1990 (12) TMI 6 - SC - Income Tax

Reassessment notices upheld, ITO's jurisdiction under sections 147(a) and 148 valid despite initial notice defects

SC held that the ITO validly assumed jurisdiction under sections 147(a) and 148 to reopen the assessee's assessment for AY 1957-58. Although the notice ... Jurisdiction to reopen the assessment under sections 147(a) and 148 - omission or failure on the part of the assessee to fully and truly disclose all the material facts - validity of reassessment - income derived from the transfer of the goodwill of the mining business as an on-going concern or a capital receipt - Whether the consideration received for such transfer is towards goodwill and therefore exempt from tax - HELD THAT:- It is undoubtedly true that the notice does not prima facie disclose the satisfaction of the two conditions precedent enjoined under section 147(a), but in the counter-affidavit filed by the Income-tax Officer in the High Court, he stated all the material facts. The respondent had inspected the record and the record also bears out the existence of the material facts. The proceedings drawn up which are abstracted earlier also show that the Income-tax Officer had applied his mind to the facts on record and was prima facie satisfied that the reopening of the assessment for the assessment year 1957-58 was needed due to those stated facts. Thus, though ex facie the notice does not disclose the satisfaction of the requirement of section 147(a), from the record and the averments in the counter affidavit, it is clear that the Income-tax Officer had applied his mind to the facts and, after prima facie satisfying himself of the existence of those two conditions precedent, reached the conclusion for reopening the assessment. It is settled law that, in an administrative action, though the order does not ex facie disclose the satisfaction by the officer of the necessary facts if the record discloses the same, the notice or the order does not per se become illegal. The Division Bench rested its conclusion on the ground that since the income derived was for the transfer of the goodwill of the business as an on-going concern, it is not capital gain and, therefore, is not liable to tax. It is premature, on the facts and circumstances in this case, to reach such a decision. We are clearly of the opinion that the Division Bench committed a grave error of law in holding that the notices under sections 148 and 142 are vitiated on account of the above conclusion. It is open to the respondent to submit his return and all the necessary materials in support of his case and the Income-tax Officer is free to consider on merits and pass the assessment order in accordance with law. It is made clear that any observations made here or by the High Court shall not be construed to mean any opinion expressed by this court on merits. It is limited only for the purpose of finding the legality of the exercise of the power under sections 147(a) and 142. The Income-tax Officer had validly and legally exercised his jurisdiction and reopened the assessment for the assessment year 1957-58. The judgment of the Division Bench is set aside and that of the single judge is restored. Appeal allowed. Issues:- Validity of notice under section 147(a) of the Income-tax Act- Assessment of income derived from the sale of goodwill- Jurisdiction of the Income-tax Officer to reopen assessmentAnalysis:1. Validity of notice under section 147(a) of the Income-tax Act:The respondent was assessed for income-tax for the assessment year 1957-58, and the Income-tax Officer reopened the assessment under sections 147(a) and 148 of the Income-tax Act. The respondent challenged the validity of the notice under article 226 of the Constitution. The court held that the Income-tax Officer must have reason to believe that income had escaped assessment due to the assessee's failure to disclose material facts. The court found that the Income-tax Officer had applied his mind to the facts and was satisfied that the reopening of the assessment was necessary. Although the notice did not prima facie disclose the satisfaction of the conditions under section 147(a), the court concluded that the Income-tax Officer had validly exercised his jurisdiction to reopen the assessment.2. Assessment of income derived from the sale of goodwill:The respondent received Rs. 15 lakhs as consideration for the transfer of the goodwill of the business. The court noted that the Division Bench held the income was not liable to capital gains tax as it was towards the sale of goodwill. However, the court found that the Division Bench erred in reaching this conclusion based on indecisiveness of counsel for the Revenue. The court emphasized that whether the assets and goodwill were transferred together or only the goodwill as an ongoing concern was a matter for the Income-tax Officer to determine. The court held that the Division Bench's conclusion was premature, and the Income-tax Officer should consider all necessary material facts before making a decision.3. Jurisdiction of the Income-tax Officer to reopen assessment:The court clarified that the Income-tax Officer had validly exercised his jurisdiction to reopen the assessment for the assessment year 1957-58. The court set aside the Division Bench's judgment and restored the judgment of the single judge. It emphasized that the legality of the exercise of power under sections 147(a) and 142 was the focus, and any opinions expressed were limited to the legality of the actions taken. The court allowed the appeal without costs, affirming the validity of the Income-tax Officer's jurisdiction to reopen the assessment.In conclusion, the Supreme Court upheld the validity of the notice under section 147(a) of the Income-tax Act, emphasized the need for a proper assessment of income derived from the sale of goodwill, and confirmed the jurisdiction of the Income-tax Officer to reopen the assessment for the relevant year.