2010 (6) TMI 64 - HC - Income Tax

Reassessment u/s 147 Issue of notice u/s 148 - . The assessee, in Schedule 18 to its balance sheet as of 31 March 2004 made a provision for diminution in the value of assets of Rs.1.41 crores under the head of operating and other expenses. In the computation of income, among the items disallowed by the assessee, was an expenditure in the amount of Rs.1.12 crores incurred during the construction period, which was a write down. In the Tax Audit Report under Section 44AB, the assessee disclosed in Item 17 amounts debited to the Profit and Loss Account. Sub paragraph (a) of Item 17 deals with expenditure of a capital nature. While furnishing a break up under this item, the assessee disclosed that an amount of Rs.1.12 crores was a write down in the value of assets. This was stated to exclude an amount of Rs.29.23 lakhs which, according to the assessee, was a write down in the value of slow/non moving inventory valued at estimated realizable value being considered as not in the nature of capital expenditure . - The AO has purported to reopen the assessment on the ground that the assessee had debited a provision amounting to Rs.1.41 crores on account of diminution in the value of assets. Held that As a result of the amendment, clause (i) has been inserted in explanation (1) to the Section which defines the meaning of the expression book profits . By the amendment, the amount or amounts set aside as provision for diminution in the value of the assets is to be added to the net profit as shown in the Profit and Loss Account for the relevant previous year, prepared under subsection (2). When the reasons were recorded by the Assessing Officer, this provision was not on the statute book and hence, could not have been referred to and, as a matter of fact, has not been referred to in support of the notice of for reopening the assessment. decided in favor of assessee

Summary

Issues:
1. Reopening of assessment under Section 147 of the Income Tax Act, 1961 based on provision for diminution in the value of assets.
2. Consideration of whether the provision made by the assessee was a capital charge or revenue expenditure.
3. Assessment of whether tangible material existed for the Assessing Officer to conclude income escapement.
4. Interpretation of the provisions of Section 115JB in the context of the assessment year and its impact on the reopening of assessment.

Issue 1: Reopening of assessment under Section 147:
The Assessing Officer issued a notice under Section 148 on 16 March 2009 to reopen the assessment for the Assessment Year 2004-05. The basis for reopening was the provision made by the assessee for diminution in the value of assets, amounting to Rs.1.41 crores, which the Assessing Officer considered to be capital in nature and not a proper charge on profits. The assessee objected to this reopening, arguing that the provision had already been disallowed in the computation of income. The Assessing Officer's reasons for reopening lacked tangible material to support income escapement, as required by law.

Issue 2: Nature of provision made by the assessee:
The assessee had made a provision for diminution in the value of assets in its balance sheet. The Assessing Officer contended that this provision was capital in nature and should not have been charged to profits. However, the assessee argued that a portion of the provision had already been disallowed in the computation of income, and the remaining amount related to a write-down of slow-moving inventory, which was not of a capital nature. Judicial precedents supported the assessee's contention that inventory write-downs are generally treated as revenue expenditures.

Issue 3: Existence of tangible material for income escapement:
The law requires the Assessing Officer to have tangible material to believe that income has escaped assessment before reopening an assessment under Section 147. In this case, the Assessing Officer's reasons for reopening did not provide sufficient tangible material to support the conclusion of income escapement. The absence of such material indicated that the reopening of the assessment was not founded on solid grounds and exceeded the Assessing Officer's jurisdiction.

Issue 4: Interpretation of Section 115JB provisions:
The Assessing Officer referred to Section 115JB while disposing of the objections raised by the assessee. However, the amendment to Section 115JB was not in effect when the reasons for reopening were recorded. The Court held that the validity of the notice to reopen the assessment should be determined based on the law as it existed at the time of recording the reasons. As the amended provisions were not in force at that time, they could not be used to support the reopening of the assessment.

In conclusion, the High Court of Bombay allowed the petition and set aside the notice issued under Section 148 for reopening the assessment for the Assessment Year 2004-05. The Court found that the reasons for reopening lacked tangible material and that the Assessing Officer had acted beyond the scope of jurisdiction. The Court also clarified the interpretation of the provisions of Section 115JB in the context of the assessment year.