2009 (4) TMI 12 - HC - Income Tax

Invalidation of Reassessment Order Due to Lack of Reasonable Basis and Scope Exceedance

M/s JAY BHARAT MARUTI LTD. Versus COMMISSIONER OF INCOME TAX

M/s JAY BHARAT MARUTI LTD. Versus COMMISSIONER OF INCOME TAX - [2010] 324 ITR 289 (Delhi), [2009] 223 CTR 269 Issues Involved:1. Validity of the initiation of reassessment proceedings under Section 147 read with Section 148 of the Income Tax Act, 1961.2. Legality of the Assessing Officer's actions in bringing to tax items not connected with the reasons for reopening the assessment.Detailed Analysis:1. Validity of the initiation of reassessment proceedings under Section 147 read with Section 148 of the Income Tax Act, 1961.Facts:- The assessee, engaged in the production of automobile parts, filed its return on 31.12.1993, declaring an income of Rs 5,35,250/-. The return was processed under Section 143(1)(a), and a refund was granted.- On 27.03.1997, the Assessing Officer issued a notice under Section 148, believing that the assessee's income had escaped assessment due to a credit balance in the MODVAT account being debited to the Profit & Loss account.- The assessee objected, arguing that the MODVAT amount was correctly debited and disclosed, and that no new information warranted the reassessment.Legal Reasoning:- The court examined whether the Assessing Officer had 'reason to believe' that income had escaped assessment, as required under Section 147.- The Supreme Court in ACIT vs Rajesh Jhaveri Stock Brokers (P) Ltd stated that 'reason to believe' means having cause or justification, not necessarily supported by legal evidence at the initiation stage.- Applying this principle, the court found that no reasonable person could conclude that the MODVAT credit balance justified reopening the assessment. The MODVAT credit is merely a duty paid on inputs used in manufacturing, not income.Conclusion:- The court held that the initiation of reassessment proceedings based on the MODVAT credit balance was bad in law, as it did not provide a reasonable basis for believing that income had escaped assessment.2. Legality of the Assessing Officer's actions in bringing to tax items not connected with the reasons for reopening the assessment.Facts:- After reopening the assessment, the Assessing Officer issued notices for additional information and made further additions and disallowances unrelated to the MODVAT credit balance.- The assessee contended that the reassessment should be limited to the specific reason for which the assessment was reopened.Legal Reasoning:- The court referred to the principles laid down by the Supreme Court in CIT vs Sun Engineering Works P. Ltd, which state that reassessment proceedings do not set aside the original assessment and should focus on the escaped income.- The court emphasized that the Assessing Officer's jurisdiction under Section 147 does not extend to unrelated items unless they are directly connected to the reason for reopening.Conclusion:- The court found that the Assessing Officer's actions in including unrelated items in the reassessment were beyond the scope of Section 147 and thus invalid.- The reassessment order was set aside for including items not connected to the original reason for reopening.Final Judgment:The court concluded that the initiation of reassessment proceedings and the consequent order were invalid. The appeal was allowed, and the reassessment order was set aside with no orders as to cost.