2013 (7) TMI 618 - HC - Income Tax

Validity of notice u/s 148 The averments has not been dealt though two affidavits have been filed - this would further led credence to the assessee s grievance that reopening notice has been issued at the behest of the audit party - apart from the assessee s averment court intrigued by the fact that though precisely on the four issues the AO called upon the assessee s explanation through a letter - in the subsequent notice for reopening which the AO issued was the only ground taken as reason to reopen the assessment which was outside of the issues on which the explanation of the assessee was called for - this would further demonstrate that the AO at that point of time was not inclined to reopen the assessment - notice lacks validity court quashed the notice appeal decided in favour of assessee.

Issues Involved:
1. Validity of the notice issued under Section 148 of the Income-tax Act, 1961.
2. Validity of the subsequent notice issued under Section 142(1) of the Income-tax Act, 1961.
3. Examination of the inclusion of excise duty in the valuation of closing stock.
4. Examination of expenses on stores, spares, and tools consumed.
5. Examination of deduction under Section 80-O.
6. Examination of deduction under Section 80HHC.
7. Reopening of assessment beyond four years from the end of the relevant assessment year.
8. Allegation of the notice being issued at the behest of the audit party.

Detailed Analysis:

1. Validity of the Notice Issued Under Section 148:
The petitioner, a public limited company, challenged a notice dated December 27, 2002, issued by the Deputy Commissioner of Income-tax under Section 148 of the Income-tax Act, 1961. The petitioner argued that the notice was issued without proper grounds and beyond the statutory period of four years from the end of the relevant assessment year. The court observed that for the Assessing Officer to assume jurisdiction for reopening the assessment, both conditions-belief that income chargeable to tax had escaped assessment and the same was due to the assessee failing to disclose truly and fully all material facts-must be satisfied. The court found that these conditions were not met, rendering the notice invalid.

2. Validity of the Subsequent Notice Issued Under Section 142(1):
The petitioner also challenged a subsequent notice issued under Section 142(1) of the Act on November 7, 2003. The court's decision to quash the initial notice under Section 148 inherently affected the validity of the subsequent notice under Section 142(1), as it was a continuation of the same reassessment process.

3. Inclusion of Excise Duty in the Valuation of Closing Stock:
The court examined whether the excise duty on finished goods should have been included in the valuation of closing stock. The petitioner had earlier explained that excise duty is payable only at the time of clearance of goods from the factory and not while they are stored in bonded premises. This explanation was accepted by the Assessing Officer during the original assessment, and no addition was made to the closing stock value on this account. The court found that there was no failure on the part of the petitioner to disclose material facts regarding this issue.

4. Expenses on Stores, Spares, and Tools Consumed:
The petitioner provided detailed information about the expenses on stores, spares, and tools consumed, amounting to Rs. 871.06 lakhs, during the original assessment. The Assessing Officer had scrutinized these details and made no additions. The court noted that the petitioner had disclosed all relevant details, and there was no failure to disclose material facts.

5. Deduction Under Section 80-O:
The petitioner's claim for deduction under Section 80-O was examined in detail during the original assessment. The petitioner had provided full details of consultancy income received in foreign currency and the related expenses. The Assessing Officer had made adjustments to the claimed deduction based on these details. The court found that there was no failure to disclose material facts on this issue.

6. Deduction Under Section 80HHC:
The petitioner's claim for deduction under Section 80HHC was also scrutinized during the original assessment. The petitioner had provided a detailed working of the claim, accompanied by a report from a chartered accountant. The court found that the petitioner had fully disclosed all material facts related to this claim.

7. Reopening of Assessment Beyond Four Years:
The court emphasized that the reopening of the assessment was beyond the statutory period of four years from the end of the relevant assessment year. For such reopening to be valid, it must be shown that the income chargeable to tax had escaped assessment due to the assessee's failure to disclose truly and fully all material facts. The court found that this condition was not met, rendering the reopening invalid.

8. Notice Issued at the Behest of the Audit Party:
The petitioner contended that the notice for reopening was issued at the behest of the audit party. The court noted that the Assessing Officer had previously issued a notice dated August 19, 1999, calling for explanations on the same issues raised by the audit party. However, in a subsequent notice for reopening issued on January 23, 2002, only one ground was taken, which was outside the issues raised by the audit party. This indicated that the Assessing Officer was not inclined to reopen the assessment on the grounds raised by the audit party. The court found that the reopening notice lacked validity and was likely influenced by the audit party's objections.

Conclusion:
The court concluded that the impugned notice lacked validity, and the conditions for reopening the assessment were not satisfied. Consequently, the notice was quashed, and the petition was disposed of, with the rule made absolute.

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