1980 (6) TMI 66 - AT - Income Tax

Summary

Issues Involved:

Applicability of Section 147(b) of the IT Act, 1961; Validity of notices under Section 148; Deductibility of 'bonus set-on reserve' as an expense; Consistency in accounting practices; Statutory liability under the Payment of Bonus Act, 1965.

Issue-wise Detailed Analysis:

1. Applicability of Section 147(b) of the IT Act, 1961:

The central issue in these appeals is the applicability of Section 147(b) of the IT Act, 1961. The assessments for the years 1972-73, 1973-74, and 1975-76 were reopened under this section. The Income Tax Officer (ITO) argued that upon perusal of the records, it was found that the 'bonus set-on reserve' was incorrectly allowed as an expense, leading to income escaping assessment. However, the Tribunal found that the 'bonus set-on reserve' had been a consistent practice since the accounting year 1964-65 and was regularly disclosed in the assessee's balance sheets and profit and loss accounts. The Tribunal concluded that there was no new information that came into the possession of the ITO to justify reopening under Section 147(b). The Tribunal held that the ITO merely re-evaluated the existing facts, which does not constitute 'information' under Section 147(b).

2. Validity of Notices under Section 148:

The notices under Section 148 were issued on 29th March 1977, requiring the assessee to file returns for the reassessment. The assessee contended that these notices were invalid as they were based on a re-evaluation of already available information rather than new information. The Tribunal agreed with the assessee, stating that the ITO had no new information to justify the reopening of assessments. The Tribunal quashed the notices under Section 148, deeming them mechanical and not conforming to the requirements of law.

3. Deductibility of 'Bonus Set-on Reserve' as an Expense:

The ITO had disallowed the 'bonus set-on reserve' as an expense in the reassessment, arguing that it was not an allowable deduction under the IT Act. The assessee argued that the 'bonus set-on reserve' was a statutory liability under the Payment of Bonus Act, 1965, and had been consistently allowed in previous assessments. The Tribunal noted that the 'bonus set-on reserve' had been allowed in assessments from 1966-67 onwards and had been subject to detailed enquiries in previous years. The Tribunal found that the ITO's disallowance was not justified and that the 'bonus set-on reserve' should be allowed as a deduction.

4. Consistency in Accounting Practices:

The assessee argued that it had consistently followed the mercantile system of accounting, including the 'bonus set-on reserve', since 1964-65. The Tribunal noted that the assessee's accounting practices had been accepted by the Revenue in previous years and that there was no basis for the ITO to disturb these practices. The Tribunal held that the regular method of accounting employed by the assessee could not be rejected without a valid reason.

5. Statutory Liability under the Payment of Bonus Act, 1965:

The assessee contended that the 'bonus set-on reserve' was a statutory liability under the Payment of Bonus Act, 1965, and therefore, should be allowed as a deduction. The Tribunal agreed, noting that the 'bonus set-on reserve' was a determined liability under the Bonus Act and had been consistently accounted for by the assessee. The Tribunal found that the ITO's disallowance of the 'bonus set-on reserve' was not justified.

Conclusion:

The Tribunal concluded that the reopening of assessments under Section 147(b) was not justified as there was no new information that came into the possession of the ITO. The notices under Section 148 were quashed, and the reassessments were deemed invalid. The Tribunal held that the 'bonus set-on reserve' was a statutory liability and should be allowed as a deduction. The appeals by the assessee were allowed.