1983 (1) TMI 62 - HC - Income Tax

Summary

Issues Involved:
1. Whether the Income Tax Officer (ITO) could have entertained a reasonable belief that there was escapement of income due to the petitioner's failure to disclose fully and truly material facts for assessment years 1970-71 and 1974-75.
2. For the assessment year 1974-75, whether the ITO could have entertained a reasonable belief that there was escapement of income in consequence of information in his possession.

Detailed Analysis:

Issue 1: Reasonable Belief of Escapement of Income Due to Non-Disclosure of Material Facts
The petitioner, a company engaged in manufacturing textiles, had consistently used a method of valuing its stock of yarn in process at 12 paise per kg for income-tax purposes, while using a different method for balance-sheet purposes. This practice had been followed since the assessment year 1966-67. The petitioner disclosed these methods and the differences in valuations in the returns filed for the relevant assessment years and answered standard queries from the ITO regarding these valuations.

The ITO later issued notices under Section 148 read with Section 147 of the Income Tax Act, 1961, for reopening the assessments for the years 1970-71 and 1974-75, alleging that the petitioner had failed to disclose fully and truly all material facts necessary for its assessment. The petitioner contested this, arguing that all relevant facts were disclosed, and the method of valuation was consistently followed and accepted in previous years.

The court held that the petitioner had indeed disclosed all primary facts necessary for assessment. The duty of the petitioner was to make a true and full disclosure of primary facts, which it had done. It was the ITO's responsibility to draw correct inferences from those facts. The court cited precedents from the Supreme Court, including CIT v. Burlop Dealers Ltd. and ITO v. Madnani Engineering Works Ltd., to support the view that mere change of opinion by the ITO does not justify reopening assessments. Therefore, the court found no justification for reopening the assessments under Section 147(a) for the years in question.

Issue 2: Reasonable Belief of Escapement of Income Due to Information in Possession for 1974-75
For the assessment year 1974-75, the respondent argued that the reopening was also justified under Section 147(b) due to information received from a revenue audit objection. The audit objection pointed out an undervaluation of closing stock due to discrepancies in the quantity of cotton consumed, which the ITO claimed constituted new information.

The court examined whether the audit objection constituted "information" under Section 147(b). It was found that the audit objection merely drew attention to material already on record and considered by the ITO during the original assessment. The court reiterated that an error discovered on reappraisal of the same material does not constitute new information and does not justify reopening the assessment. The court concluded that the reopening of the assessment for the year 1974-75 under Section 147(b) was also unjustified.

Conclusion:
The court ruled that the notices issued by the ITO for reopening the assessments for the years 1970-71 and 1974-75 were void and without jurisdiction. The petitioner had made full and true disclosures of all material facts, and the ITO's actions were based on a mere change of opinion rather than new information or failure to disclose. Therefore, the court quashed and set aside the impugned notices and ruled in favor of the petitioner.