2015 (7) TMI 54 - HC - Income Tax

Validity of reopening of assessment - Held that - When the Assessing Officer had failed to record anywhere his satisfaction or belief that the income chargeable to tax had escaped assessment on account of the failure of the assessee to disclose truly and fully all material facts necessary for assessment. On the contrary, it was the Assessing Officer, who failed to consider the materials placed before him at the time of regular assessment for which the assessee cannot be found fault with. Therefore, the notice issued under Section 147 of the Income Tax Act beyond the period of four years was wholly without jurisdiction and cannot be sustained. - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the reopening of assessment is bad in law.
2. Whether the reassessment proceedings should be set aside.

Detailed Analysis:

Issue 1: Whether the reopening of assessment is bad in law.
The primary question for consideration is whether the Tribunal was right in holding that the reopening of assessment is bad in law. The respondent/assessee, engaged in the manufacture and sale of drugs, filed a return of income for the assessment year 1996-1997. The return was selected for scrutiny, and income was assessed. After four years, the Department initiated proceedings under Section 147 by issuing a notice under Section 148, claiming that certain expenses were incorrectly treated as revenue deductions instead of capital in nature.

The Tribunal found no failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. The original assessment was completed under Section 143(3), and the Department did not claim any failure by the assessee to disclose material facts. The Tribunal allowed the assessee's appeal, setting aside the reassessment proceedings.

The Court analyzed Section 147 and its proviso, which restricts action after four years unless there is a failure to disclose material facts. It was noted that the Department could not invoke Explanation 1 to Section 147, as the details were disclosed during the regular assessment. The Tribunal's finding was that it was the Assessing Officer's failure to consider the material facts, not the assessee's failure to disclose them.

Issue 2: Whether the reassessment proceedings should be set aside.
The Court upheld the Tribunal's decision, emphasizing that any failure to consider the material facts by the Assessing Officer cannot be attributed to the assessee. The Tribunal correctly concluded that the reassessment proceedings were invalid as they were initiated beyond the four-year period without any failure on the part of the assessee to disclose material facts.

The Court referenced multiple precedents, including the Supreme Court's decision in Commissioner of Income-Tax v. Kelvinator of India Ltd., which held that reassessment must be based on "tangible material" and not merely a change of opinion. The Court also cited decisions from the Madras High Court and the Bombay High Court, reinforcing that reopening assessments beyond four years requires clear evidence of failure to disclose material facts by the assessee.

In conclusion, the Court dismissed the appeal filed by the Department, confirming the Tribunal's order and holding that the reopening of assessment was indeed bad in law. The substantial question of law was answered in favor of the respondent/assessee, and the reassessment proceedings were set aside. The appeal was dismissed with no order as to costs.