2011 (3) TMI 1756 - HC - Income Tax

Challenging the legality and validity of the initiation of reassessment proceedings - HELD THAT - In the case on hand, the assessee has not included the CST paid on the closing stock while making its valuation. Similarly, the assessee has not included the 30% of the Excise Duty. The case of the Department is thus the assessee has claimed excess loss of income in its return which is contrary to section 145-A. At this stage, the Department has placed reliance upon Explanation 2(C) to section 147. Sub clause (iv) to clause(c) of Explanation 2 to section 147 supports the Department's point of view that it is a case of deemed escapement of assessment. It is not necessary for us to dwell upon this point any further. The sufficiency of the reason is beyond the scope of scrutiny at this stage. The sufficiency of the material cannot be gone into but relevancy certainly can be gone into. The reasons recorded by the concerned authority are relevant reasons to form a belief that the income of the petitioner has escaped assessment. Therefore, We find no force in the argument of the petitioner that on the basis of the reasons recorded by the AO, the re-assessment proceedings could not have been initiated. There is relevant material to form a belief that the income of the petitioner has escaped income. At this stage, it can be said that there is relevant material on the record to form a reasonable belief that the taxable income of the assessee has escaped assessment, in view of section 145-A.

Issues Involved:
1. Validity of the reassessment notice issued without fresh reasons.
2. Justification for initiation of reassessment proceedings based on the valuation of closing stock.

Detailed Analysis:

Issue 1: Validity of the Reassessment Notice Issued Without Fresh Reasons

Argument by Petitioner:
- The petitioner argued that the reassessment notice dated 6.6.2003 was invalid because it was issued based on reasons recorded on 12.5.2003 without fresh reasons being recorded. This, according to the petitioner, vitiated the notice.

Counter by Respondent:
- The respondent contended that the earlier notice dated 13.5.2003 was withdrawn due to a formal defect (absence of a rubber stamp impression). To rectify this mistake, a fresh notice was issued on 6.6.2003.

Court's Analysis:
- The court found that the earlier notice was valid except for the formal defect. The assessing officer issued a fresh notice to correct this defect, which is permissible as quasi-judicial authorities have the power to rectify mistakes.
- The court emphasized that the mandate of law requires recorded reasons at the initiation of reassessment proceedings, which existed in this case. The petitioner's argument that no fresh reasons were recorded was deemed illogical and unsupported by law or case law.

Conclusion:
- The court held that the reassessment notice dated 6.6.2003 was valid as the reasons recorded on 12.5.2003 were sufficient for the initiation of reassessment proceedings.

Issue 2: Justification for Initiation of Reassessment Proceedings Based on the Valuation of Closing Stock

Argument by Petitioner:
- The petitioner claimed that the objections regarding the valuation of closing stock did not justify the initiation of reassessment proceedings. The accounts were maintained as per the prescribed Accounting Standard, which did not require the inclusion of Central Sales Tax (CST) and excise duty in the value of goods/raw material in the closing stock.
- The petitioner argued that as a 100% Export Oriented Unit (EOU), it was exempt from excise duty unless the goods were sold in the local market. Thus, there was no material to form a belief that the income had escaped assessment.

Counter by Respondent:
- The respondent argued that under section 145-A of the Income Tax Act, the petitioner was required to include the amount of tax, duty, cess, or fee actually paid by the assessee in the closing stock of goods. The petitioner's failure to do so indicated that the account books were not maintained as per the Act's requirements, justifying the belief that income had escaped assessment.

Court's Analysis:
- The court noted that the petitioner admitted to not including CST and excise duty in the closing stock valuation. Section 145-A, introduced by the Finance Act No. 2 of 1998, mandates the inclusion of any tax, duty, cess, or fee paid or incurred by the assessee in the cost of raw materials.
- The court emphasized that the sufficiency of material is not to be examined at this stage; it is sufficient that there is some material on which a belief that taxable income has escaped assessment can be formed.
- The court referred to the Explanation attached to Section 145-A, which clarifies that any tax, duty, cess, etc., must be included in the cost of raw materials, regardless of any right to reimbursement.
- The court also cited relevant case law, including the Supreme Court's decision in Commissioner of Income Tax v. British Paints India Ltd., which supports the inclusion of all costs, including taxes, in the valuation of closing stock.

Conclusion:
- The court found that there was relevant material to form a belief that the petitioner's income had escaped assessment due to the non-inclusion of CST and excise duty in the closing stock valuation.
- The reassessment proceedings were justified under Section 147, supported by Explanation 2(C) to Section 147, which deems cases of under-assessment or excessive loss as instances of escaped assessment.

Final Judgment:
- Both writ petitions were dismissed. The petitioner was directed to appear before the concerned authority to proceed with the reassessment. The period of stay order was excluded from the limitation period for completing the reassessment proceedings.

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