1984 (12) TMI 106 - AT - Income Tax

Summary

Issues Involved:
1. Legality of reopening the assessment under Section 147(b) of the Income-tax Act, 1961.
2. Validity of the reassessment based on audit objections.
3. Justification for additions made in the reassessment.
4. Bona fide belief of the Income Tax Officer (ITO) regarding escaped income.

Detailed Analysis:

Legality of Reopening the Assessment:
The original assessment for the assessment year 1976-77 was completed on 31-8-1979. It was reopened by the ITO under Section 147(b) of the Income-tax Act, 1961, based on objections raised by the internal audit. The Commissioner (Appeals) annulled the reassessment, stating that the reopening was not legally sustainable as there was no new information justifying it. The department challenged this, arguing that the ITO had new information from the internal audit pointing out obvious omissions.

Validity of the Reassessment Based on Audit Objections:
The ITO reopened the assessment based on two objections from the internal audit: (1) incorrect computation of outgoings from the unsold portion of the Marthanda building, and (2) incorrect disallowance of building maintenance costs. However, in the reassessment, the ITO only made an addition concerning the Marthanda property and did not address the maintenance factor.

The Commissioner (Appeals) held that the original assessment of the Marthanda property income was correct and that there was no new information justifying the reopening. The department accepted this finding, leading to the conclusion that no income had escaped assessment under the two factors initially cited for reopening.

Justification for Additions Made in the Reassessment:
Despite the initial reasons for reopening being invalid, the reassessment included various other additions based on a subsequent revenue audit report. The department argued that the reassessment could be sustained if the ITO had a bona fide belief at the time of reopening that income had escaped assessment. However, the Supreme Court and other judicial precedents emphasize that the ITO must independently evaluate the audit objections and form a belief based on his assessment.

Bona Fide Belief of the ITO Regarding Escaped Income:
The ITO's belief that income had escaped assessment must be based on a thorough evaluation of the audit objections. In this case, the ITO failed to independently verify the audit's claims about the Marthanda property and building maintenance costs. The audit's objections were found to be incorrect upon closer scrutiny, indicating that the ITO did not have a bona fide belief that income had escaped assessment.

The ITO did not address the maintenance factor in the reassessment, and there was no evidence that the ITO had a bona fide belief in the audit's claims. The reassessment order was silent on the maintenance factor, and the ITO did not require the assessee to explain any discrepancies, further undermining the department's position.

Conclusion:
The Tribunal upheld the Commissioner (Appeals)'s decision, stating that the reopening of the assessment was not legally sustainable. The appeal by the department was dismissed, affirming that the reassessment could not be justified based on the audit objections and the ITO's lack of bona fide belief in the alleged escaped income.