2012 (12) TMI 611 - HC - Income Tax

Reassessment - Can the assessing officer, to reopen an assessment, entertain a reason to believe which is contrary to the statute? - Exemption u/s 10(21) - Accumulation of income u/s 11(2) - - held that - Two important conditions for the applicability of section 147 are (a) income chargeable to tax must have escaped assessment and (b) assessing officer must have reason to believe so. When section 11(3) treats the accumulated income of the past year of the petitioner as income of the assessment year 2001-02, there can be no question of any income escaping assessment in the past assessment years i.e. the assessment years 1998-99 to 2000-01. It follows that the assessing officer cannot entertain any reason to believe that income chargeable to tax for those years had escaped assessment. Even assuming that there was breach of any statutory conditions under which the exemption was granted to the petitioner under section 10(21), the entire accumulated income of the earlier years cannot be taxed in those years by reopening the assessments for those years. Section 11(3), which is made applicable to section 10(21), itself provides that the entire accumulated income shall be deemed to be the income of the assessee of the previous year in which the breach of the conditions or the contingency occurs. The statute having thus fixed the assessment year in which the entire past accumulated income falls to be taxed, it is impermissible in law for the assessing officer to entertain a reason to believe that income chargeable to tax for the assessment years 1998-99 to 2000-01 had escaped assessment. Notice issued u/s 148 quashed. - Decided in favor of assessee.

Summary

Issues:
1. Jurisdiction of assessing officer to reopen assessments under section 148 of the Income Tax Act.
2. Interpretation of sections 10(21), 11(2) and 11(3) in relation to the taxation of accumulated income of a scientific research association.
3. Application of statutory provisions in determining the assessment year for taxing accumulated income.
4. Conditions for applicability of section 147 regarding escaped assessment of income.

Analysis:
1. The main issue in this case is the jurisdiction of the assessing officer to reopen assessments under section 148 of the Income Tax Act. The court examined whether the assessing officer can entertain a "reason to believe" contrary to the statute when issuing notice under section 148. The court emphasized that the assessing officer's power is limited by statutory provisions and cannot reopen assessments based on reasons that do not align with the law.

2. The court delved into the interpretation of sections 10(21), 11(2), and 11(3) concerning the taxation of accumulated income of a scientific research association. Section 10(21) provides for exemption of income of such associations subject to conditions in section 11(2) and (3). Section 11(3) deems accumulated income taxable in the year a contingency occurs, not in past years. The court highlighted that the assessing officer must tax accumulated income in the year of breach as mandated by the statute.

3. Regarding the determination of the assessment year for taxing accumulated income, the court noted that the statute fixes the year in which accumulated income is to be taxed. In this case, the accumulated income of the petitioner was to be taxed in the assessment year 2001-02 due to a breach of statutory provisions. The court emphasized that the assessing officer cannot consider accumulated income as having escaped assessment in past years but must tax it in the specific year of breach.

4. The court discussed the conditions for the applicability of section 147 concerning escaped assessment of income. It highlighted that for section 147 to apply, income must have genuinely escaped assessment, and the assessing officer must have a valid reason to believe so. Since section 11(3) deems accumulated income as income of a specific year, there is no question of income escaping assessment in past years. Therefore, the assessing officer cannot entertain reasons to believe that income for those years had escaped assessment.

In conclusion, the court quashed the notice issued under section 148 for the assessment years 1998-99 to 2000-01, ruling in favor of the petitioner. The judgment emphasized the importance of adhering to statutory provisions and limitations on the assessing officer's power to reopen assessments based on incorrect reasons.