2018 (11) TMI 1175 - HC - Income Tax

Re-assessment proceedings u/s 147 - reopening of after four years of completion of the assessments - rectification proceedings u/s 154 which is handed over across the Bar for the respondent - Held that - It is pertinent that even in the rectification order, AO specifically notices that the assessee had been maintaining accounts for income tax purposes under the cash system. There was no accounts called for by the AO, who completed the assessment proceedings. We are of the opinion that there could be no allegation raised of non-disclosure of full and true material facts. The reassessment proceedings having been attempted after a period of four years as prescribed under Section 147, there should be non-disclosure of full and true material facts. We agree with the Tribunal that there was no warrant for re-assessment especially after the expiry of four years. We reject the I.T.Appeals, answering the questions of law in favour of the assessee

Summary

Issues:
1. Assessment years 1997-98 and 1998-99 - Re-assessment proceedings under Section 147 read with Section 143(3).
2. Maintenance of accounts under mercantile system and filing returns based on cash system.
3. Obligation to maintain accounts based on the system used for income tax computation.
4. Absence of full and true disclosure of material facts for assessment.
5. Rectification proceedings under Section 154 for the year 1997-98.

Analysis:
1. The judgment pertains to appeals against the Tribunal's order for assessment years 1997-98 and 1998-99. The assessee maintained accounts under the mercantile system but filed returns based on the cash system permitted by Section 145 of the Income Tax Act, 1961. Re-assessment proceedings were initiated under Section 147 after four years of the original assessments.

2. The Standing Counsel argued that under Section 44AA, the assessee must maintain accounts based on the system used for income tax computation and return filing. In this case, since the assessee did not maintain accounts under the cash system, re-assessment proceedings were initiated.

3. The court analyzed whether there was a lack of full and true disclosure of material facts necessary for assessment. The Assessing Officer initially accepted the returns filed by the assessee, which indicated maintaining accounts under the mercantile system but computing income tax under the cash system. The issue arose due to changes in the Companies Act mandating mercantile system accounts. Re-assessment was dropped for earlier years when income returned under the cash system exceeded that under the mercantile system.

4. For the year 1997-98, rectification proceedings under Section 154 were conducted. The rectification order acknowledged that the assessee maintained accounts under the cash system for income tax purposes. The court held that there was no non-disclosure of material facts, and re-assessment after four years was unwarranted.

5. Even in the rectification order, it was noted that the assessee maintained accounts under the cash system for income tax purposes. The court concluded that there was no basis for re-assessment after the prescribed four-year period under Section 147. The appeals were rejected in favor of the assessee, and the questions of law were answered against the Revenue.