2004 (2) TMI 41 - HC - Income Tax

Bombay HC quashes notice for reopening assessment proceedings issued beyond four-year period under section 147

Hindustan Lever Ltd. Versus RB. Wadkar, Assistant Commissioner of Income-tax And Others (No. 1).

The Bombay HC quashed a notice for reopening assessment proceedings. The court held that the Assessing Officer lacked jurisdiction to reopen the ... Notice for reopening of assessment - failed to disclose fully and truly all material facts necessary for the assessment - Jurisdiction to reopen the concluded assessment after the expiry of four years from the last day of the relevant assessment year - Held that:- In the case in hand it is not in dispute that the assessment year involved is 1996-97. The last date of the said assessment year was March 31, 1997, and from that date if four years are counted, the period of four years expired on March 31, 2001. The notice issued is dated November 5, 2002, and received by the assessee on November 7, 2002. Thus, the notice is clearly beyond the period of four years. The reasons recorded must be based on evidence. The Assessing Officer, in the event of challenge to the reasons, must be able to justify the same based on material available on record. He must disclose in the reasons as to which fact or material was not disclosed by the assessee fully and truly necessary for assessment of that assessment year, so as to establish the vital link between the reasons and evidence. That vital link is the safeguard against arbitrary reopening of the concluded assessment. The reasons recorded by the Assessing Officer cannot be supplemented by filing an affidavit or making an oral submission, otherwise, the reasons which were lacking in the material particulars would get supplemented, by the time the matter reaches the court, on the strength of the affidavit or oral submissions advanced. Having recorded our finding that the impugned notice itself is beyond the period of four years from the end of the assessment year 1996-97 and does not comply with the requirements of the proviso to section 147 of the Act, the Assessing Officer had no jurisdiction to reopen the assessment proceedings which were concluded on the basis of assessment under section 143(3) of the Act. On this short count alone the impugned notice is liable to be quashed and set aside. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Court are:(a) Whether the notice issued under Section 148 of the Income Tax Act, 1961 (the 'Act') for reopening the assessment for the assessment year 1996-97 is valid and within the prescribed limitation period as per the proviso to Section 147 of the Act.(b) Whether the Assessing Officer had jurisdiction to reopen the assessment after the expiry of four years from the end of the relevant assessment year without recording reasons that the assessee failed to disclose fully and truly all material facts necessary for assessment.(c) Whether the petitioners had disclosed all material facts necessary for the assessment, especially regarding excise and customs duty on stocks lying in bonded warehouse, and whether the income had escaped assessment on account of non-disclosure.(d) The applicability of precedents concerning the disclosure of material facts and the limitation period for reopening assessments.2. ISSUE-WISE DETAILED ANALYSISIssue (a) and (b): Validity and limitation of the notice under Section 148 read with proviso to Section 147Relevant legal framework and precedents: Section 147 of the Act empowers the Assessing Officer to reopen an assessment if he has reason to believe that income chargeable to tax has escaped assessment. However, the proviso to Section 147 restricts such reopening after four years from the end of the relevant assessment year unless the failure to disclose fully and truly all material facts necessary for assessment is established. The notice under Section 148 must be issued within this limitation period and must be supported by reasons recorded by the Assessing Officer.Court's interpretation and reasoning: The Court emphasized that the proviso to Section 147 is a clear statutory bar on reopening assessments beyond four years unless there is a failure on the part of the assessee to disclose material facts. The Court noted that the relevant assessment year is 1996-97, ending on March 31, 1997, and the four-year limitation expired on March 31, 2001. The impugned notice dated November 5, 2002, was clearly beyond this period.The Court held that the reasons recorded by the Assessing Officer must explicitly disclose that the assessee failed to disclose fully and truly all material facts necessary for assessment. The reasons recorded in this case did not contain such a statement or inference. The Court rejected the Revenue's submission that such failure could be inferred from the reasons recorded.Key evidence and findings: The reasons recorded by the Assessing Officer stated that excise and customs duty was not included in the valuation of closing stock, contrary to Board's Instruction No. 1389 dated March 24, 1981. However, it did not state that the assessee failed to disclose material facts. The petitioners had disclosed their accounting policy and the relevant figures in the original and revised returns along with audit reports.Application of law to facts: Since the notice was issued beyond the four-year period without the requisite recorded reasons indicating failure to disclose material facts, the reopening was barred by limitation. The Court stressed that reasons recorded must be clear, unambiguous, and self-explanatory, forming a vital link between conclusion and evidence, and cannot be supplemented later by affidavit or oral submissions.Treatment of competing arguments: The Revenue argued that failure to disclose could be inferred and that the merits of the case should be decided by the Assessing Officer. The Court rejected these contentions, emphasizing strict compliance with statutory requirements and that reopening notices must stand or fall on the reasons recorded at the time of issuance.Conclusions: The notice under Section 148 was held to be beyond limitation and without jurisdiction, and therefore liable to be quashed and set aside.Issue (c): Disclosure of material facts and whether income escaped assessmentRelevant legal framework and precedents: The proviso to Section 147 requires that reopening beyond four years is only permissible if there is failure to disclose fully and truly all material facts. The Court considered precedents where similar facts were held to constitute full disclosure, notably judgments in cases involving excise and customs duty on bonded warehouse stocks.Court's interpretation and reasoning: The petitioners had disclosed their accounting policy regarding excise and customs duty on stocks in bonded warehouses in the original and revised returns, as well as in the audit report under Section 44AB. The Court found this constituted full and true disclosure of material facts.Key evidence and findings: The petitioners' returns and accounts specifically noted the accounting treatment of excise and customs duty and the estimated amounts involved. The audit report corroborated this disclosure. The petitioners also paid the excise and customs duty before the due date for filing the return.Application of law to facts: Since the petitioners had fully disclosed the relevant facts, the reopening on the ground of income escaping assessment due to non-disclosure was not justified. The Court relied on precedents where similar disclosures were held sufficient to preclude reopening.Treatment of competing arguments: The Revenue contended that the excise and customs duty should have been included in the stock valuation and that income had escaped assessment. The Court held that this was a matter of merits which could be examined only if the reopening was valid. Since reopening was barred, the merits were not considered.Conclusions: The petitioners had made full disclosure; hence, the reopening was not justified on grounds of escaped income due to non-disclosure.Issue (d): Applicability of precedentsRelevant legal framework and precedents: The Court referred to two key judgments where similar facts were involved: one concerning the accounting treatment of excise and customs duty on bonded warehouse stocks and the limitation for reopening assessments.Court's interpretation and reasoning: The Court found the facts of the present case identical to those in the cited precedents, where it was held that the return and accompanying documents constituted full disclosure and that reopening beyond four years was impermissible in absence of failure to disclose.Application of law to facts: The Court applied these precedents to the facts of the present case to reinforce the conclusion that the reopening was barred by limitation and lacked jurisdiction.Conclusions: The precedents squarely supported the petitioners' contention and the Court's decision to quash the reopening notice.3. SIGNIFICANT HOLDINGSThe Court held:'The reasons recorded by the Assessing Officer cannot be supplemented by filing an affidavit or making an oral submission, otherwise, the reasons which were lacking in the material particulars would get supplemented, by the time the matter reaches the court, on the strength of the affidavit or oral submissions advanced.''The reasons recorded should be clear and unambiguous and should not suffer from any vagueness. The reasons recorded must disclose his mind. The reasons are the manifestation of the mind of the Assessing Officer. The reasons recorded should be self-explanatory and should not keep the assessee guessing for the reasons.''Where an assessment under Sub-section (3) of Section 143 has been made for the relevant assessment year, no action can be taken under Section 147 after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for that assessment year.''The notice dated November 5, 2002, issued under Section 148 of the Act is barred by limitation and the Assessing Officer had no jurisdiction to reopen the assessment proceedings which were concluded on the basis of assessment under Section 143(3) of the Act.'Core principles established include the strict adherence to the limitation period for reopening assessments under Section 147 read with Section 148, the requirement of explicit and clear reasons recorded by the Assessing Officer indicating failure to disclose material facts to justify reopening beyond four years, and the principle that reasons cannot be supplemented post hoc.Final determination on the issue of limitation and jurisdiction was that the reopening notice was invalid and was quashed. Since the Court decided the matter on this ground, it did not delve into the merits of the case.