1978 (2) TMI 14 - HC - Income Tax

Summary

Issues Involved:
1. Jurisdiction of the Income Tax Officer (ITO) to issue notice under Section 148.
2. Alleged failure of the petitioner to disclose fully and truly all material facts necessary for assessment.
3. Validity of reassessment proceedings initiated by the ITO.

Detailed Analysis:

1. Jurisdiction of the ITO to Issue Notice Under Section 148:

The court emphasized that for the ITO to acquire jurisdiction to issue a notice under Section 148, two conditions must be satisfied:
- The ITO must have reason to believe that income chargeable to tax has escaped assessment.
- Such income must have escaped assessment due to the omission or failure on the part of the assessee to make a return under Section 139 or to disclose fully and truly all material facts necessary for the assessment for that year.

In this case, the court found that the only ground for initiating reassessment was the alleged failure of the petitioner to disclose fully and truly all material facts necessary for its assessment. The court reiterated that once the assessee has made a true and full disclosure of the primary facts at the time of the original assessment, the duty of the assessee ends. It is for the ITO to draw correct inferences from those primary facts.

2. Alleged Failure of the Petitioner to Disclose Fully and Truly All Material Facts Necessary for Assessment:

The respondent claimed that the petitioner failed to disclose material facts fully and truly in the following instances:

- Manufacturing Activity and Priority Industry Status: The respondent argued that the petitioner's manufacturing activity of producing strawboards did not qualify as a priority industry under Schedule VI of the Act, and hence, the relief under Section 80-I was wrongly allowed. The court noted that the fact of manufacturing strawboards was before the ITO during the original assessment, and it was for the ITO to draw the correct inference. This was deemed a mere change of opinion, not a failure to disclose material facts.

- Excess Recovery of Excise Duty: The respondent contended that the amount of Rs. 4,05,000 refunded on account of excess recovery of excise duty was wrongly treated as business income, leading to an incorrect allowance under Section 80-I. The court found that this amount was disclosed in the profit and loss account, and it was for the ITO to decide its treatment. Again, this was a change of opinion, not a failure to disclose material facts.

- Expenditure on Earthen Dam: The respondent claimed that the expenditure of Rs. 16,006 on constructing an earthen dam was capital expenditure and not allowable as revenue expenditure. The court held that this expenditure was disclosed in the profit and loss account, and it was for the ITO to decide its nature. This did not constitute a failure to disclose material facts.

- Expenses of Earlier Years: The respondent argued that the amount of Rs. 2,774 debited as expenses of earlier years was incorrectly allowed. The court pointed out that this expenditure was actually disallowed in the original assessment, indicating non-application of mind by the respondent.

- Payment to Government of Gujarat: The respondent questioned the nature of the expenditure of Rs. 8,888 paid to the Government of Gujarat, whether it was a donation or capital expenditure. The court noted that this expenditure was disclosed and allowed as business expenditure in the original assessment. The respondent's belief that it was wrongly allowed did not justify reassessment.

3. Validity of Reassessment Proceedings Initiated by the ITO:

The court concluded that there was no material before the respondent to reasonably believe that there was an omission or failure on the part of the petitioner to disclose fully and truly all material facts necessary for assessment. The reassessment proceedings were initiated merely on a change of opinion, and in one instance, the respondent's belief was based on a non-existent ground.

The court held that the reassessment proceedings were initiated without satisfying the conditions precedent for exercising the power under Section 147. Consequently, the impugned notice under Section 148 was quashed and set aside, and the respondent was restrained from initiating reassessment proceedings against the petitioner.

Judgment:

The writ petition was allowed, the impugned notice issued by the respondent was quashed and set aside, and the respondent was restrained from initiating reassessment proceedings against the petitioner. The respondent was ordered to pay the costs of the petition to the petitioner.