructed or informed the A.O. as to the legal inference which he should draw from the primary facts. There was thus no failure on the part of the petitioner to disclose full and true primary particulars at the time of the completion of the original assessment. The notice issued u/s 148 is therefore, declared to be without jurisdiction Decided in favor of assessee. Validity of re-opening of assessment of A.Y. 06-07 questioned on basis of judegment in A.Y. 03-04 - adjustment to the book profit u/s 115JB not made for provision for NPA and for doubtful debts return processed u/s 143(1)(a) Held that - Firstly, notice issued u/s 148 is within the period of 4 years from the end of relevant A.Y. Secondly, issue whether the provisions in question should be added back in terms of the relevant clause in the Explanation-1 below Section 115JB is debatable but the fact remains that it could not be examined since the return filed by the assessee was merely processed u/s 143(1)(a) and, therefore, no inference or opinion could have been formed by A.O. as to the disallowbility of the provisions. Validity of notice issued u/s 148 upheld Decided against the assessee.

Issues Involved:
1. Validity of the notice issued under Section 148 of the Income Tax Act, 1961.
2. Whether there was a failure to disclose fully and truly all material facts necessary for assessment.
3. Application of Clause (c) of Explanation 1 to Section 115JB of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Validity of the Notice Issued Under Section 148 of the Income Tax Act, 1961:
In W.P.(C) 12438/2009, the petitioner challenged the notice issued under Section 148 for the assessment year 2003-04, arguing that it was issued after four years from the end of the relevant assessment year and was therefore without jurisdiction. The court agreed with the petitioner, stating that the notice issued after the statutory period was invalid since there was no failure on the part of the petitioner to furnish full and true particulars necessary for its assessment.

In W.P.(C) 12457/2009, the petitioner also challenged the notice under Section 148 for the assessment year 2006-07. However, the court found that since the return was merely processed under Section 143(1)(a) and no assessment under Section 143(3) had been made, the notice issued within four years was valid. The court held that the Assessing Officer had "reason to believe" that income chargeable to tax had escaped assessment, thus justifying the notice under Section 148.

2. Whether There Was a Failure to Disclose Fully and Truly All Material Facts Necessary for Assessment:
In W.P.(C) 12438/2009, the court noted that the petitioner had submitted all relevant documents, including the profit and loss account, balance sheet, and audit report in Form No.29B, which disclosed the provision for diminution in the value of unquoted investments. The court emphasized that the duty of the assessee is to disclose all primary facts, not to guide the Assessing Officer on the legal inferences to be drawn from those facts. Since the petitioner had disclosed all material facts, the court concluded that there was no failure on its part, making the reopening of the assessment invalid.

In W.P.(C) 12457/2009, the court found that since the return was only processed under Section 143(1)(a) without scrutiny, the Assessing Officer had not formed any opinion on the matter. Therefore, the issue of failure to disclose material facts did not arise, and the reopening of the assessment was justified.

3. Application of Clause (c) of Explanation 1 to Section 115JB of the Income Tax Act, 1961:
In W.P.(C) 12438/2009, the court examined whether the provision for diminution in the value of unquoted investments should be added back to the book profit under Clause (c) of Explanation 1 to Section 115JB. The court noted that this was a legal and accounting issue that the Assessing Officer had to decide based on the disclosed facts. The court held that the petitioner was not required to inform the Assessing Officer about the legal inferences to be drawn from the disclosed facts. The court also referenced the retrospective amendment to Section 115JB, which clarified the issue but was not in force at the time of the original assessment. Therefore, the court concluded that the petitioner had not failed to disclose material facts, and the notice under Section 148 was invalid.

In W.P.(C) 12457/2009, the court found that the Assessing Officer had "reason to believe" that the provisions for doubtful debts and non-performing assets should be added back to the book profit under Clause (c) of Explanation 1 to Section 115JB. Since the return was only processed under Section 143(1)(a), the Assessing Officer had not previously formed an opinion on the matter. Therefore, the court held that the reopening of the assessment was justified, and the petition was dismissed.

Conclusion:
In W.P.(C) 12438/2009, the court quashed the notice issued under Section 148, declaring it without jurisdiction due to the full and true disclosure of material facts by the petitioner. In W.P.(C) 12457/2009, the court upheld the notice under Section 148, finding that the Assessing Officer had valid "reason to believe" that income had escaped assessment, and dismissed the petition.

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