2012 (12) TMI 690 - HC - Income Tax

Reassessment - valuation of closing stock u/s 145A - held that - The whole raison de tre for reopening assessment is the escapement of income. From the above facts it was established that in either method of accounting the total income would not have changed and the final figure would have remained the same. There was therefore no question of any underassemment and consequently there was no escapement of income. The Assessing Officer did not apply his mind and overlooked the simple accounting principle. The centripetal condition that there has to be an escapement of income is not fulfilled. The justification for reopening therefore falls to the ground. Notice issued u/s 148 held as illegal and quashed. - Decided in favor of assessee.

Summary

Issues Involved:
1. Validity of the notice issued under Section 148 of the Income Tax Act, 1961.
2. Compliance with conditions under Section 147 of the Income Tax Act for reopening assessment.
3. Adequacy of material for reopening the assessment.
4. Alleged failure of the assessee to disclose fully and truly all material facts.
5. Justification for reopening based on unutilized CENVAT credit.

Detailed Analysis:

1. Validity of the Notice Issued Under Section 148:
The petitioner challenged the notice dated 30.03.2011 issued under Section 148 of the Income Tax Act, seeking to reopen the assessment for the Assessment Year 2004-2005. The petitioner also sought to quash the decision dated 24.11.2011, whereby the Assessing Officer rejected the petitioner's objections to the reopening of the assessment. The court noted that the reopening notice was issued after the expiry of four years from the end of the relevant assessment year, invoking the First Proviso to Section 147, which requires that the escapement of income must be due to the assessee's failure to disclose fully and truly all material facts necessary for the assessment.

2. Compliance with Conditions Under Section 147:
For the Assessing Officer to exercise the power to reopen an assessment under Section 147, the following conditions must be met: (i) reason to believe that income chargeable to tax has escaped assessment, (ii) the belief must be based on tangible material, (iii) the escapement must be due to the assessee's failure to disclose material facts. The court found that the reasons recorded by the Assessing Officer did not indicate that the assessee failed to disclose fully and truly the necessary facts, thus failing to meet the conditions stipulated under Section 147.

3. Adequacy of Material for Reopening the Assessment:
The court observed that during the original assessment, the petitioner had provided all necessary details, including audited annual accounts, audit reports, and details of opening stock, purchases, sales, and closing stock. These details were scrutinized by the Assessing Officer, and the assessment was completed under Section 143(3) on 21.12.2006. The court held that no new tangible material was available to the Assessing Officer to justify the reopening of the assessment. The reliance on the same set of facts considered during the original assessment amounted to a mere change of opinion, which is not a valid ground for reopening the assessment.

4. Alleged Failure of the Assessee to Disclose Fully and Truly All Material Facts:
The court noted that the petitioner had disclosed all relevant facts during the original assessment proceedings. The details regarding the unutilized CENVAT credit were part of the audited accounts and were specifically addressed in response to the Assessing Officer's queries. The court emphasized that the duty of the assessee is to disclose primary facts, and it is the Assessing Officer's responsibility to draw inferences and conclusions from those facts. The court found no failure on the part of the assessee to disclose material facts.

5. Justification for Reopening Based on Unutilized CENVAT Credit:
The Assessing Officer's reason for reopening the assessment was that the unutilized CENVAT credit of Rs. 11,94,403/- was not credited to the profit & loss account, resulting in underassessment of income. The court found that even if the alternative method of accounting was followed, it would not have resulted in any change in the total income. The court held that the omission to credit the CENVAT amount did not lead to any underassessment of income, and thus, there was no escapement of income. The court concluded that the Assessing Officer did not apply his mind properly and overlooked basic accounting principles.

Conclusion:
The court held that the impugned notice dated 30.03.2011 issued under Section 148 of the Act was illegal and quashed it. Consequently, all subsequent actions and orders based on the impugned notice were also set aside. The petition was allowed without any order as to costs.