Reassessment Quashed for Ignoring Section 148 Objection and Misapplying Section 32(2) on Depreciation Carry Forward

The HC held the writ petition maintainable as the AO failed to decide the objection under section 148 separately before passing the reassessment order, warranting quashing of both the objection order and reassessment. The AO's non-application of section 32(2) during reassessment was improper; a wrong legal inference in the original assessment does not justify reopening under section 147. Regarding unabsorbed depreciation from A.Y. 1997-98, the Court ruled it is governed by the amended section 32(2) post-Finance Act 2001, allowing carry forward and set off without the eight-year restriction. The petition was allowed in favor of the assessee.

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Issues Involved:
1. Maintainability of the writ petition challenging the notice under Section 148 and the reassessment order.
2. Whether the Assessing Officer can reopen an assessment on the ground of incorrect application of Section 32(2) of the Act.
3. Interpretation of Section 32(2) regarding the carry forward and set off of unabsorbed depreciation.

Issue-wise Detailed Analysis:

1. Maintainability of the Writ Petition:
The court examined whether the writ petition challenging the notice under Section 148 and the reassessment order is maintainable. It was argued that the petitioner had alternative remedies available, such as filing a statutory appeal. The court referred to the decision in Parixit Industries (P.) Ltd. v. Assistant Commissioner of Income-tax, which held that if the Assessing Officer fails to dispose of the objections to the notice under Section 148 before passing the reassessment order, a writ petition is maintainable. The court emphasized that the Assessing Officer must first decide the objections and communicate the decision to the assessee before proceeding with the reassessment. The court concluded that the writ petition is maintainable as the Assessing Officer did not follow the mandated procedure.

2. Reopening of Assessment on Incorrect Application of Section 32(2):
The court considered whether the Assessing Officer could reopen the assessment on the ground that the unabsorbed depreciation was incorrectly allowed to be set off. The court referred to the Supreme Court's decision in Commissioner of Income Tax v. Kelvinator of India Limited, which stated that reassessment cannot be based on a mere change of opinion and must be supported by tangible material. The court found that the assessee had fully disclosed all material facts, and the original assessment allowed the unabsorbed depreciation after due scrutiny. The reopening of the assessment was based on the same material without any new tangible evidence, amounting to a change of opinion. The court held that the reassessment was not justified and quashed the notice and reassessment order.

3. Interpretation of Section 32(2) Regarding Unabsorbed Depreciation:
The court examined whether the unabsorbed depreciation for the assessment year 1997-98 could be carried forward and set off beyond eight years as per the amended Section 32(2) by the Finance Act, 2001. The court referred to the CBDT Circular No.14 of 2001, which clarified that the restriction of eight years for carrying forward unabsorbed depreciation was removed to enable the industry to conserve funds for replacing plant and machinery. The court concluded that the unabsorbed depreciation available on 1st April 2002 would be governed by the amended provisions, allowing it to be carried forward indefinitely. The court held that the unabsorbed depreciation from assessment years 1997-98 to 2001-02 became part of the depreciation for the assessment year 2002-03 and could be carried forward without any time limit.

Conclusion:
The court allowed the writ petition, quashing the notice under Section 148 and the reassessment order. The court emphasized the importance of following the mandated procedure for disposing of objections before reassessment and held that reopening the assessment based on a change of opinion was not permissible. The court also clarified that the amended Section 32(2) allowed indefinite carry forward of unabsorbed depreciation from assessment years 1997-98 to 2001-02.

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