2025 (3) TMI 1123 - HC - Income Tax

Validity of reopening of assessment u/s 147 - difference of rent in the profit and loss account and AIR - HELD THAT - We are surprised as to how the audit memo came to the attention of the petitioner since the audit memo is internal correspondence between the audit department of the revenue and the AO. An explanation in response to the audit memo cannot be treated as disclosure during the assessment proceedings but it is post the assessment proceedings. Therefore the response to the audit memo cannot be considered for adjudicating whether there was a failure on the part of the petitioner to disclose fully and truly all material facts necessary for the assessment. In the clarification to the audit memo there is no explanation of the difference between rental figures. However it appears that the petitioner s contention in the course of giving audit clarification seems to be that the TDS was deducted in some cases @10% and not @2%. This is a very vague reply and indeed this reply was not presented during the assessment proceedings. We upheld the reopening of the assessment regarding the difference in rental figures. Non-deduction of TDS on staff salary - In the letters filed by the petitioner during the assessment proceedings there are no details concerning the deduction of TDS on salary. The letter dated 17 August 2015 states that the ledger copy of the salary expenses is attached. However such ledger copy has not been annexed in the writ petition but the same appears to have been annexed with the rejoinder. On a perusal of the salary ledger account it is unclear whether the TDS has been deducted. There is no mention in the objections on this issue and therefore the only inference which could be drawn is that there has been no disclosure during the regular assessment proceedings on this issue. Hence the reopening is upheld even on this account. Claim of depreciation - Reasons recorded show that the petitioner has claimed depreciation on printers @60% in the audit report and the balance sheet whereas according to the revenue the depreciation should be only @15% / 7.5%. Insofar as this issue is concerned since the petitioner has claimed depreciation by disclosing the same @60% at least prima facie there cannot be any failure on the part of the petitioner to disclose fully and truly all material facts necessary for the assessment and therefore on this issue we do not uphold the initiation of the reassessment proceedings. However since we have upheld the reassessment proceedings on the above two grounds this issue can be examined during the reassessment proceedings. Difference in the total receipts as appearing in the profit and loss account and as per AIR details - In the letter dated 17 August 2015 in Item 7 there is a reference to reconciliation of TDS with 26AS statement. The said statement was not annexed to the petition but the same is annexed in the rejoinder of the petitioner at page 232. On a perusal of the said statement it appears that the petitioner has filed a reconciliation of the figures as per the profit and loss account the 26AS statement and the statistics that appear in the reasons recorded can be found in the said statement. Therefore insofar as this issue is concerned in our view the petitioner has prima facie disclosed and explained the difference in the course of the assessment proceedings and therefore reassessment of this account might be vulnerable. However since we have upheld the reassessment proceedings on the other two items the petitioner will be free to explain the reconciliation during the reassessment proceedings. Therefore the overall challenge of reopening the assessment fails. Decided in favour of assessee.

Summary

ISSUES PRESENTED and CONSIDERED

The Court considered several core legal questions in this case:

1. Whether the notice under Section 148 of the Income-tax Act, 1961, for reopening the assessment for the Assessment Year 2013-14 was validly issued.

2. Whether there was a failure on the part of the petitioner to disclose fully and truly all material facts necessary for the assessment, justifying the reassessment proceedings.

3. Whether the reasons provided for reopening the assessment were sufficient and based on valid grounds, including discrepancies in rental income, non-deduction of TDS on staff salary, excess depreciation claimed on printers, and differences in total receipts.

ISSUE-WISE DETAILED ANALYSIS

Relevant legal framework and precedents: The Court examined the provisions of Sections 147 and 148 of the Income-tax Act, 1961, which pertain to the reopening of assessments. The first proviso to Section 147 requires that there be a failure to disclose fully and truly all material facts necessary for the assessment for reopening beyond four years from the end of the relevant assessment year.

Court's interpretation and reasoning: The Court emphasized that the jurisdictional condition for reopening an assessment is the failure to disclose fully and truly all material facts necessary for the assessment. The Court also noted that if reassessment proceedings are upheld on any one of the issues, the proceedings cannot be quashed with respect to other issues as per Explanation 3 to Section 147.

Key evidence and findings:

1. Difference in Rental Income: The Court found no evidence that the petitioner disclosed the difference in rental income between the profit and loss account and the AIR details during the original assessment proceedings. The petitioner failed to provide any documentation to support the claim that this discrepancy was disclosed.

2. Non-deduction of TDS on Staff Salary: The Court noted that there were no details provided by the petitioner concerning the deduction of TDS on salary during the assessment proceedings. The salary ledger account did not clarify whether TDS had been deducted.

3. Excess Depreciation on Printers: The Court recognized that the petitioner had disclosed the depreciation claimed on printers at 60% in the audit report and balance sheet. Thus, there was no failure to disclose material facts regarding this issue.

4. Difference in Total Receipts: The petitioner provided a reconciliation of the figures as per the profit and loss account and the 26AS statement, which explained the difference in total receipts. Therefore, the Court found that the petitioner had disclosed this information during the assessment proceedings.

Application of law to facts: The Court applied the legal standards for reopening assessments to the facts of each issue. It concluded that the reopening was justified on the grounds of undisclosed rental income and non-deduction of TDS on staff salary, as these were not disclosed during the original assessment.

Treatment of competing arguments: The Court considered the petitioner's argument that the audit memo response constituted disclosure. However, it rejected this argument, noting that the audit memo is internal correspondence and not part of the assessment proceedings.

Conclusions: The Court upheld the reassessment proceedings on the grounds of undisclosed rental income and non-deduction of TDS on staff salary. It did not uphold the proceedings based on excess depreciation on printers and differences in total receipts, as these were disclosed during the assessment proceedings.

SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning: "Insofar as the difference in rental income is concerned as per the profit and loss account and the AIR details, the same were not disclosed in the course of the regular assessment proceedings and, therefore, we cannot find any fault in the AO issuing notice under Section 148 of the Act beyond a period of 4 years from the end of the relevant assessment year."

Core principles established: The Court reaffirmed that for reopening an assessment beyond four years, there must be a failure to disclose fully and truly all material facts necessary for the assessment. The Court also highlighted that if reassessment is justified on any one issue, it cannot be quashed for other issues.

Final determinations on each issue: The Court upheld the reassessment proceedings based on the undisclosed rental income and non-deduction of TDS on staff salary. It dismissed the petition challenging the notice under Section 148, discharged the rule, and vacated the interim reliefs granted.