2009 (11) TMI 585 - HC - Income Tax

High Court invalidates assessment reopening under section 147(a) of Income-tax Act, rejects unjustified depreciation adjustment.

The High Court ruled in favor of the assessee against the Revenue, holding that the reopening of the assessment under section 147(a) of the Income-tax Act ... Reassessment - Book profit - MAT - claim of depreciation was disclosed – Failed to disclose material facts necessary for assessment or information regarding escape of income from assessment - reopening of assessment under section 147(a) of the Act was not valid Issues Involved:1. Validity of reopening of assessment under section 147(a) of the Income-tax Act, 1961.2. Adjustment for depreciation based on subsequent events introducing Schedule XIV to the Companies Act.3. Requirement for providing depreciation as per Schedule XIV to the Companies Act before the end of the accounting year.Issue-wise Detailed Analysis:1. Validity of Reopening of Assessment under Section 147(a):The Tribunal upheld the reopening of the assessment under section 147(a) of the Income-tax Act, 1961, on the grounds that the assessee did not fully disclose material facts necessary for the assessment year 1988-89. The Tribunal noted that the assessee had provided excess depreciation which affected the computation of income under section 115J of the Act. The Tribunal found that there was sufficient material for the Assessing Officer to have a reasonable belief that the assessee had failed to disclose fully and truly all material facts necessary for the assessment, leading to income chargeable to tax escaping assessment.However, the High Court disagreed, noting that the audit report dated June 30, 1987, for the year ending April 30, 1987, reflected full and complete disclosure of the facts. The court emphasized that the Assessing Officer should have examined the facts of claiming depreciation on the written down value method during the initial assessment proceedings. The court cited precedents, including State Bank of Indore v. ITAT and Star Automobiles v. ITO, emphasizing that the conditions for reopening under section 147(a) were not met as the primary facts were disclosed by the assessee. Consequently, the High Court held that the reopening of the assessment under section 147(a) was not valid.2. Adjustment for Depreciation Based on Subsequent Events Introducing Schedule XIV:The Tribunal held that the adjustment for depreciation was required to be made based on the subsequent introduction of Schedule XIV to the Companies Act, even though the balance-sheet was prepared according to the Companies Act. The Tribunal referred to sections 205(1)(b) and 350 of the Companies Act, concluding that the depreciation should be ascertained at the end of the accounting year in accordance with the relevant provisions in force at that time.The High Court, however, referred to the Supreme Court's decision in Apollo Tyres v. CIT, which clarified that the Assessing Officer does not have the jurisdiction to go behind the net profit shown in the profit and loss account except as provided in the Explanation to section 115J. The court noted that section 115J refers to accounts as per Schedule VI and not Schedule XIV introduced by the Companies (Amendment) Act, 1988. The High Court concluded that the Tribunal erred in holding that the adjustment for depreciation was required based on the subsequent introduction of Schedule XIV.3. Requirement for Providing Depreciation as per Schedule XIV Before the End of the Accounting Year:The Tribunal held that the assessee should have provided depreciation as per Schedule XIV to the Companies Act, which was introduced with retrospective effect from April 2, 1987, even though the books of account were closed and the accounts were passed in the annual general meeting. The Tribunal reasoned that the depreciation should be ascertained at the rates provided in Schedule XIV at the end of the accounting year.The High Court disagreed, noting that the accounts were audited and passed in the annual general meeting before the amendment introducing Schedule XIV came into force. The court referred to the decision in Amichand Investment P. Ltd. v. Deputy CIT, which held that book profit under section 115J should not be increased by amounts not debited to the profit and loss account. The High Court concluded that the Tribunal was not justified in holding that the assessee should have provided depreciation as per Schedule XIV before the end of the accounting year.Conclusion:The High Court answered the reference in the negative, in favor of the assessee and against the Revenue, holding that:- The reopening of the assessment under section 147(a) was not valid.- The adjustment for depreciation based on the subsequent introduction of Schedule XIV was not justified.- The assessee was not required to provide depreciation as per Schedule XIV before the end of the accounting year.