2014 (12) TMI 725 - HC - Income Tax

Validity of notice for reopening of assessment u/s 148 - Failure on the part of the assessee to disclose fully and truly all material facts or not Held that - Assessee did not have any opening stock on 01.04.2005 - By virtue of a Business Transfer Agreement, the assessee received a stock valued at ₹ 19,90,92,944/- from Hindustan Motors Ltd. which became its initial stock - there were additions to the stock and the difference between the initial stock and the closing stock at the end of the year, that is, on 31.03.2006, came to ₹ 5,76,42,819 - there has been no failure on the part of the assessee to make a full and true disclosure of the material facts pertaining to the closing stock and that the allegation raised by the respondents is not borne out by the records. The initial view of the AO also coincided with the view taken by the assessee but because there was some circular which had been issued by the CIT, even though the AO disagreed with the audit objection, he had to take remedial steps u/s 148 - this also discloses the fact that the AO had not applied his own mind but was dictated to by the circular which he felt he was bound to follow - The provision for reopening of assessment u/s 147 specifically requires that it is the AO who must have reason to believe that income chargeable to tax has escaped assessment - The belief must be of the AO himself and not of anybody else in the present case, although the AO believed that no income had escaped assessment and he had disagreed with the audit objection yet he went on to issue the notice u/s 148 which cannot be sustained in law thus, the notice for reopening if set aside Decided in favour of assessee.

Summary

Issues:
1. Validity of notice issued under Section 148 of the Income-tax Act, 1961 for reopening assessment.
2. Alleged understatement of closing stock leading to escapement of income from assessment.

Issue 1: Validity of notice under Section 148:
The petition challenged a notice dated 28.03.2013 issued under Section 148 of the Income-tax Act, 1961 to reopen the assessment for the year 2006-07. The original assessment was made on 24.12.2008, and the notice was issued beyond four years from the end of the assessment year, triggering the proviso to section 147. The reasons for re-opening the assessment included alleged escapement of income due to failure to disclose material facts. The petitioner contended that all relevant information was disclosed during the original assessment, rendering the notice and subsequent proceedings misconceived. The Assessing Officer rejected the objections raised by the petitioner, leading to the legal challenge.

Issue 2: Alleged understatement of closing stock:
The crux of the matter revolved around the alleged understatement of closing stock by an amount of Rs. 19,90,92,944, resulting in escapement of income. The petitioner argued that the said amount was not closing stock but initial stock received from another entity as per a Business Transfer Agreement. The petitioner demonstrated that the stock entries accurately reflected the transfer and valuation in the balance sheet and Profit and Loss Account. The difference between the initial stock and closing stock was correctly shown as an increase in inventories, impacting the income calculation. The court concurred with the petitioner's position, emphasizing that there was no failure to disclose material facts regarding the closing stock, as alleged by the revenue.

The judgment highlighted the importance of the Assessing Officer's independent belief in income escapement for issuing notices under Section 148. It underscored the need for a genuine reason to believe in income escapement, emphasizing the Assessing Officer's discretion and independent assessment. Ultimately, the court quashed the notice and subsequent order, ruling in favor of the petitioner due to the lack of merit in the allegations and the incorrect application of the law by the revenue authorities.