Invalid reopening under Income-tax Act: High Court rules error discovery not valid reason for reassessment

Commissioner Of Income-Tax Versus Sundaram Industries Ltd.

Commissioner Of Income-Tax Versus Sundaram Industries Ltd. - [1998] 231 ITR 761, 140 CTR 513, 92 TAXMANN 589 Issues Involved:
1. Validity of reopening the assessment under section 147(b) of the Income-tax Act, 1961.
2. Determination of terminal allowance and profit under sections 32(1)(iii) and 41(2) of the Income-tax Act, 1961, respectively.

Issue-wise Detailed Analysis:

1. Validity of Reopening the Assessment under Section 147(b):

The original assessment was completed on December 22, 1971. The Income-tax Officer (ITO) reopened the assessment under section 147(b) of the Income-tax Act, 1961, on March 20, 1975, claiming that the terminal allowance worked out and claimed by the assessee was incorrect. The assessee filed a revised return, maintaining the same income as originally furnished and contended that all material particulars had been provided initially, making the reopening invalid. The ITO argued that the reopening was within the time limit and based on new information provided by the head clerk.

The Appellate Assistant Commissioner (AAC) held that the reopening was merely a change of opinion on the same facts, which is not permissible under section 147. The AAC further noted that the loss of Rs. 17,022 was admissible as originally allowed, citing the decision in Allied Publishers (P.) Ltd. v. CIT [1968] 68 ITR 546 (Bom).

The Tribunal upheld the AAC's decision, stating that the ITO did not have a bona fide belief that income had escaped assessment, as required under section 147. The Tribunal noted that the head clerk's note did not constitute valid information under section 147(b) because it did not point out the correct application of section 38(2). The Tribunal concluded that the reopening was invalid.

The Department argued that the ITO had ignored the admitted position that only one-third of the property was used for business and the provisions of sections 38(2) and 41(2). The Department contended that the head clerk's note constituted valid information under section 147(b).

The High Court, after reviewing the facts and relevant case law, including Kalyanji Mavji and Co. v. CIT [1976] 102 ITR 287 and Indian and Eastern Newspaper Society v. CIT [1979] 119 ITR 996, held that the reopening was invalid. The Court emphasized that an error discovered on reconsideration of the same material does not constitute valid grounds for reopening under section 147(b). The Court found that the ITO had considered all the material facts during the original assessment and that the reopening was based on a reappraisal of the same material, which is not permissible.

2. Determination of Terminal Allowance and Profit under Sections 32(1)(iii) and 41(2):

The ITO initially allowed a terminal allowance of Rs. 17,022 under section 32(1)(iii). Upon reassessment, the ITO computed a profit of Rs. 30,554 under section 41(2), based on the fact that only one-third of the property was used for business purposes.

The AAC and the Tribunal both held that the property should be considered a business asset in its entirety, even though only one-third was used for business purposes. The Tribunal concluded that the determination of the written down value (WDV) should be made in accordance with section 43, and the entire property should be treated as a business asset.

The High Court did not render an opinion on the merits of this issue, as it had already concluded that the reopening of the assessment under section 147(b) was invalid.

Conclusion:

The High Court answered question No. 1 in the affirmative, holding that the reopening of the assessment under section 147(b) was invalid and against the Department. The Court did not render an opinion on question No. 2, which related to the merits of the case.