9911796707
TMI Blog1983 (1) TMI 62X X X X Extracts X X X X X X X X Extracts X X X X ..... d under art. 226 of the Constitution of India. Petitioner is a company registered under the Indian Companies Act, 1913, and it is engaged in the business of manufacturing textiles for the last several years. The respondent is the ITO having jurisdiction' to assess the petitioner. The relevant assessment years with which this petition is concerned are assessment years 1970-71 and 1974-75, corresponding years of account being financial years 1969-70 and 1973-74, respectively. Petitioner was following the cost method for the purpose of valuing its opening and closing stocks of cloth and yarn for the purpose of income-tax assessments for the last several years. Common method was followed for the purpose of valuing the stocks of cloth and yarn, both for the purposes of income-tax and balance-sheet and profit and loss account up to the assessment year 1965-66. Departure was, however, made in the assessment year 1966-67, that is, financial year 1965-66. In that year, the petitioner changed the method of valuation of stocks of yarn in process and cloth for the purposes of the Companies Act. Balance-sheet and profit and loss account required to be prepared under the provisions of the Compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... --------- 70,49,184 Difference = 1,56,121 " In the course of assessment proceedings for the assessment year 196667, the petitioner also submitted the following note ::showing difference in valuation : " Note : Over-valuation in the closing stock of yarn in process as on 31-3-1966 on the basis of method followed for income-tax purposes till now is as follows : Rs. (1) Over-valuation in weaving process due to change in method of adding 6 p. per. 1b. to cost of ready yarn and that method followed for balance-sheet on 31-3-1966, by adding 25% of weaving charges to cost of ready yarn. 90,565 (2) Over-valuation in stock of ready yarn, spinning process, weaving process and cloth on 31-3-1966, due to change in method of valuing cotton on basis of loss percentage to that of valuing cotton on the basis of yarn manufactured. 63,349 -------- 1,53,914 " -------- It would thus appear that the working of valuation on the basis of both methods was placed before the ITO. The ITO while framing the assessment for the assessment year 1966-67, on February 17, 1968, stated as follows : " The assessee-company has claimed deduction of Rs. 1,55,127, being over-valuation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the difference between the two methods of valuation and pointing out the adjustment which was required to be made as a result of the difference in framing the income-tax assessment. Every year assessment was completed on the basis of the valuation of the opening and closing stock shown by the petitioner for the purposes of income-tax assessment. For the assessment year 1970-71, which is one of the years under our consideration, the petitioner filed return of income along with the statement showing computation of total income. According to the petitioner, in one of the statements, two valuations of closing stock of yarn and cloth one for the purposes of income-tax proceedings as per the method consistently adopted by it from year to year, and another for the purpose of balance-sheet, were disclosed giving details as to how the valuations were worked out. The valuation of the closing stock on method described as cost method were shown as follows : ----------------------------------------------------------------------- Valuation for Valuation as per Over-valuation income-tax balance-sheet in balance-sheet --------------------------------------------------------------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income-tax purposes was pointed out. The working as regards the valuation, which was shown, was as follows : ------------------------------------------------------------------------------ Valuation for Valuation as per Over-valuation income-tax balance-sheet in balance-sheet purpose ------------------------------------------------------------------------------ Rs. Rs. Rs. Cloth including terry-cotton cloth 83,03,657 1,27,86,222 44,82,565 yarn 15,48,375 17,38,489 1,90,114 --------- 46,72,679 --------- As against this difference in valuation, the difference in the valuation of the opening stock came to Rs. 19,61,595 resulting in a net difference of 27,11,084, which amount as stated above was to be deducted from the profit as per the profit and loss account. In this year also, while relying on query No. 21 put by the ITO, as in the earlier year, it was pointed out that method of valuation far the purpose of income-tax was explained in a statement accompanying the return of income. The ITO, while framing the assessment for the assessment year 1974-75, gave effect to the difference in valuation by deducting Rs. 27,11,084 as stated above. The respondent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds that the respondent was not in possession of any information in consequence of which he could entertain reasonable belief that there was escapement of income from assessment in the aforesaid years Petitioner has, therefore, filed this petition challenging the validity of the aforesaid notices issued by the respondent under s. 148 read with s. 147 of the Act and prayed that the said notices be quashed and set aside. Assessments are sought to be reopened by the Respondent on account of method of valuation adopted by the petitioner for valuing yarn in process for income-tax purposes. In the respondent's affidavit, it is stated that on perusal of the method adopted for the valuation of the yarn in process, it was found that the petitioner had shown cost in respect of such yarn at 12 paise per kg. whereas the actual cost as disclosed in the balance-sheet was more. According to the respondent, the correct cost of yarn in process was shown in the balance-sheet whereas the valuation for the purpose of income-tax was adopted on estimate basis. It is stated that the method which the petitioner had declared for the purpose of income-tax was unscientific, arbitrary and unreliable and it wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is court in Arvind Boards and Paper Products Ltd. v. M. T. Keshruwala, ITO [1980] 124 ITR 626 (Guj), it is well settled that two conditions have to be satisfied before the ITO acquired jurisdiction to issue notice under s. 148 in respect of an assessment beyond the period of four years but within a period of eight years from the end of the relevant year, namely, (i) that the ITO must have reason to believe that the income chargeable to tax had escaped assessment and, (ii) that he must have reason to believe that such income has escaped assessment by reason of the omission or failure on the part of the assessee, (a) to make a return under s. 139 for the assessment year to the ITO, or (b) to disclose fully and truly material facts necessary for the assessment for that year. Both these conditions must co-exist to confer jurisdiction on the ITO. It is also imperative for the ITO to record his reasons before initiating proceedings as required by s. 148(2). Another requirement is that before notice is issued after the expiry of four years from the end of the relevant assessment years, the Commissioner should be satisfied on the reasons recorded by the ITO that it is a fit case for the is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d its stock of yarn in process at 12 p. per kg. In other words, the stock of yarn in process was valued at a uniform rate of 12 p. though, in the balance-sheet, the figures of cost adopted were different. Now, as pointed out above, the petitioner has been consistently following the method of valuing its stock of yarn in process at the fixed or uniform rate of 12 p. per kg. This method of valuation of stock of yarn in process has been followed for the last several years for income-tax purposes. However, from the assessment year 1966-67, that is financial year 1965-66, the petitioner adopted two methods of valuation of the stock, one for the purpose of income-tax and another for the balance-sheet and profit and loss account. For the purpose of income-tax, it followed the past practice of valuing the stock, while for the purpose of balance-sheet and profit and loss account, it adopted a slightly different method of valuation. Cost of yarn in process was shown at 12 p. per kg. for the purpose of valuing its stock as in the past for the purposes of income-tax. For the assessment years under reference, that is, assessment years 1970-71 and 1974-75, the petitioner followed the same method ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preme Court in CIT v. Burlop Dealers Ltd. [1971] 79 ITR 609 and ITO v. Madnani Engineering Works Ltd. [1979] 118 ITR 1. In Burlop Dealers' case, the assessee in the course of its original assessment to income-tax for the assessment year 1949-50, had produced a partnership agreement with one Ratiram Tansukhrai and claimed that the profits earned by it from H. Manory Ltd. had been divided between itself and Ratiram Tansukhrai under the partnership agreement and its one-half share of the profit namely, Rs. 87,937, was the only amount assessable to tax in respect of this source. The ITO accepted the partnership agreement and assessed the assessee only on the profit of Rs. 87,937. It appears that while making assessment for the assessment year 1950-51, the ITO found that the partnership agreement between the assessee and Ratiram Tansukhrai was a got up device to reduce that profit received from H. Manory Ltd. and the assessee was, therefore, liable to tax on the entire amount of profit coming from H. Manory Ltd. This view taken by the ITO was confirmed on appeal by the AAC and the Tribunal. The High Court also on a reference agreed with the view of the Tribunal. The ITO thereupon issued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se [1979] 118 ITR 1 (SC), for the assessment year 1959-60, which was completed on August 23, 1960, certain interest paid by the assessee to its creditors from whom it claimed to have borrowed monies on hundis was allowed as deductible expenditure. Subsequently on January 25, 1968, i.e., after a lapse of four years from the end of the assessment year, a notice was issued by the ITO to reopen the assessment of the assessee on the ground that the transactions of loan represented by the hundis were bogus and no interest was paid by the respondent to any of the creditors and interest was wrongly allowed. The assessee challenged the validity of the notice by filing a writ petition in the High Court. On December 5, 1968, the ITO in his counter-affidavit, declined to disclose the facts on the ground that if such facts were disclosed it would cause great prejudice to the interests of the Revenue and would frustrate the object of reopening the assessment. Thereafter, he filed a further affidavit on January 27, 1970, stating that in the course of the assessment of the respondent for the assessment year 1963-64 it was discovered that various items shown as loans against the security of hundis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inal assessment proceedings and the case is not one where the final figure of valuation alone was given with the statement that it was arrived at on the basis of actual cost. That apart, even assuming that the description accordingly given by the petitioner about the method of valuation constituted a primary fact, the petitioner, as earlier stated, had simultaneously placed on record in the form of a statement the details or particulars in relation to the valuation of stock. In other words, the actual method adopted by the petitioner for valuing the stock was laid bare in all its essential particulars in the course of the original assessment proceedings. Such material also constituted a primary fact which was fully disclosed. There was thus a true and full disclosure of all the primary facts at the time of the original assessment. Once the petitioner had done this, his duty ended. It was for the ITO to draw a correct inference from all those primary facts taken together and to decide, inter alia, whether or not the stock could be said to have been valued at cost as claimed by the petitioner, having regard to the method adopted. It was no part of the duty or responsibility of the pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on was with regard to valuation of stock of cloth; whereas the reason for reopening the assessment recorded by the respondent is valuation of stock of yarn in process. What would constitute " information " in consequence of possession of which the ITO can act within the meaning of s. 147(b) has been the subject-matter of many decisions. This court in K. Mansukhram & Sons v. CIT [1982] 133 ITR 65 reviewed the legal position on the question in the light of the decision of the Supreme Court in Indian and Eastern Newspaper Society v. CIT [1979] 119 ITR 996 (SC), and observed that the view which finally prevailed as to the legal position governing the applicability of s. 147(b) was as follows (p. 73): " This decision clarifies the legal position on the question as to when instruction or knowledge as to facts of the correct state of law constitute 'information' within the meaning of s. 147(b). Instruction or knowledge concerning any fact relating to the assessment, which has a concrete existence and definitive vitality and which is capable of influencing the determination of an issue arising in the course of an assessment but has escaped notice of the ITO, would constitute 'information ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s also the method of valuation adopted by the petitioner in valuing the stock of yarn in process when he framed the original assessment. The reasons recorded by the respondent to reopen assessments made it clear that according to him there was an error in accepting the basis adopted by the petitioner in valuing stock of yarn in process. It is obvious that this error, if any, is discovered on a reappraisal of the same material without anything more. Here what seems to have happened is that the respondent has upon a review of the material on record, arrived at a different conclusion on the above aspects of the case. This is, therefore, case of mere change of opinion which does not give power or jurisdiction to the respondent to reopen the assessment. We are, therefore, of the opinion that there is no jurisdiction for reopening the assessment for the assessment year 1974-75 under s. 147(b) of the Act. For the foregoing reasons we hold that the impugned notices issued by the ITO for the assessment years 1970-71 and 1974-75 are void and without jurisdiction. In the result, this petition succeeds. The impugned notices dated March 19, 1979, and March 29, 1979, Exs. C-3 and C-1, respectiv ..... X X X X Extracts X X X X X X X X Extracts X X X X
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