1998 (11) TMI 108 - HC - Income Tax

Notices under section 148 quashed as reassessment arose from mere change of opinion; section 43B and Explanation 1 insufficient

HC quashed notices issued under section 148 and set aside reassessment proceedings for the relevant year, holding that the AO's recorded reasons amounted ... Reassessment proceedings under section 147 for escapement of income - change of opinion - application of section 43B to valuation of opening and closing stock - reason to believe must be founded on material having nexus - binding precedent of the jurisdictional High Court - non-exercise of due diligence is not equivalent to lack of application of mindReassessment proceedings under section 147 for escapement of income - change of opinion - reason to believe must be founded on material having nexus - Validity of notices issued for reopening assessment for the assessment year 1986-87 - HELD THAT: - The court held that notices issued to reopen the assessment for 1986-87 amounted to a mere change of opinion by the Assessing Officer and thus were not valid. The reasons recorded by the Assessing Officer showed that the same facts and legal position (including reliance on this Court's decision in Lakhanpal's case) were before the original Assessing Officer and that the allowance had been made after application of mind. Absent fresh material having a reasonable nexus to form a belief that income had escaped assessment, issuance of a reopening notice is impermissible. The court emphasised that subjective satisfaction must be based on material which justifies a belief of escapement and that mere second thoughts or disagreement with an earlier considered conclusion cannot be the foundation for reopening.Notices for reopening assessment for 1986-87 quashed as they constitute a prohibited change of opinion unsupported by material with nexus.Application of section 43B to valuation of opening and closing stock - binding precedent of the jurisdictional High Court - non-exercise of due diligence is not equivalent to lack of application of mind - Whether the Assessing Officer had valid grounds to disbelieve the assessee's adjustment under section 43B and to treat the allowance as erroneous - HELD THAT: - The court found no indication in the reasons that the Assessing Officer doubted applicability of the High Court's decision in Lakhanpal's case to the facts of the assessee, nor any material showing that that decision had been rendered ineffective by later authority. The allowance, being made pursuant to a binding jurisdictional precedent and after inquiry, reflected conscious application of mind. Allegations of non-inclusion in audited profit and loss account or of non-exercise of due diligence by the earlier Assessing Officer did not demonstrate that the allowance was erroneous or that the assessee had failed to disclose material facts. Consequently, these grounds did not furnish a lawful foundation to reopen assessment.Assessing Officer had no valid grounds to treat the allowance under section 43B as an erroneous allowance and could not rely on asserted lack of due diligence to reopen the assessment.Final Conclusion: The petitions were allowed; the notices initiating reassessment proceedings for assessment year 1986-87 were quashed on the ground that they represented a mere change of opinion unsupported by material with a nexus to form a reason to believe that income had escaped assessment. Issues Involved:1. Validity of notices u/s 148 for reassessment.2. Applicability of section 43B adjustments.3. Change of opinion by the Assessing Officer.4. Jurisdiction of the Assessing Officer under section 147.Summary:1. Validity of Notices u/s 148 for Reassessment:The petitioner, a private limited company and an assessee under the Income-tax Act, 1961, challenged the notices issued u/s 148 for reassessment of its income for the assessment year 1986-87. The notices were issued on March 7, 1990, and subsequently on March 27, 1991, after the initial notice was withdrawn. The petitioner contended that the question about the operation of section 43B had been duly considered by the Assessing Officer during the original assessment, and the claim was allowed after application of mind, supported by the decision in Lakhanpal National Ltd. v. ITO [1986] 162 ITR 240.2. Applicability of Section 43B Adjustments:The petitioner had adjusted the value of opening and closing stock by excluding the component of customs duty as a consequence of its treatment under section 43B. This adjustment was in line with the decision in Lakhanpal's case, which had not been reversed or overruled. The Assessing Officer had allowed this adjustment during the original assessment after making inquiries and considering the petitioner's claims.3. Change of Opinion by the Assessing Officer:The court opined that section 147 does not confer jurisdiction on the Assessing Officer to review his own order on a mere change of opinion. The reasons recorded by the Assessing Officer for issuing the notice disclosed that the case was nothing but a mere change of opinion on facts already before the Assessing Officer during the original assessment. The court reiterated that mere change of opinion does not confer jurisdiction to initiate reassessment proceedings.4. Jurisdiction of the Assessing Officer under Section 147:The court emphasized that for the Assessing Officer to have jurisdiction u/s 147, there must be material having a reasonable nexus to the formation of the opinion about escapement of income. The reasons recorded by the Assessing Officer did not disclose any new material or error that would justify reopening the assessment. The reference to the decision in CIT v. British Paints India Ltd. [1991] 188 ITR 44 was found to be irrelevant to the controversy at hand.Conclusion:The court quashed the impugned notices for initiating reassessment proceedings for the assessment year 1986-87, holding that the reasons recorded by the Assessing Officer disclosed no more than a mere change of opinion. The petitions succeeded, and the rule was made absolute in each case, with no order as to costs.