2011 (5) TMI 699 - HC - Income Tax

Invalid reopening of assessment under Section 148 of Income Tax Act quashed for lack of material facts disclosure

The court held that the reopening of the assessment under Section 148 of the Income Tax Act, 1961 was invalid as there was no failure on the part of the ... Reopening - reasons recorded on the ground that the petitioner had incurred expenses towards advertisement expenses which claim according to the Assessing Officer, was not justified - second ground for reopening is that certain additions were disallowing expenses towards repair and maintenance under section 40A(3) of the Act - AO has reopened the assessment merely to make inquiries. Nothing is stated in the reasons recorded to indicate that any income chargeable to tax has actually escaped assessment in relation to the said ground - grounds for reopening the assessment are not valid grounds - basic requirement for invoking the provisions of section 147 of the Act, viz., that income chargeable to tax should have escaped assessment, is itself not satisfied - notice issued under section 148 of the Act seeking to reopen the assessment under section 147 of the Act, is without jurisdiction and as such, cannot be sustained - petition succeeds and is, accordingly, allowed Issues Involved:1. Validity of reopening the assessment under Section 148 of the Income Tax Act, 1961.2. Justification of the grounds for reopening the assessment.3. Requirement of dealing with objections raised by the petitioner.Detailed Analysis:1. Validity of Reopening the Assessment under Section 148 of the Income Tax Act, 1961:The petitioner challenged the notice dated 24.3.2009 issued under Section 148 of the Income Tax Act, 1961, which sought to reopen the assessment for the assessment year 2002-03. The reopening was initiated beyond a period of four years from the end of the relevant assessment year. According to the proviso to Section 147 of the Act, for reopening an assessment after four years, there must be a failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. The court noted that the petitioner had filed the return as required, and there was no failure to disclose material facts. Therefore, the assumption of jurisdiction by the Assessing Officer under Section 147 was invalid.2. Justification of the Grounds for Reopening the Assessment:The reasons recorded for reopening the assessment included two main grounds:- The petitioner incurred advertisement expenses of Rs. 26,10,975, which the Assessing Officer deemed unjustified.- Certain additions were made in the assessment year 2006-07, disallowing expenses towards repair and maintenance under Section 40A(3) of the Act, which the Assessing Officer considered for the assessment year 2002-03.Regarding the first ground, the court observed that the issue of advertisement expenses had already been addressed in a revision under Section 263 of the Act by the Commissioner, which was set aside by the Tribunal and confirmed by the High Court. Hence, reopening the assessment on this ground was not permissible as it would amount to the Assessing Officer sitting in appeal over the Tribunal's findings.For the second ground, the court noted that the Assessing Officer's reasons indicated a need for further investigation rather than a definite belief that income had escaped assessment. The court referenced the case of Shankarlal Nagji and Co. and others v. Income Tax Officer, which held that a completed assessment cannot be reopened merely to make inquiries. The Supreme Court in Chhugamal Rajpal v. S. P. Chaliha emphasized that the Income Tax Officer must have a 'reason to believe' that income has escaped assessment, not merely a reason to suspect.3. Requirement of Dealing with Objections Raised by the Petitioner:The petitioner had submitted detailed objections against the reasons recorded for reopening the assessment. The Assessing Officer rejected these objections without adequately addressing the contentions raised by the petitioner. The court highlighted that dealing with objections is not an empty formality; the Assessing Officer is required to meet the contentions raised by the assessee if he deems the objections unjustified.Conclusion:The court concluded that neither of the grounds for reopening the assessment were valid. Consequently, the impugned notice issued under Section 148 of the Act, the order rejecting the objections, and the subsequent notice under Section 143(2) were quashed and set aside. The petition was allowed, and the rule was made absolute with no order as to costs.