2011 (4) TMI 1036 - HC - Income Tax

Reopening of assessment - notice after 4 years - valuation of closing stock - allegation of under valuation - held that - assessee disclosed the method of valuation and also enclosed details of valuation of polished diamonds as on 31.3.2003 and the methodology for working out average cost of polished diamonds per carat. It was after the such detailed exercise undertaken by the Assessing Officer he framed his original assessment. - there was no failure on the part of the assessee to disclose fully and truly all material facts for the purpose of computation of the income of the assessee for the relevant assessment year. - Revenue would not permit reopening of the assessment beyond 4 years.

Issues Involved:
1. Validity of reopening assessment under Section 147 of the Income-tax Act, 1961.
2. Alleged undervaluation of closing stock of polished diamonds.
3. Alleged undervaluation of closing stock of rough diamonds.
4. Alleged diversion of interest-bearing funds for interest-free loans.

Issue-wise Detailed Analysis:

1. Validity of Reopening Assessment under Section 147 of the Income-tax Act, 1961:
The petitioner challenged the reopening of assessment for the assessment year 2003-2004 initiated by a notice dated 29.3.2010 under Section 148 of the Income-tax Act, 1961. The primary contention was that the reopening was beyond four years from the end of the relevant assessment year, which is impermissible unless there is a failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. The court examined whether the conditions for such reopening were satisfied, particularly focusing on whether the assessee had disclosed all necessary facts during the original assessment proceedings.

2. Alleged Undervaluation of Closing Stock of Polished Diamonds:
The respondent claimed that the assessee undervalued the closing stock of polished diamonds by adopting a rate of Rs.7,656/- per carat instead of the cost price of Rs.8,089/- per carat or the market price of Rs.10,266/- per carat. The court noted that during the original assessment, the assessee had disclosed the methodology for valuing the closing stock, which included detailed working out of the cost of diamonds. The assessee had provided necessary documents and explanations, including a statement indicating the various rates at which the closing stock was sold in the subsequent year. The court concluded that there was no failure on the part of the assessee to disclose fully and truly all material facts for the purpose of computation of income.

3. Alleged Undervaluation of Closing Stock of Rough Diamonds:
The respondent also alleged that the assessee undervalued the closing stock of rough diamonds by adopting an average rate of Rs.1238.91 per carat instead of the purchase rate of Rs.2982.52 per carat. Similar to the polished diamonds, the court found that the assessee had disclosed the method of valuation of closing stock in its return and during the assessment proceedings. The assessee had provided detailed explanations and supporting documents, which were examined by the Assessing Officer. The court held that the assessee had disclosed all necessary facts, and the reopening on this ground was not justified.

4. Alleged Diversion of Interest-bearing Funds for Interest-free Loans:
The respondent contended that the assessee had diverted interest-bearing funds for advancing interest-free loans to three relatives, resulting in disallowable interest expenses. The court examined the records and found that the assessee had disclosed the details of loans and advances in its return and provided further details during the assessment proceedings. The Assessing Officer had raised specific queries regarding these advances, and the assessee had supplied the required information. The court concluded that the assessee had fully and truly disclosed all material facts, and the reopening on this ground was also not justified.

Conclusion:
The court found that the reasons recorded for reopening the assessment were not sufficient to permit such reopening beyond four years. The assessee had disclosed all necessary details during the original assessment proceedings, and there was no failure on its part to disclose fully and truly all material facts. Consequently, the court quashed the impugned notice dated 29.3.2010 and the order rejecting the objections of the petitioner dated 13.12.2010, allowing the petition with consequential effect.

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