2014 (6) TMI 444 - HC - Income Tax

Invalidity of Income Tax Act Section 148 notice due to lack of new material; reassessment unsustainable.

Bombay Stock Exchange Ltd. Versus Deputy Director of Income Tax, (Exemption)

The court found the notice issued under Section 148 of the Income Tax Act invalid, as it was based on a change of opinion without new tangible material. ... Validity of notice u/s 148 of the Act – Change of opinion – Exemption u/s 11 of the Act - Held that:- The reasons for initiating re-assessment proceedings do in fact state that there was a failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment - merely making the bald assertion was not enough –Relying upon Hindustan Lever Ltd. v/s R.B. Wadkar, Assistant Commissioner of Income Tax and others [2004 (2) TMI 41 - BOMBAY High Court ] - there are no details given by the AO as to which fact or material was not disclosed by the Petitioner that led to it's income escaping assessment - There is merely a bald assertion in the reasons that there was a failure to disclose fully and truly all material facts without giving any details – the notice is bad in law and on this ground alone the assessee is entitled to succeed. The AO had allowed the provision for doubtful accounts as an application of income for the A.Y. 2005- 2006 - the provision for doubtful accounts consisted of three items viz. (i) general charges which could not be recovered from various members due to various reasons; (ii) amounts relating to valan account and (iii) general charges and valan account balance of members prior to 1996-97 which could not be recovered - The statement has not been controverted while disposing of the objections when the AO passed his order - the initiation of reassessment proceedings is unsustainable. The assessee had fully and truly disclosed all material facts regarding the reduction of ₹ 25,44,889/- from the income from investments and deposits as set out in Schedule K to the Income and Expenditure Account read with Statement enclosed with the computation of income - the initiation of re-assessment proceedings on this ground also was based merely on a “change of opinion”. The income of the assessee is exempted u/s 11 of the Act – assessee is not carrying on any business - section 40(a)(ia) has no application and the notice issued on the basis was wholly misconceived - it was only out of abundant caution that the assessee used to get its books of accounts audited u/s 44AB of the Act and that this practice was being followed since the last 15 years – Decided in favour of Assessee. Issues Involved:1. Validity of notice issued under Section 148 of the Income Tax Act, 1961.2. Alleged failure to disclose fully and truly all material facts necessary for assessment.3. Legality of reassessment based on 'change of opinion'.4. Specific grounds for reopening the assessment, including provisions for doubtful accounts, double deduction, inadmissible expenses under Section 40(a), and depreciation on fixed assets.Detailed Analysis:Issue 1: Validity of Notice Issued Under Section 148The petitioner challenged the notice dated 28th February 2011 issued under Section 148 of the Income Tax Act, 1961, for Assessment Year 2005-06. The court examined whether the notice was issued in compliance with the statutory requirements, particularly considering that more than four years had elapsed since the end of the relevant assessment year.Issue 2: Alleged Failure to Disclose Fully and Truly All Material FactsThe petitioner argued that they had disclosed all material facts necessary for the assessment, and the reasons for reopening the assessment did not specify which facts were not disclosed. The court noted that the reasons provided by the Assessing Officer did not detail any specific material facts that were allegedly not disclosed by the petitioner. The court emphasized that merely making a bald assertion without providing details is insufficient to justify reopening the assessment.Issue 3: Legality of Reassessment Based on 'Change of Opinion'The petitioner contended that the reassessment was based on a 'change of opinion,' which is impermissible in law. The court found that the Assessing Officer had relied on the same material that was already available during the original assessment, indicating that the reassessment was indeed based on a change of opinion rather than new tangible material.Issue 4: Specific Grounds for Reopening the Assessment1. Provision for Doubtful Accounts:- The court referred to a previous judgment involving the same petitioner, where it was held that the provision for doubtful accounts was disclosed in the income and expenditure account, and there was no suppression of material facts. The court found that the initiation of reassessment proceedings on this ground was unsustainable as it was based on a change of opinion.2. Double Deduction:- The court noted that the alleged double deduction for Rs.25,44,889/- was already disclosed in the original return and scrutinized by the Assessing Officer during the original assessment. The court concluded that the reassessment on this ground was also based on a change of opinion and was unsustainable.3. Inadmissible Expenses Under Section 40(a):- The court held that Section 40(a) applies to deductions claimed under 'profits and gains of business or profession,' which was not applicable to the petitioner as their income was exempt under Section 11 of the Act. The court found that the reliance on Section 40(a) for reopening the assessment was wholly misconceived.4. Depreciation on Fixed Assets:- The court referred to a previous judgment where it was held that claiming both capital expenditure as application of income and depreciation on capital assets was permissible. The court found that the reassessment on this ground was also unsustainable.Conclusion:The court concluded that the notice issued under Section 148 was invalid as it was based on a change of opinion without any new tangible material. The petitioner had disclosed all material facts necessary for the assessment, and the reassessment proceedings were unsustainable on all specific grounds cited. The petition was granted, and the rule was made absolute, quashing the impugned notice.