2015 (8) TMI 668 - HC - Income Tax

Reopening of assessment - Deduction of depreciation on revalued portion of the assets is only for the purpose of presentation and accretion to reserves did not increase book profit. Therefore, there is no justification in reducing the net profit by the amount of revaluation reserve - Held that - Identical issue had come up before this Court in Rallis India Ltd. (2010 (3) TMI 164 - BOMBAY HIGH COURT ) wherein a reopening notice was inter alia issued on the ground that the book profits have to be increased in view of the Explanation to Section 115JB of the Act (similar to Section 115JA of the Act) after adding provision made doubtful debts and for diminution in the value of investment. This Court in the above case recorded the fact that Apex Court in HCL Comnet Systems and Services Ltd.(2008 (9) TMI 18 - SUPREME COURT) has held that the provision for doubtful debts is a provision made for diminution in the value of assets and is not a liability. Thus it would not fall under clause (c) of the Explanation to Section 115 JA of the Act. Consequent to the aforesaid decision of the Apex Court, the Parliament has amended Explanation both under Section 115JA as well as 115JB of the Act in 2009 by adding clause (g) and (i) with retrospective effect from 1 April 1998 and 1 April 2001 respectively. This Court held that though the amendment was made with retrospective effect, the critical date is the date on which the Assessing Officer exercises jurisdiction under Section 148 of the Act and the subsequent amendment could not have been and is in fact not a ground on which the Assessing Officer sought to reopen the assessment. Thus the above decision would apply to the facts of the present case. Accordingly on the above ground of absence of reason to believe that income chargeable to tax has escaped assessment, the impugned notice is not sustainable. - Decided in favour of assessee.

Issues Involved:
1. Validity of the notice issued under Section 148 of the Income Tax Act, 1961.
2. Allegations of failure to disclose material facts fully and truly.
3. Justification for reopening the assessment beyond four years.
4. Determination of whether the reopening was based on a change of opinion.
5. Applicability of retrospective amendments to the Explanation of Section 115JA of the Act.

Detailed Analysis:

1. Validity of the notice issued under Section 148 of the Income Tax Act, 1961:
The petitioner challenged the notice dated 29 March 2007 under Section 148, seeking to reopen the assessment for the Assessment Year 2000-01. The petitioner argued that the notice was issued beyond the four-year period without indicating any failure on their part to disclose material facts fully and truly. The court emphasized that reopening an assessment must meet specific jurisdictional requirements, including recording reasons for the notice and having a reason to believe that income chargeable to tax has escaped assessment.

2. Allegations of failure to disclose material facts fully and truly:
The petitioner contended that all material facts were disclosed during the original assessment proceedings. The court noted that the reopening notice was based on the assertion that provisions for doubtful debts and depletion in long-term investments were unascertained liabilities that should have been added back to the net profit. The court found that these provisions are not liabilities but are meant to cover the likely fall in the value of assets, as held by the Supreme Court in CIT Vs. HCL Comnet Systems and Services Ltd.

3. Justification for reopening the assessment beyond four years:
The petitioner argued that the notice was issued beyond the four-year period and that there was no failure on their part to disclose material facts. The court reiterated that for reopening beyond four years, there must be a failure to disclose fully and truly all material facts necessary for assessment. The court found that there was no such failure on the part of the petitioner, and the reasons for reopening did not justify the belief that income chargeable to tax had escaped assessment.

4. Determination of whether the reopening was based on a change of opinion:
The petitioner argued that the reopening was based on a change of opinion, as all three issues raised in the notice were considered during the original assessment proceedings. The court agreed, noting that the issues were indeed considered and that the reopening notice was merely an attempt to reconsider the same issues, which is not permissible.

5. Applicability of retrospective amendments to the Explanation of Section 115JA of the Act:
The revenue contended that the introduction of clause (g) to the Explanation of Section 115JA with retrospective effect justified the reopening notice. However, the court held that the validity of the reopening notice must be tested based on the reasons recorded at the time of issuing the notice. The court found that the reasons recorded did not indicate that the provisions for doubtful debts and depletion of long-term investments were unascertained liabilities, and thus the retrospective amendment could not be relied upon.

Conclusion:
The court concluded that the Assessing Officer did not have a reason to believe that income chargeable to tax had escaped assessment. The reopening notice dated 29 March 2007 was found to be unsustainable, and the petition was allowed. The rule was made absolute with no order as to costs.

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