2004 (7) TMI 72 - HC - Income Tax

Reopening of assessment on the ground that on account of the insertion of Explanation 8 to section 43(1) as introduced by the Finance Act 1986 with retrospective effect from April 1 1974 the assessee was not entitled to claim depreciation or investment allowance on the capitalisation of interest paid after the date on which the machinery was first installed and put to use. Held that for the purpose of deciding the question under section 147 whether the assessee had disclosed fully and truly all material facts necessary for the relevant assessment year the law applicable would be the law as it stood on the date of filing of the return. - we are of the view that there was no failure on the part of the assessee to disclose truly and fully all material facts. Therefore the condition precedent for invocation of the powers under section 147 read with sections 148 and 149 was not fulfilled. impugned notice is quashed

Issues Involved:
1. Validity of the notice issued under Section 148 read with Section 147 of the Income-tax Act, 1961, for reopening the assessment.
2. Applicability and retrospective effect of Explanation 8 to Section 43(1) of the Income-tax Act, 1961.
3. Alleged failure of the assessee to disclose fully and truly all material facts necessary for the assessment.

Issue-wise Detailed Analysis:

1. Validity of the Notice Issued under Section 148 Read with Section 147 of the Income-tax Act, 1961:
The petitioner challenged the notice dated March 31, 1994, issued by the Income-tax Officer under Section 148 read with Section 147 of the Income-tax Act, 1961, proposing to reopen the assessment for the assessment year 1983-84. The notice was issued on the last day of the 10th year from the expiry of the assessment year. The court noted that the notice was not issued on the grounds of failure to file a return under Section 139 or in response to a notice under Section 142 or 148, but rather on the grounds of a statutory amendment with retrospective effect. The court concluded that the condition precedent for invoking powers under Section 147 read with Sections 148 and 149 was not fulfilled, rendering the notice without any authority of law.

2. Applicability and Retrospective Effect of Explanation 8 to Section 43(1) of the Income-tax Act, 1961:
Explanation 8 to Section 43(1) was introduced by the Finance Act, 1986, with retrospective effect from April 1, 1974. The Explanation clarified that interest paid in connection with the acquisition of an asset, relatable to any period after the asset was first put to use, shall not be included in the actual cost of the asset. The court acknowledged that statutory amendments with retrospective effect are to operate as if the law was always in place. However, it emphasized that the fiction created by the retrospective amendment is to operate within the field for which it is meant. The court held that if the proceedings were pending on April 1, 1986, the Explanation would have applied. However, since the assessee filed its return in 1983, it could not be expected to anticipate the legislative amendment made in 1986.

3. Alleged Failure of the Assessee to Disclose Fully and Truly All Material Facts Necessary for the Assessment:
The court examined whether the assessee had failed to disclose fully and truly all material facts necessary for the assessment. It was noted that the assessee had capitalized interest payable on term loans and claimed depreciation and investment allowance on the capitalized interest. The court found that there was no culpability on the part of the assessee, as the assessee had disclosed all material facts in the return filed in 1983. The court observed that the assessee could not have foreseen the retrospective amendment in 1986. The court cited CIT v. Navnitlal Sakarlal and CIT v. Hindustan Electro Graphites Ltd., emphasizing that an assessee cannot be imputed with clairvoyance to predict future legislative changes. The court concluded that there was no failure on the part of the assessee to disclose material facts, and therefore, the notice for reopening the assessment was invalid.

Conclusion:
The court allowed the petition, quashing and setting aside the impugned notice dated March 31, 1994, issued under Section 148 read with Section 147 of the Income-tax Act, 1961. The rule was made absolute with no order as to costs.

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