2013 (10) TMI 68 - HC - Income Tax

Reassessment - Notice u/s 148 for making additions u/s 41(1) - the assessee was collecting the amount towards excise duty by way of security as there was dispute of classification of goods - Interest on fixed deposits made out of security deposits in the form of excise duty collected were offered for taxation Held that - A provisional assessment was made in pursuance to which the assessee started depositing the amount collected as excise duty from customers and offerred the same as security to the Central Excise Department. He offerred interest on the deposit to tax. The dispute was ultimately resolved in the year 2000 in which he was liable to pay Rs.26,39,484/-. The assessee thereafter started returning excise duty to the persons from whom they were collected and the remaining amount to tax in the assessment year 2004-05. In the circumstances, it cannot be said that the assessee was allowed any allowance or deduction in the assessment year in question in respect of expenditure or trading liability incurred by the assessee. Every security in pursuance to provisional assessment in respect of which final assessment were passed and in which amount collected were offerred as security by way of FDs to collect excise duty would not fall within the meaning of trading liability incurred by assessee, thus provision of Section 41 (1) is not applicable. There was no nexus between reasons recorded in formation of belief from the facts emerging in the case, the jurisdiction for framing reassessment under Section 147 - decided against the revenue.

Summary

Issues:
1. Jurisdiction for framing reassessment under Section 147
2. Applicability of Section 41(1) to the case
3. Validity of notice under Section 148

Jurisdiction for framing reassessment under Section 147:
The case involved an appeal under Section 260A of the Income Tax Act, 1961, arising from a judgment and order passed by the Income Tax Appellate Tribunal. The primary issue was whether the Tribunal was justified in concluding that the jurisdiction for framing reassessment under Section 147 was invalid. The Tribunal found that there was no nexus between the reasons recorded and the formation of belief for reassessment. The Assessing Officer believed that income had escaped assessment due to excise duty, but the Tribunal held that since the excise duty was not allowed or deducted in earlier years, Section 41(1) was not applicable. The Tribunal set aside the reassessment order, deeming the assumption of jurisdiction for reassessment as legally flawed.

Applicability of Section 41(1) to the case:
The Tribunal analyzed the applicability of Section 41(1) to the case, particularly in relation to excise duty collected by the assessee. It was established that the excise duty collected was not offered as income in previous years and was not treated as a trading receipt. The Tribunal reasoned that since the excise duty was not allowed or deducted in earlier years, Section 41(1) did not apply. The Tribunal concluded that the amount in question was not undisclosed income and that there was no basis for reassessment under Section 147.

Validity of notice under Section 148:
The validity of the notice issued under Section 148 was also scrutinized in the case. The Assessing Officer recorded reasons for reassessment, citing the excise duty collected as the basis for income escaping assessment. However, the Tribunal found that the reasons provided did not establish a valid ground for reassessment under Section 147. The Tribunal upheld that the notice under Section 148 was not valid due to the lack of connection between the reasons recorded and the formation of belief for reassessment.

In conclusion, the High Court dismissed the income tax appeal, affirming the Tribunal's decision regarding the invalidity of the reassessment under Section 147 and the inapplicability of Section 41(1) to the case. The Court concurred with the Tribunal's findings that there was no justification for reassessment based on the facts presented, thereby upholding the dismissal of the appeal.