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2025 (3) TMI 724 - HC - Income TaxReopening of assessment u/s 147 - schedule to the accounts contained the fact of nonrecognition of certain income - Whether income from non-performing assets can be offered only on cash basis even though the assessee is following a mercantile system of accounting? - HELD THAT - Although Explanation 1 to Section 147 of the Income Tax Act 1961 as it stood till 31.03.2021 stipulated that mere production of Books of Account or other evidence before the AO from which material evidence could with due diligence have been discovered by the AO will not necessarily amount to disclosure within the meaning of 1st Proviso to Section 147 the fact remains that both the amount of Rs. 594.33 lakhs and 438.96 lakhs were available and were seen by the AO while processing the return u/s 143(1) of the Income Tax Act 1961 and while passing the order on 01.07.1998. Therefore the invocation of machinery u/s 148 for passing reassessment order u/s 143(3) r.w.s.147 was without any jurisdiction and has therefore been rightly interfered by the Appellate Tribunal. Although for the purpose of claiming deductions the respondent / assessee should have written off such income under Section 36(1)(vii) of the Income Tax Act 1961. In the light of the above discussion we answer the substantial questions of law in favour of the respondent / assessee.
ISSUES PRESENTED and CONSIDERED
The Court considered the following core legal questions: 1. Whether the Tribunal was correct in holding that reopening the assessment beyond four years was invalid due to the fact that the schedule to the accounts contained the non-recognition of certain income, despite Explanation 1 to Section 147 of the Income Tax Act? 2. Whether income from non-performing assets can be recognized on a cash basis even if the assessee follows a mercantile system of accounting? ISSUE-WISE DETAILED ANALYSIS 1. Reopening of Assessment beyond Four Years Relevant legal framework and precedents: The assessment was reopened under Section 148 of the Income Tax Act, which allows for reassessment if the Assessing Officer has reason to believe that income has escaped assessment. The first proviso to Section 147 restricts reopening beyond four years unless there is a failure to disclose material facts fully and truly. Explanation 1 to Section 147 clarifies that mere production of books or evidence does not amount to disclosure. Court's interpretation and reasoning: The Court found that the Tribunal correctly applied the first proviso to Section 147, emphasizing that there was no failure on the part of the assessee to disclose material facts. The Tribunal's reliance on precedents like Commissioner of Income Tax Vs. Elgi Finance Company Limited and Commissioner of Income Tax Vs. Foramer France supported this view. Key evidence and findings: The Court noted that the relevant income and facts were disclosed in the assessee's annual report and were considered during the original assessment. The Tribunal found that the reopening was based on the same set of facts already available to the Assessing Officer. Application of law to facts: The Court concluded that the reopening of the assessment was unjustified as the necessary material facts were already disclosed, and the Assessing Officer had the opportunity to consider them during the original assessment. Treatment of competing arguments: The appellant argued that the mere production of accounts did not constitute full disclosure. However, the Court found that the facts were sufficiently disclosed and that the reopening was not warranted. Conclusions: The Court upheld the Tribunal's decision that the reopening beyond four years was invalid due to the absence of any failure to disclose material facts by the assessee. 2. Recognition of Income from Non-Performing Assets Relevant legal framework and precedents: The issue involves whether income from non-performing assets should be recognized on a cash basis or as per the mercantile system of accounting. The Tribunal referred to the prudential norms of the Reserve Bank of India (RBI) which allow for non-recognition of income from non-performing assets. Court's interpretation and reasoning: The Tribunal allowed the assessee to recognize income from non-performing assets on a cash basis, aligning with the RBI prudential norms. The Court found no error in this approach. Key evidence and findings: The assessee had disclosed non-recognition of income in its annual report, consistent with RBI norms. The Tribunal found that the assessee's approach was bona fide and aligned with industry standards. Application of law to facts: The Court agreed with the Tribunal that the assessee's method of recognizing income from non-performing assets on a cash basis was justified under the circumstances and applicable norms. Treatment of competing arguments: The appellant contended that the mercantile system should apply uniformly. However, the Court upheld the Tribunal's finding that the RBI norms provided a valid basis for the assessee's approach. Conclusions: The Court affirmed the Tribunal's decision allowing the assessee to recognize income from non-performing assets on a cash basis. SIGNIFICANT HOLDINGS The Court's significant holdings included: - The reopening of assessment beyond four years was invalid due to the absence of any failure to disclose material facts by the assessee. The Court emphasized that "mere production of Books of Account or other evidence from which material evidence could be gathered with due diligence or discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of 1st Proviso to Section 147." - The Court upheld the Tribunal's reliance on the RBI prudential norms, allowing the assessee to recognize income from non-performing assets on a cash basis despite following a mercantile system of accounting. - The Court dismissed the appeal, affirming the Tribunal's decision in favor of the assessee, and concluded that the reassessment proceedings were without jurisdiction.
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