Invalid reassessment under ITA Section 147/148; assessee entitled to chosen accounting method.

The Tribunal held that the reassessment under Section 147/148 of the Income Tax Act was invalid as the Assessing Officer had all necessary information during the original assessment, and no new material was presented. The reassessment was initiated solely on an audit objection, which was deemed insufficient. Additionally, the Tribunal determined that the assessee was entitled to adopt a hybrid system of accounting as disclosed in its notes on accounts, rejecting the Assessing Officer's attempt to challenge the accounting method chosen by the assessee. The Tribunal allowed the appeal of the assessee, quashing the lower authorities' orders.

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Issues Involved:
1. Validity of reopening the assessment under Section 147/148 of the Income Tax Act.
2. Adoption of the method of accounting under Section 145 of the Income Tax Act.

Detailed Analysis:

1. Validity of Reopening the Assessment under Section 147/148:
The primary issue involves whether the reopening of the assessment under Section 147/148 is valid. The original return was filed on 5th October 1987, and the assessment was completed under Section 143(3) on 15th March 1989. The AO noticed that the assessee failed to show an income of Rs. 19,57,500 as interest on the balance of purchase consideration payable by its wholly-owned subsidiary. This led to the initiation of proceedings under Section 147 and issuance of a notice under Section 148 on 3rd January 1997, almost nine years later.

The Tribunal considered the disclosure made by the assessee in its annual report and notes on accounts, which stated that the interest would be accounted for on a receipt basis. These notes were available with the AO during the original assessment. The Tribunal cited several case laws, including the Hon'ble Supreme Court's decision in CIT v. Foramer France and the Full Bench of the Hon'ble Delhi High Court in CIT v. Kalvinator of India Ltd., which emphasized that mere change of opinion is not a valid ground for reassessment.

The Tribunal concluded that the reopening of the assessment was not justified as the AO had all the necessary information during the original assessment, and no new material was brought on record. The reassessment proceedings were initiated merely on audit objection, rendering the reassessment under Section 147/148 invalid.

2. Adoption of Method of Accounting under Section 145:
The second issue pertains to whether the assessee is entitled to adopt a hybrid system of accounting under Section 145 of the Income Tax Act. The assessee followed the mercantile system of accounting but decided to account for the interest on the balance of purchase consideration on a receipt basis, as stated in its annual report and notes on accounts.

The Tribunal examined whether the assessee could change the method of accounting for a particular transaction. The CIT(A) had dismissed the appeal, stating that the assessee, having chosen the mercantile system, could not unilaterally change it for specific transactions. However, the Tribunal found that the assessee had made a full and true disclosure of its accounting method in the notes on accounts, which were part of the original assessment records.

The Tribunal referred to various case laws, including the Hon'ble Delhi High Court's decision in Coca Cola Export Corporation v. S.C. Tewari, which held that reopening an assessment based on a different view of the same facts is not permissible. The Tribunal concluded that the assessee's disclosure of the change in the accounting method was sufficient, and the AO's action to reopen the assessment was without jurisdiction.

Conclusion:
The Tribunal quashed the orders of the lower authorities, ruling that the reassessment under Section 147/148 was invalid and the assessee was entitled to follow the hybrid system of accounting as disclosed in its notes on accounts. The appeal of the assessee was allowed.

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