2015 (3) TMI 648 - HC - Income Tax

Reopen of assessment invoking Explanation 2 to Section 153 - remission or cessation of liability during the relevant assessment year - Tribunal directing AO to reopen the assessment of an earlier year which would amount to enhancement of income - Held that - In the case on hand, admittedly, credit balances are lying in the names of third parties for long number of years and there are no purchases by the assessee from those parties after 1996-1997. That apart, it was found that no such persons reside in the addresses given by the assessee. Under such circumstances, necessarily these amounts have to be determined under one head or the other. If Section 41(1) of the Act does not apply to the facts of the present case, it has to be determined how the credit balances should be treated. The assessee had conceded before the Tribunal that assessment of the earlier assessment years relating to such purchases can be reopened and he has no objection to the same. The purpose of such concession is to determine the correct tax liability. It was under such circumstances, the Assessing Officer was directed to reopen the assessment of the year in which such purchases were made from third parties to examine whether such purchases were bogus or not. The net result of such a direction may also go in favour of the assessee, if he is able to prove the bona fides. The effect would be that the correct tax liability will thereafter be determined. We find that such a direction is in consonance with the provisions of Explanation 2 to Section 153 of the Act. Such a direction passed by the Tribunal in the present factual scenario, in our considered opinion, cannot be said to be erroneous. - Decided in favour of the revenue

Summary

Issues:
1. Direction to reopen assessment invoking Explanation 2 to Section 153 of the Act.
2. Direction to reopen assessment of an earlier year amounting to income enhancement.

Issue 1: Direction to reopen assessment invoking Explanation 2 to Section 153 of the Act

The appeal challenged the order of the Income Tax Appellate Tribunal directing the Assessing Officer to reopen the assessment invoking Explanation 2 to Section 153 of the Act. The appellant, a wholesale dealer in cloth, had credit balances with certain parties, and the Assessing Officer raised concerns regarding these balances. The Tribunal found no evidence of remission or cessation of liability during the relevant assessment year and ordered the reopening of assessments of earlier years to examine the genuineness of purchases made from these parties. The Tribunal's decision was based on the concession made by the appellant that assessments of earlier years could be reopened. The High Court upheld the Tribunal's decision, stating that the direction to reopen the assessment was in line with Explanation 2 to Section 153 of the Act, aiming to determine the correct tax liability.

Issue 2: Direction to reopen assessment of an earlier year amounting to income enhancement

The second issue involved the direction by the Tribunal to reopen the assessment of an earlier year, potentially leading to an enhancement of income. The appellant initially conceded before the Tribunal that assessments of earlier years related to certain purchases could be reopened, indicating no objection to such actions. The Tribunal's decision to reopen assessments of earlier years was based on the need to examine the genuineness of purchases made from specific parties. The High Court found that such a direction was made to ensure the determination of the correct tax liability and was not erroneous. The Court emphasized that the net result of reopening assessments could also benefit the appellant if they could prove the genuineness of the transactions. Therefore, the High Court dismissed the appeal, ruling against the appellant and in favor of the revenue, with no costs imposed.

This detailed analysis of the judgment from the Madras High Court highlights the issues raised in the appeal and the reasoning behind the decision to uphold the Tribunal's directions regarding the reopening of assessments under the Income Tax Act.