Section 148 notice valid under proviso to Section 147 and Explanation 1 for escaped income from unpaid purchases

HC upheld the section 148 notice, finding reassessment permissible despite lapse of four years because income had escaped assessment. The court held that the AO had overlooked an item representing unpaid purchases, which led to suppression of income, and this was not merely a change of opinion. Under the proviso to section 147 and Explanation 1, mere production of books does not constitute full disclosure; since the AO had not considered the unpaid-purchase item in the original assessment, issuance of the notice was sustained.

---

---

Issues Involved:
1. Whether the Department is right in issuing notice u/s 148 of the Income-tax Act, 1961, for the assessment year 1994-95 on the ground of underassessment within the meaning of section 147 of the Income-tax Act for having reason to believe that the expenditure of Rs.6,70,758 ought to have been disallowed as the said amount represented unpaid purchaseRs.

Summary:

Issue 1: Validity of Notice u/s 148
Facts:
The petitioner, a partnership firm assessed under the Income-tax Act, 1961, for 18 years, followed a hybrid system of accounting. For the assessment year 1994-95, the petitioner filed its return of income on October 31, 1994, showing a total income of Rs.1,53,174, which was later assessed at Rs.2,17,030 after scrutiny. On March 16, 2001, the petitioner received a notice dated March 14, 2001, issued by the Assessing Officer u/s 148, calling upon the petitioner to file its return of income within 30 days. The petitioner challenged this notice.

Arguments:
Mr. Dastur, representing the petitioner, argued that the hybrid system of accounting was permissible during the assessment year 1994-95 and had been consistently accepted by the Department. He contended that the notice u/s 148 was issued solely on the ground that the hybrid system was not permissible, which was incorrect as the amendment to section 145(1) disallowing the hybrid system took effect only from the assessment year 1997-98. He further argued that there was no underassessment or revenue loss, and the reopening of the assessment was a case of change of opinion without any failure on the part of the assessee to disclose all facts.

Findings:
The court noted that the hybrid system of accounting was recognized at the relevant time. However, the Assessing Officer found that Rs.6,70,758 representing unpaid purchases was wrongly granted a deduction, resulting in underassessment within the meaning of section 147. The court distinguished the present case from other cited cases where no income had escaped assessment. The court held that the principle of res judicata does not apply, and each assessment year is a separate unit. The court found that the Assessing Officer had detected escapement of income and was justified in issuing the notice u/s 148.

Conclusion:
The court concluded that the issuance of the notice u/s 148 was valid as there was escapement of income due to the unpaid purchases being wrongly allowed as a deduction. The writ petition was rejected.

---