Section 148 notice and Commissioner's contemporaneous approval quashed for failure to apply their mind and verify disclosure

The HC held the s.148 notice and the Commissioner's approval to reopen assessment invalid. The Commissioner granted approval contemporaneously without verifying whether the assessee failed to make full and true disclosure or whether reopening fell within the four-year limitation; this non-application of mind rendered the approval and consequent notices and reasons recorded unsustainable. The impugned notices and the order justifying reopening were quashed and set aside.

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Issues Involved:
1. Validity of the notice issued under section 148 of the Income-tax Act, 1961.
2. Barred by limitation.
3. Change of opinion.
4. Approval by the Commissioner of Income-tax.
5. Full and true disclosure of income.
6. Valuation of closing stock with Modvat (excise and customs duty paid).

Detailed Analysis:

1. Validity of the Notice Issued under Section 148 of the Income-tax Act, 1961:
The petitions challenge the notices dated September 15, 2003, issued under section 148 of the Income-tax Act, 1961, seeking to reopen completed assessments for the assessment years 1997-98 and 1998-99. The petitioners argue that the notice is invalid as it was issued beyond the statutory period of four years from the end of the relevant assessment year. The court found that the reasons for reopening the assessment were unsustainable, as they did not lead to a belief that income had escaped assessment.

2. Barred by Limitation:
The petitioners argue that the notice issued under section 148 dated September 15, 2003, is barred by limitation since it was issued beyond the statutory period of four years from the end of the relevant assessment year. The court agreed, noting that the impugned notice was issued beyond four years from the last date of the relevant assessment year without alleging any failure to disclose full and true material facts, making it liable to be set aside.

3. Change of Opinion:
The petitioners contend that the notice under section 148(1) cannot be issued merely on a change of opinion, as the returns were subject to scrutiny and assessment under section 143(3). The court found that no fresh facts were brought on record to justify the notice, making the reopening of the assessment without jurisdiction and bad in law.

4. Approval by the Commissioner of Income-tax:
The petitioners argue that the approval granted by the Commissioner of Income-tax, Mumbai, suffers from non-application of mind and was granted in a casual manner. The court noted that the Commissioner did not verify whether there was any failure on the part of the assessee to disclose full and true relevant facts in the return of income. This lack of consideration justified the contention that the approval granted was without application of mind, making the impugned notices and the order justifying reasons recorded unsustainable.

5. Full and True Disclosure of Income:
The petitioners submitted that full information regarding tax deducted at source from payments made to various parties was disclosed in the return of income. The court found that true and full information with respect to IDS was disclosed in the return for IDS in Form No. 27, and all obligations with respect to IDS were properly complied with. Therefore, the first reason for reopening the assessment was unsustainable.

6. Valuation of Closing Stock with Modvat (Excise and Customs Duty Paid):
The second reason for issuing the notice under section 148(1) was related to the valuation of closing stock with Modvat (excise and customs duty paid). The court noted that the inventory is required to be valued either at cost or market price, whichever is lower, and the assessee had valued its closing stock at cost. The excise duty and sales tax paid on the purchase of raw materials form part of the cost and are required to be considered for the valuation of closing stock, as laid down by the apex court in the case of British Paints India Ltd. The court found that this issue was already considered in the assessment order dated December 21, 2000, and the reasons mentioned for reopening were unsustainable.

Conclusion:
The court concluded that the power to reopen the assessment was exercised on unsustainable reasons. The impugned notices and consequently the order justifying reasons recorded were quashed and set aside. The petitions were allowed, and the rule was made absolute in each petition with no order as to costs.

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