2014 (4) TMI 208 - HC - Income Tax

Reopening of the Assessment u/s 148 of the Act - Incorrect valuation of closing stock valuation of shares - Accommodation entries taken from Mukesh Choksi and his related/controlled companies Held that - the objections are raised to the notice u/s 148 seeking to reopen the assessment, the AO has to deal with the objections on merits following the principles governing reassessment the AO cannot brush aside the objections merely with a statement that proceedings are only initiated when AO has reasons to believe that there is an escapement of income - There is a difference between recording of reasons to believe and reassessment order - Reopening is permissible on foundation of prima facie belief but the fact alleged or the reason propounded must have some basis and should not be mere surmise, gossip or rumour - Comparison of the reason to believe communicated vide letter dated 05.09.2012 and the audit memo dated 31.03.2008 shows that the reasons are verbatim copy of the audit memo - The reasons to believe reproduce the audit memo. Relying upon G.K.N Driveshafts (India) Limited v. Income Tax Officer 2002 (11) TMI 7 - SUPREME Court - the reassessment notice is not sustainable on the issue of valuation of closing stock - on the issue of valuation of closing stock of M/s MRPL Ltd. and taking of accommodation entries, the order is cryptic and does not deal with the objections raised, it needs to be relooked by the AO the matter remitted back to the AO for re-examination of the issue of reopening on the ground of valuation of closing stock of M/s MRPL Ltd. and taking of accommodation entries Decided partly in favour of Assessee.

Issues Involved:

1. Validity of the notice under Section 148 of the Income Tax Act, 1961 for reopening the assessment.
2. Incorrect valuation of closing stock of shares.
3. Incorrect rate of valuation of closing stock of shares of MRP Ltd.
4. Alleged accommodation entries taken from companies run by Mukesh Choksi.

Detailed Analysis:

1. Validity of the notice under Section 148 of the Income Tax Act, 1961 for reopening the assessment:

The petitioner challenged the notice dated 29.03.2012 under Section 148 seeking to reopen the assessment for the year 2005-06, arguing that the notice was based on a mere change of opinion and audit objections. The petitioner contended that there was full and true disclosure of all material facts during the original assessment, and the reassessment proceedings were initiated without any fresh tangible material. The court found that the reasons recorded for reopening the assessment were verbatim copies of the audit memo, indicating a change of opinion. The court emphasized that the Assessing Officer must objectively consider and deal with objections on merits, following principles governing reassessment as settled by judicial pronouncements. The court held that the notice under Section 148 was not sustainable on the issue of valuation of closing stock.

2. Incorrect valuation of closing stock of shares:

The internal audit wing raised objections regarding the valuation of closing stock of shares, which the petitioner had valued as per Accounting Standard-13 (AS-13), i.e., at lower of cost or fair value. The petitioner argued that this method was consistently followed and accepted in previous assessments. The court noted that the balance sheet as on 31.03.2005 clearly showed that the petitioner had disclosed the method of valuation as "valued at cost or market price, whichever is lower." Since there was true and full disclosure, the court concluded that this was a case of change of opinion based on audit objection, which is impermissible in law.

3. Incorrect rate of valuation of closing stock of shares of MRP Ltd.:

The audit objections also pointed out that the petitioner had valued 4,40,000 shares of MRP Ltd. at Rs. 20.09 per share instead of the purchase price of Rs. 22.10 per share. The petitioner clarified that this was a typographical error, and the actual number of shares held was 4,00,000, valued correctly at Rs. 22.10 per share. The court observed that the Assessing Officer had not addressed this aspect in the impugned order and failed to explain how there was an escapement of income when the valuation was revenue neutral. The court remanded the matter to the Assessing Officer to re-examine the issue of reopening on this ground.

4. Alleged accommodation entries taken from companies run by Mukesh Choksi:

The petitioner was alleged to have taken accommodation entries amounting to Rs. 3,13,07,210 from companies run by Mukesh Choksi. The petitioner categorically denied any transactions with these companies and requested details of such entries. The Assessing Officer did not provide any specific details or evidence to support the allegation, merely relying on the statement of Mukesh Choksi. The court held that the Assessing Officer must provide a basis or foundation for the belief that income had escaped assessment, which was not done in this case. The court remanded the matter to the Assessing Officer to re-examine this issue as well.

Conclusion:

The court allowed the writ petition partly, setting aside the impugned order dated 28.01.2013, and remanded the matter to the Assessing Officer to re-examine the issues of valuation of closing stock of MRP Ltd. shares and the alleged accommodation entries. The reassessment notice was held unsustainable on the issue of valuation of closing stock, and the Assessing Officer was directed to objectively consider and deal with the objections raised by the petitioner.

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