2017 (1) TMI 1201 - HC - Income Tax

Reopening of assessment - petitioner had declared business loss and income under other sources and while computing the business income, the assessee has claimed loss on sale of asset which is a capital gain and the petitioner is not entitled to this amount and hence, it has to be disallowed while computing the business income - Held that - The income earned by the petitioner was exempt from tax. As already pointed out the petitioner while filing the return of income on 28.10.2005, declared business loss and income from other sources and while computing business income, the assessee had claimed the loss on sale of assets, as a capital loss. This according to the first respondent, the assessee is not entitled to do and he is of the opinion that it ought to have disallowed the same while computing the business income and such amount claimed as loss on sale of asset is chargeable to tax under escapement assessment. If such is the reason, this Court cannot interfere with the impugned notice on the ground that there is no loss of revenue and that the petitioner did not carry forward the loss related to the assessment year 2005-06 or set off against the income of the petitioner in the subsequent years. These issues are factual issues, which the assessee has to raise before the first respondent. More particularly, this Court will not go into the aspect as to what is the effect of not carrying forward the loss to the next year or not setting it off against the income in the subsequent years and whether the petitioner would be entitled to file revised returns for the subject year etc. These being factual, it is best left to the assessing authority to decide. This Court is not inclined to interdict the proceedings initiated by the first respondent by issuing a Writ and the prayer sought for by the petitioner to quash the notice under Section 148 of the Act, is held to be not maintainable and as the petitioner had been communicated with the reasons for reopening by communication dated 03.10.2007, liberty is granted to the petitioner to submit their objections within a period of three weeks from the date of receipt of a copy of this order, after which, the first respondent shall take a decision thereon on merits and in accordance with law after affording an opportunity of personal hearing to the petitioner, uninfluenced by any observations made in this order.

Issues Involved:
1. Validity of notice under Section 148 of the Income Tax Act.
2. Failure to issue notice under Section 143(2) within the statutory time limit.
3. Levy of penalty under Section 271BA.
4. Reference to Transfer Pricing Officer under Section 92CA.
5. Alleged revenue loss due to incorrect claim of capital loss as business loss.

Detailed Analysis:

1. Validity of Notice under Section 148 of the Income Tax Act:
The petitioner, a 100% Export Oriented Unit, sought to quash the notice issued by the respondent under Section 148 of the Income Tax Act, 1961, for the assessment year 2005-06. The notice was based on the belief that the petitioner’s income had escaped assessment. The petitioner argued that the notice was issued without reasonable cause and was an attempt to cover up the failure to initiate assessment proceedings within the statutory time limit. The court, however, emphasized the procedure outlined by the Supreme Court in GKN Driveshafts (India) Ltd vs. ITO, which mandates that the noticee should file a return, seek reasons for the notice, file objections, and await a speaking order from the Assessing Officer. The court held that the petitioner must follow this procedure and dismissed the writ petition as premature.

2. Failure to Issue Notice under Section 143(2) within the Statutory Time Limit:
The petitioner contended that the respondent failed to issue a notice under Section 143(2) within the statutory time limit, which precluded the respondent from reopening the assessment under Section 148. The court referred to the decision in CIT vs. M.Chellappan, which stated that the omission to issue a notice within the statutory time does not empower the Assessing Officer to reopen the assessment. However, the court noted that the petitioner did not follow the procedural requirements as outlined in GKN Driveshafts (India) Ltd vs. ITO and thus, the challenge to the notice was premature.

3. Levy of Penalty under Section 271BA:
The petitioner argued that the respondent had levied a penalty under Section 271BA for non-filing of the audit report along with the return of income for the assessment year 2005-06 before completing the assessment. The respondent countered that the penalty was justified as the petitioner failed to comply with the requirements of Section 92E within the due date. The court did not delve into the merits of the penalty but emphasized that the petitioner should raise these factual issues before the Assessing Officer.

4. Reference to Transfer Pricing Officer under Section 92CA:
The petitioner contended that the respondent exceeded his jurisdiction by referring the matter to the Transfer Pricing Officer under Section 92CA, which was arbitrary. The respondent justified the reference, stating that the petitioner had international transactions with associated enterprises and failed to file the required report in Form 3CEB on time. The court held that these are factual issues to be addressed by the Assessing Officer and not by the writ court.

5. Alleged Revenue Loss due to Incorrect Claim of Capital Loss as Business Loss:
The petitioner claimed that even if the loss on the sale of assets amounting to ?69,243 was disallowed, the taxable income would still be NIL, and there was no revenue loss to the department. The court noted that the petitioner’s income was exempt under Section 10A/10B and that the dispute was whether the loss on the sale of assets should be considered a capital loss or a business loss. The court held that these factual determinations should be made by the Assessing Officer and not by the writ court.

Conclusion:
The court dismissed the writ petition, holding that the petitioner must follow the procedure outlined by the Supreme Court in GKN Driveshafts (India) Ltd vs. ITO. The petitioner was granted liberty to submit objections to the reasons for reopening within three weeks, and the Assessing Officer was directed to decide on the objections on merits and in accordance with the law, after affording an opportunity of personal hearing to the petitioner.

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