2016 (4) TMI 167 - HC - Income Tax

Reopening of assessment - Held that - Apart from the mistake made in the audit report by mentioning the system of accounting of the Assessee as mixed and the letter issued by the Assessee himself, no other tangible material was cited to justify the reopening of assessment for AY 2006-07 and 2007-08, the two years for which the reopening was beyond the period of four years. The reasons provided were the same reasons supplied for the reopening of the assessment for AYs 2008-09 and 2009-10 although for AY 2008-09 the earlier assessment was completed under Section 143 (1) of the Act. The fact of the matter was that the reason for the reopening of the assessment was a mistaken factual premise that the Assessee had changed the system of accounting from the mercantile to the cash system. It was more than adequately explained by the Assessee that this was an inadvertent error. The Assessee has convincingly shown that he has consistently been following the mercantile system of accounting not only for AYs in question but for the earlier and later AYs as well. Since the action of the Revenue was based on a factually erroneous premise, the Court is of the view that the reopening of the assessments for the said AYs is not sustainable in law. Decided in favour of assessee

Summary

Issues Involved:
1. Reopening of assessments under Section 148 of the Income Tax Act, 1961.
2. Alleged failure to disclose fully and truly all material facts necessary for assessment.
3. Method of accounting followed by the Assessee.
4. Validity of the reasons provided for reopening the assessments.

Issue-wise Detailed Analysis:

1. Reopening of assessments under Section 148 of the Income Tax Act, 1961:
The Assessee, a medical practitioner, challenged the notices issued by the Deputy Commissioner of Income Tax (DCIT) under Section 148 of the Income Tax Act, 1961, seeking to reopen the assessments for Assessment Years (AYs) 2006-07 to 2009-10. The reopening was based on the assertion that the Assessee had not disclosed fully and truly all material facts necessary for assessment.

2. Alleged failure to disclose fully and truly all material facts necessary for assessment:
The DCIT issued notices under Section 148 for AYs 2006-07 and 2008-09 on 25th and 28th March 2013, respectively, and for AYs 2007-08 and 2009-10 on 5th and 7th March 2014, respectively. The reasons for reopening the assessments were based on the information gathered during the scrutiny proceedings for AY 2010-11, which indicated that the Assessee was following a mixed system of accounting, contrary to the provisions of Section 145 of the Act.

3. Method of accounting followed by the Assessee:
The Assessee contended that the method of accounting followed was consistently mercantile, not mixed as mentioned in the audit report. It was argued that the mention of a mixed system was a clerical error by the auditor. The Assessee provided a letter from the auditor clarifying that the method of accounting was mercantile, and this was consistently followed in previous and subsequent years.

4. Validity of the reasons provided for reopening the assessments:
The Court found that the reopening of the assessments was based on a mistaken factual premise that the Assessee had changed the system of accounting from mercantile to cash. The Court noted that the Assessee had adequately explained the error and consistently followed the mercantile system. The Court also observed that the objections raised by the Assessee were not adequately addressed by the Assessing Officer (AO).

The Court concluded that the reopening of the assessments was not sustainable in law as it was based on an erroneous premise. The Court referred to the precedent set in Commissioner of Income Tax v. Kelvinator of India Limited (2010) 320 ITR 561 (SC), which requires tangible material for reopening assessments, a requirement not fulfilled in this case.

Judgment:
The Court quashed the impugned notices under Section 148 of the Act and the corresponding orders rejecting the Assessee's objections. The writ petitions were allowed, and the reopening of assessments for AYs 2006-07 to 2009-10 was deemed invalid. The Court did not award any costs.