2014 (2) TMI 1077 - HC - Income Tax

Reopening of Assessment u/s 147 of the Act - Held that - The reason why the assessee did not credit the entire sale consideration to the Profit and Loss account was explained - Explanation whether valid in law is not important at this stage - What is important is that the reason for such reduced amount being credited to Profit and Loss account was eloquently and elaborately stated in the notes - In the return filed by the assessee itself, thus there was clear explanation why and on what basis the assessee adjusted the loss of MEK and Foods Division against the sale proceeds of Carbon Black unit before crediting remainder to the Profit and Loss account thus, there was no failure on part of the assessee to disclose truly and fully all material facts - There was no suggestion that the income chargeable to tax had escaped assessment for the failure of the assessee to disclose truly and fully all material facts - There was no hint in the reasons recorded by the Assessing Officer that there was failure on part of the petitioner in disclosing true and full facts Notice is liable to be set aside. Disallowance u/s 32A of the Act - Investment allowance Agreement to sell Held that - The grounds relied upon by the Assessing Officer simply would not permit him to reopen the assessment that too after four years of end of relevant assessment year - The second ground itself is based on inaction on part of the Assessing Officer in the original assessment in not disallowing the investment allowance under section 32A(4) of the Act which was earlier granted to the assessee pertaining to its unit which was now sold - In the agreement parties decided to transfer the finished goods at market value - deviation from the agreement may either be by mutual consent, explicit or implied, or may even be in breach of terms of the agreement - when the admitted fact is that the assessee charged and received only the book value of its finished product, there was no reason for the Assessing Officer to tax the amount which the petitioner never received Decided in favour of Assessee.

Summary

Issues:
1. Validity of notice issued by Assessing Officer to reopen assessment for the assessment year 1997-1998.
2. Grounds for reopening assessment.
3. Failure to disclose true and full facts by the petitioner during scrutiny assessment.

Analysis:

Issue 1: Validity of notice to reopen assessment
The petitioner challenged the notice dated 25.7.2003 issued by the Assessing Officer seeking to reopen the assessment for the assessment year 1997-1998. The notice was issued beyond four years from the end of the relevant assessment year. The petitioner contended that there was no new material available for reopening the assessment, and there was no allegation of income escaping assessment due to failure to disclose material facts. The petitioner also argued that there was no failure on their part to disclose true and full facts during the scrutiny assessment.

Issue 2: Grounds for reopening assessment
The Assessing Officer cited three grounds for reopening the assessment. Firstly, regarding the profit on the sale of assets where the petitioner adjusted losses of other divisions against the sale proceeds before crediting the remainder to the Profit and Loss account. Secondly, the failure to disallow investment allowance under section 32A for the unit that was sold. Thirdly, the alleged violation of the agreement by transferring finished goods at book value instead of market value. The court noted that the second and third grounds did not justify reopening the assessment after four years from the relevant assessment year.

Issue 3: Failure to disclose true and full facts
The court analyzed the reasons recorded by the Assessing Officer and found that the petitioner had provided a clear explanation for the accounting treatment in the notes submitted by the auditor. The court emphasized that the petitioner had disclosed all material facts, and there was no indication in the reasons recorded that income had escaped assessment due to the petitioner's failure to disclose true and full facts. The court also considered the case law cited by both parties and concluded that there was no valid reason to reopen the assessment. Therefore, the court quashed the impugned notice dated 25.7.2003 and disposed of the petition.