2006 (3) TMI 102 - HC - Income Tax

Reopening of the assessment under section 143(3) read with section 147 - notice under section 148 after the expiry of four years from the end of the assessment year - This is a case where the assessee has got an undue benefit which it should not have got since it was following the mercantile system of accounting. The assessee had disclosed certain materials and on the basis of the same the assessee got some benefit which it should not have got. - contention of the assessee that no substantial question of law arises for consideration is rejected. The questions of law raised are substantial questions of law. The questions referred to us are answered in favour of the Revenue Held that there was failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment justifying reopening of assessment - Assessing Officer was justified in issuing notice under section 148 after the expiry of four years

Issues Involved:
1. Justification of claiming expenditure for liability not related to the relevant assessment year.
2. Failure to disclose fully and truly all material facts necessary for assessment and whether reopening was based on a mere change of opinion.
3. Justification of issuing notice under section 148 after the expiry of four years from the end of the assessment year.

Detailed Analysis:

1. Justification of Claiming Expenditure for Liability Not Related to the Relevant Assessment Year:
The primary issue was whether the assessee, following the mercantile system of accounting, was justified in claiming expenditure for a liability that did not relate to the previous year relevant to the assessment year. The court noted that the assessee claimed a deduction of penal interest levied by the Sales Tax Department for the belated payment of purchase tax amounting to Rs. 63,18,000. This claim was initially allowed but later reopened by the Assessing Officer on the grounds that the expenditure related to earlier years. The court referred to precedents, including Keshav Mills Ltd. v. CIT [1953] 23 ITR 230 (SC) and Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC), which clarified that under the mercantile system, liabilities should be accounted for in the year they accrue, not when they are paid. The court concluded that the liability to pay penal interest did not crystallize during the previous year relevant to the assessment year 1984-85, thereby invalidating the deduction claim.

2. Failure to Disclose Fully and Truly All Material Facts Necessary for Assessment and Whether Reopening Was Based on a Mere Change of Opinion:
The second issue was whether there was a failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment, justifying the reopening of the assessment. The Tribunal had initially ruled in favor of the assessee, stating that all material facts were disclosed during the initial assessment and that the reopening was based on a change of opinion by the successor officer. However, the court found that the assessee did not disclose the fact that the liability to pay penal interest arose in earlier years, not the relevant assessment year. This non-disclosure was deemed material and justified the reopening of the assessment. The court emphasized that the purpose of Section 147 is to ensure that all material facts necessary for assessment are disclosed fully and truly.

3. Justification of Issuing Notice Under Section 148 After the Expiry of Four Years from the End of the Assessment Year:
The third issue was whether the Assessing Officer was justified in issuing a notice under section 148 after the expiry of four years from the end of the assessment year. The court noted that the proviso to section 147, as amended, allows for reopening of assessments beyond four years if there is a failure to disclose fully and truly all material facts necessary for assessment. Since the assessee failed to disclose the material fact regarding the timing of the liability, the Assessing Officer was justified in issuing the notice under section 148. The court referred to the decision in Phool Chand Bajrang Lal v. ITO [1993] 203 ITR 456, which supports the reopening of assessments when material facts are not fully disclosed.

Conclusion:
The court concluded that the assessee was not justified in claiming the deduction for penal interest as the liability did not accrue in the relevant assessment year. The failure to disclose this material fact justified the reopening of the assessment, and the notice under section 148 was valid even after the expiry of four years. The appeal by the Revenue was allowed, and the order of the Tribunal was set aside. The questions of law were answered in favor of the Revenue and against the assessee.

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