1990 (2) TMI 37 - HC - Income Tax

Summary

Issues Involved:
1. Whether the Inspecting Assistant Commissioner of Income-tax had any reason to believe that the income of the petitioner had escaped assessment for the assessment years 1981-82 and 1982-83.
2. Whether the material forming the basis for the belief that income had escaped assessment was legitimate.
3. Whether the petitioner had disclosed all material facts necessary for assessment.
4. Whether the losses claimed by the petitioner were inflated and if such inflation constituted income escaping assessment.
5. Whether the reasons recorded by the Inspecting Assistant Commissioner could sustain the belief that the petitioner's income had escaped assessment.
6. Whether the petitioner's failure to disclose fully and truly all material facts justified the issuance of notices under section 148 of the Income-tax Act.
7. Whether the losses sustained in subsequent years could affect the determination of income escaping assessment for the years in question.

Detailed Analysis:

1. Reason to Believe Income Escaped Assessment:
The court examined whether the Inspecting Assistant Commissioner had any reason to believe that the income of the petitioner had escaped assessment for the years 1981-82 and 1982-83. The impugned notices were issued under section 148 of the Income-tax Act, based on the belief that income chargeable to tax had escaped assessment due to the petitioner's failure to disclose all material facts fully and truly.

2. Legitimacy of Material Forming Basis for Belief:
The court reviewed the material forming the basis for the belief that income had escaped assessment. The Inspecting Assistant Commissioner had relied on reports from chartered accountants and board meeting minutes indicating excess payments and inflated losses. The court found that these documents provided a rational and intelligible nexus to the belief that income had escaped assessment.

3. Disclosure of Material Facts:
The petitioner contended that it had disclosed all material facts necessary for assessment. The court noted that the petitioner had appended a note in the profit and loss account for the assessment year 1982-83, indicating changes in the system of cotton purchases and ongoing examinations by auditors. However, the court emphasized that mere production of evidence was not enough; the petitioner was required to disclose all primary facts fully and truly.

4. Inflation of Losses:
The court examined whether the losses claimed by the petitioner were inflated and if such inflation constituted income escaping assessment. The auditors' reports indicated that the petitioner had made excess payments and inflated losses. The court observed that these findings were relevant primary facts that the petitioner had failed to disclose fully and truly.

5. Reasons Recorded by Inspecting Assistant Commissioner:
The court reviewed the reasons recorded by the Inspecting Assistant Commissioner for reopening the assessments. For the assessment year 1982-83, the reasons included excess payments to a firm and failure to verify relevant documents. For the assessment year 1981-82, the reasons included misappropriation in cotton purchases and inflated losses. The court found these reasons to be legitimate and sufficient to sustain the belief that income had escaped assessment.

6. Justification for Issuance of Notices:
The court held that the petitioner's failure to disclose fully and truly all material facts justified the issuance of notices under section 148. The court emphasized that the requirement of law was for the assessee to disclose all primary facts necessary for assessment, and the petitioner's disclosures were insufficient.

7. Effect of Subsequent Years' Losses:
The petitioner argued that the losses sustained in subsequent years could not be converted into income, and therefore, no income had escaped assessment. The court rejected this argument, stating that jurisdiction under section 147(a) is based on the belief that income chargeable to tax "has escaped assessment in that year," and this issue cannot be determined with reference to subsequent years' profits and losses.

Conclusion:
The court concluded that the Inspecting Assistant Commissioner had legitimate reasons to believe that the petitioner's income had escaped assessment due to the failure to disclose all material facts fully and truly. The impugned notices under section 148 were justified, and the petitions were dismissed. The interim orders were discharged, and no order as to costs was made.