2007 (8) TMI 316 - HC - Income Tax

Reassessment proceedings - closing stock of the assessee-firm on the dissolution was valued at cost price - Assessing Officer, however, found that it should have been valued at market price original assessment completed adopting the original cost price reopening of assessment on advice of internal audit party held that opinion of an internal audit party regarding valuation of closing stock at market price was a change of opinion - Such change of opinion cannot justify the reassessment proceedings

Summary

Issues:
1. Validity of reassessment proceedings initiated by the Income-tax Appellate Tribunal.
2. Correct valuation method for closing stock of a dissolved partnership firm.

Issue 1: The High Court was tasked with determining the validity of the reassessment proceedings initiated by the Income-tax Appellate Tribunal. The Tribunal had referred a question of law to the court regarding the ab initio void nature of the reassessment proceedings in relation to the assessment year 1981-82. The court analyzed the facts of the case, where the partnership firm had been dissolved, and a proprietary concern had emerged. The Assessing Officer had revalued the closing stock at market price instead of the original cost price, leading to a difference in income. The court considered the arguments presented by the parties, including the reliance on the Partnership Act, 1932. The Commissioner of Income-tax (Appeals) had upheld the Assessing Officer's decision, but the Tribunal disagreed, stating that reopening the assessment based on advice from the audit party amounted to a change in opinion. The court referred to the Supreme Court's decision in Indian and Eastern Newspaper Society v. CIT [1979] 119 ITR 996, emphasizing that the Income-tax Officer must independently assess the situation and cannot solely rely on the audit party's opinion on a legal matter. The court ultimately held that the reassessment proceedings were void ab initio and restored the status quo ante.

Issue 2: The second issue involved determining the correct valuation method for the closing stock of the dissolved partnership firm. The court examined the differing views of the Assessing Officer, Commissioner of Income-tax (Appeals), and the Tribunal regarding the valuation of the closing stock. The Tribunal had emphasized that the Income-tax Officer cannot act solely on the advice of the audit party and must make an independent judicial finding based on information in possession. The court cited the Supreme Court's decision and a Division Bench of the Gujarat High Court, reiterating the importance of the Income-tax Officer's independent assessment of the law. Based on these legal principles, the court ruled in favor of the assessee, highlighting the necessity for the Income-tax Officer to determine the effect and consequence of the law independently. The court's decision was guided by established legal principles and precedents, ultimately favoring the assessee in the matter of correct valuation of the closing stock of the dissolved partnership firm.