2011 (1) TMI 89 - HC - Income Tax

Re-assessment proceedings under section 147(a) - compulsory acquisition - Long-Term Capital Gains - purchase price of the acquired land as the appellant company made a claim for higher compensation Assessee claimed exemption under section 54E - Assessing Officer held that the assessee company was not entitled to the benefit of exemption under section 54E as it was inserted by the Finance Act 1979 w.e.f. 1-4-1979 - appellant has made the relevant disclosure in the returns for the relevant assessment year when the enhanced compensation was received - amount was invested by the appellant in Bonds which entitles him to certain benefits in view of the provisions of section 54E of the IT Act - benefit is available to the appellant for that year in question which may not have been available for the assessment year 1965-66 cannot be a reason for the assessing authority to reopen the assessment for the year 1965-66 - order of the Tribunal not sustainable and accordingly set aside

Summary

The core legal questions considered by the Court are twofold: (1) whether the re-assessment proceedings under section 147(a) read with section 148 of the Income-tax Act, 1961 were rightly initiated against the assessee, and (2) whether valid approval had been accorded by the Central Board of Direct Taxes under section 151(1) of the Income-tax Act for reopening the assessment of the assessee.

Regarding the first issue, the Court examined the conditions precedent for reopening an assessment under section 147(a), which requires the Income-tax Officer (ITO) to have reason to believe that income chargeable to tax has escaped assessment due to omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. The Court emphasized that the duty of the assessee is to make a true and full disclosure of primary facts, and it is not incumbent upon the assessee to advise the ITO on the inferences to be drawn from those facts. The Court relied on precedents including the Supreme Court's decision in Lakhmani Mewal Das, which clarified that mere change of opinion by the ITO as to the taxability of certain income does not justify reopening the assessment if there was no non-disclosure of material facts.

The facts showed that the assessee had disclosed the ongoing litigation concerning the compensation for compulsory acquisition of its electricity units, including the arbitration and subsequent appeals up to the Supreme Court. The final amount of compensation was uncertain at the time of the original return filing for the assessment year 1965-66. The Court drew upon authoritative rulings such as P.C. Gulati and Harish Chandra, which held that income from compulsory acquisition accrues only when the compensation amount is finally determined and payable. Consequently, the enhanced compensation received in the later year (1978-79) was rightly declared and assessed in the relevant assessment year (1979-80). The Court found that there was no omission or failure by the assessee to disclose material facts at the time of the original assessment, negating the foundation for reopening under section 147(a).

On the second issue concerning the validity of the approval by the Central Board of Direct Taxes under section 151(1), the Court scrutinized the procedural compliance for issuing a notice beyond eight years but within sixteen years from the end of the relevant assessment year. Section 151(1) mandates that the Board must be satisfied, based on reasons recorded by the ITO, that the case is fit for reopening. The Court observed that the purported approval was evidenced by a mere rubber stamp bearing the endorsement "Yes. The Board is satisfied," signed by an Under Secretary. The Court held this to be insufficient and indicative of non-application of mind, as it lacked any recorded reasons linking the material facts with the conclusion. The Court cited the Supreme Court's decision in Union of India v. M.L. Capoor, which underscored the necessity for reasons to demonstrate a rational nexus between the facts considered and the decision reached. The absence of such reasons rendered the approval invalid.

The Court also addressed the assessee's argument that the availability of exemption under section 54E for the enhanced compensation received in the later assessment year could not be a ground to reopen the earlier assessment year. It was held that the benefit of section 54E, introduced w.e.f. 1-4-1979, applied only to the year when the enhanced compensation was actually received and invested, and could not retrospectively affect the assessment year 1965-66. Therefore, the reopening of the earlier assessment on this basis was impermissible.

In resolving these issues, the Court applied the relevant statutory provisions-sections 147, 148, 149, and 151 of the Income-tax Act-and relied on a consistent line of judicial precedents that clarify the scope of reopening assessments, the duty of disclosure by the assessee, and the timing of income accrual in cases of compulsory acquisition and disputed compensation.

The Court rejected competing arguments from the revenue that the enhanced compensation income escaped assessment in the original year and that the reopening was justified. It found that the assessee had fully disclosed the primary facts, including the pendency of litigation and uncertainty of compensation, and that the final income was assessed in the correct year when it accrued. The mechanical rubber-stamping of approval by the Board was held to be a procedural defect invalidating the notice under section 148.

Consequently, the Court concluded that the impugned order of the Income-tax Appellate Tribunal was unsustainable. The notice issued under section 148 dated 15-12-1981 and all proceedings arising therefrom were quashed, affirming that the reopening of the assessment for the year 1965-66 was unjustified. Both questions presented were answered in favour of the assessee and against the revenue.

Significant holdings include the Court's observation on the necessity of meaningful reasons for Board approval under section 151(1):

"Reasons are the links between the materials on which certain conclusions are based and the actual conclusions. They disclose how the mind is applied to the subject-matter for a decision whether it is purely administrative or quasi-judicial. They should reveal a rational nexus between the facts considered and the conclusions reached. Only in this way can opinions or decisions recorded be shown to be manifestly just and reasonable."

This principle underscores the requirement of reasoned decision-making in tax proceedings involving reopening of assessments beyond the normal time limit.

Additionally, the Court reaffirmed the principle that the duty of the assessee is limited to full and true disclosure of primary facts, not the inferences to be drawn therefrom, and that income accrues for tax purposes only upon final determination and receipt of compensation, not at the time of initial acquisition or claim.

In sum, the Court held that reopening of assessment under section 147 requires both non-disclosure of material facts and valid Board approval under section 151(1), and in the absence of these, such reopening is impermissible. The final determination was that the reopening notice was invalid and the reassessment proceedings were quashed accordingly.