2004 (2) TMI 298 - AT - Income Tax

Summary

Issues Involved:
1. Validity of proceedings under Section 148.
2. Addition of Rs. 1,15,20,000 due to change in the method of valuation of closing stock.
3. Charging of interest under Sections 234B and 234C of the IT Act.

Issue-wise Detailed Analysis:

1. Validity of Proceedings under Section 148:
The assessee contended that the reassessment proceedings under Section 148 were invalid as they were based on a change of opinion by the Assessing Officer (AO). The original assessment was completed under Section 143(3) on 8th March 1999, and the AO later issued a notice under Section 148 on 22nd February 2001, based on the tax audit report indicating a change in the method of valuation of closing stock, which led to an understatement of profits by Rs. 115.20 lakhs. The assessee argued that the tax audit report was already on record, and the AO had considered it during the original assessment, as evidenced by the disallowance of entertainment expenses based on the same report.

The Departmental Representative argued that the AO had not considered the issue of change in valuation of closing stock in the original assessment order and that the reassessment was valid as it was based on the information that income had escaped assessment.

The Tribunal, after considering the submissions and relevant case laws, concluded that the reassessment was based on a mere change of opinion, which is not permissible under the law. The Tribunal referred to the Full Bench decision of the Delhi High Court in CIT vs. Kelvinator of India Ltd., which held that mere change of opinion is not a valid ground for reassessment. The Tribunal also referred to CBDT Circular No. 549, which clarified that the words "reason to believe" were reintroduced in Section 147 to prevent reassessment based on a mere change of opinion. Therefore, the Tribunal set aside the order of the CIT(A) and allowed the ground raised by the assessee.

2. Addition of Rs. 1,15,20,000 due to Change in Method of Valuation of Closing Stock:
The assessee argued that the change in the method of valuation of closing stock was bona fide and for genuine reasons, and the new method was consistently followed in subsequent years. The change was made to exclude transportation expenses reimbursed by the Food Corporation of India (FCI) from the valuation of closing stock. The assessee contended that including these expenses in the closing stock was unnecessary as they were being reimbursed by FCI.

The Departmental Representative supported the CIT(A)'s order, which confirmed the addition based on the auditors' report indicating an understatement of profits.

The Tribunal acknowledged that a bona fide change in the method of accounting, consistently followed in subsequent years, is valid. However, the Tribunal noted that there was no evidence before them that all such expenses had been received and credited to the Profit & Loss account, except for a certificate from statutory auditors presented for the first time. Therefore, the Tribunal set aside the matter to the AO for examination of whether the reimbursement of hamali, freight charges, and other charges had been duly received and credited to the Profit & Loss account, after providing adequate opportunity to the assessee.

3. Charging of Interest under Sections 234B and 234C:
This ground was of consequential nature. The Tribunal directed the AO to charge interest as per the provisions of the Act.

Conclusion:
The Tribunal partly allowed the appeal. The reassessment proceedings under Section 148 were invalidated on the grounds of being based on a mere change of opinion. The issue regarding the addition of Rs. 1,15,20,000 was remanded back to the AO for further examination. The charging of interest under Sections 234B and 234C was directed to be done as per the provisions of the Act.