1978 (7) TMI 223 - AT - Income Tax

Summary

Issues Involved:
1. Validity of the re-opening of the assessment under Section 147(b) of the Income Tax Act.
2. Merits of the addition of Rs. 5,060 related to the trade mark payment.

Issue-Wise Detailed Analysis:

1. Validity of the Re-opening of the Assessment under Section 147(b):

The first contention in the appeal is against the validity of the re-opening of the assessment. The original assessment was completed on 23rd Nov., 1971, with a total income of Rs. 11,62,280. Subsequently, the Income Tax Officer (ITO) had recourse to the provisions of Section 147(b) and re-opened the assessment. The reasons recorded by the ITO before issuing notice under Section 148 included an audit objection dated 6th Feb., 1974, which pointed out a purported loss in revenue due to a change in the previous year permitted for the assessment year 1971-72.

The ITO noted on 19th March, 1976, that the audit objection constituted "information" within the meaning of Section 147(b) and issued a notice under Section 148. However, the ITO's reply to the audit objection dated 22nd Aug., 1974, categorically stated that the point raised by the audit was devoid of merit and could not be accepted. This indicates that the ITO did not have reason to believe that income had escaped assessment, which is a necessary criterion for invoking Section 147(b).

The appellate authority emphasized that the ITO himself must form the belief that income had escaped assessment. The Supreme Court's decision in Johri Lal vs. CIT was cited, stating that in the absence of material on record to show that the ITO had formed the requisite belief, it was not open to the Tribunal to justify the proceedings taken by the ITO. Consequently, the re-opening of the assessment was deemed invalid.

2. Merits of the Addition of Rs. 5,060 Related to the Trade Mark Payment:

In the re-assessment, the ITO brought to tax an amount of Rs. 5,060, which had been allowed to be written off from the value of certain trade marks. This decision was based on another audit objection which pointed out that the amount had been wrongly allowed as a deduction. The ITO disagreed with the assessee's contention that 1/14th of the amount was admissible as a deduction, stating that the amount paid for the utilization of trade marks was different from an amount paid for the acquisition of patent rights, and therefore, the circular of the Central Board of Revenue was inapplicable.

The Appellate Assistant Commissioner (AAC) upheld the ITO's decision, stating that it was settled law that an audit note constituted "information" for the purposes of Section 147(b) and that the assessment was validly re-opened. The AAC also upheld the withdrawal of the allowance originally made of Rs. 5,060.

However, since the re-opening of the assessment was found invalid, the reassessment, including the addition of Rs. 5,060, was cancelled. The appellate authority did not go into the merits of the addition made, as the re-opening itself was invalid.

Conclusion:
The appeal was allowed, and the reassessment was cancelled due to the invalidity of the re-opening under Section 147(b). The appellate authority emphasized that the ITO must form the belief that income had escaped assessment based on the information in his possession, which was not satisfied in this case.