1992 (6) TMI 55 - AT - Income Tax

Invalid Reassessment Cancelled: Tribunal Rules in Favor of Assessee

The tribunal held that the reassessment proceedings under section 147(a) were invalid and bad in law. Consequently, the reassessment was cancelled, and ... Interest Income, Interest On Advance, Mercantile System Issues Involved:1. Validity of reassessment under section 147(a) of the Income-tax Act, 1961.2. Disallowance of specific expenses and commissions.3. Educational expenses.4. Car expenses.5. Bar licence fee.6. Addition of interest on kist deposits.7. Levy of interest under sections 139(8) and 217(1A).Detailed Analysis:1. Validity of Reassessment under Section 147(a) of the Income-tax Act, 1961:The reassessment was initiated under section 147(a) due to the alleged omission of interest income on kist deposits by the assessee. The assessment was reopened based on an audit objection which indicated that the interest income should have been included on an accrual basis. The assessee contended that it followed the cash system of accounting for interest on kist deposits and that there was no omission or mistake in the original assessment. The tribunal held that the reassessment was not permissible based on the Supreme Court's decision in Indian & Eastern Newspaper Society v. CIT, as the audit party's role was limited to providing information, not forming a legal opinion. Additionally, the reassessment should have been made under section 147(b) and not section 147(a), which had already expired. Therefore, the reassessment proceedings were held to be bad in law.2. Disallowance of Specific Expenses and Commissions:The Income-tax Officer disallowed Rs. 21,13,790 on special expenses and commissions, citing a lack of verifiable vouchers or necessity for such expenditures. The tribunal noted that the original assessment was completed after scrutinizing the books of accounts under section 143(3). It was observed that the nature of the abkari business often involves unverifiable vouchers, and the original assessment had accepted these expenditures. Therefore, the tribunal viewed the reassessment as a mere change of opinion on the same set of facts, which is not permissible.3. Educational Expenses:The Income-tax Officer disallowed Rs. 15,410 on educational expenses due to the absence of verifiable vouchers. The tribunal did not specifically address this issue separately but implied that such disallowances were part of the broader issue of reassessment validity and change of opinion.4. Car Expenses:Similarly, Rs. 25,000 was disallowed on car expenses due to unverifiable vouchers. The tribunal treated this disallowance under the same reasoning applied to other disallowed expenses, emphasizing the impermissibility of reassessment based on a change of opinion.5. Bar Licence Fee:The Income-tax Officer disallowed Rs. 50,000 on bar licence fees, again due to unverifiable vouchers. The tribunal's analysis suggested that such disallowances were part of the broader issue of reassessment validity and change of opinion.6. Addition of Interest on Kist Deposits:The reassessment included an addition of Rs. 2,37,246 as interest on kist deposits. The tribunal held that the interest on kist deposits should be assessed on an accrual basis only if the assessee failed to disclose the income or material facts. However, it was found that the assessee had accounted for interest on a cash basis, and there was no material evidence to suggest otherwise. Moreover, the tribunal noted that the interest accrued during the period when the deposits were assigned to the Excise Commissioner could not be taxed in the hands of the assessee. Thus, the addition of interest on kist deposits was not justified.7. Levy of Interest under Sections 139(8) and 217(1A):The tribunal did not find justification for the levy of interest under sections 139(8) and 217(1A) in the reassessment proceedings.Conclusion:The tribunal concluded that the reassessment proceedings under section 147(a) were invalid and bad in law. Consequently, the reassessment was cancelled, and the appeal of the assessee was allowed. The tribunal did not delve into the merits of the disallowances made by the assessing authority as the reassessment itself was held to be invalid.