2009 (11) TMI 35 - HC - Income Tax

Reasons for reopening of an assessment power under section 148 held that - From the return of income filed by the petitioner the Assessing Officer had found that the petitioner had earned interest on deposits to the tune of Rs.12, 80, 258/- and that they sought deduction of a sum of Rs.9, 26, 830.84 towards admissible expenses that included the general administrative expenses vehicle maintenance salaries etc. The losses brought forward from the previous assessment years were also set off and the petitioner claimed a total income of only Rs.3, 02, 626.16. It is this that prompted the second respondent to issue a notice under Section 148 - The Assessing Officer has taken a stand prima facie that the expenditure debited to the profit and loss account under various heads are not incidental to the earning of interest income. Therefore the stand taken by the second respondent that he has reason to believe that certain income chargeable to tax escaped assessment cannot be said to be vague irrational or devoid of any basis.

Summary

Issues Involved:
1. Validity of the notice issued under Section 148 of the Income Tax Act, 1961.
2. Whether the conditions precedent for the exercise of jurisdiction under Section 147 of the Income Tax Act, 1961 were satisfied.

Detailed Analysis:

1. Validity of the notice issued under Section 148 of the Income Tax Act, 1961:
The petitioner challenged the notice issued under Section 148 of the Income Tax Act, 1961, which called for various details and led to the reopening of the assessment for the year 2004-05. The petitioner argued that the notice was invalid as it was based on incorrect grounds. The court referred to several precedents, including the Supreme Court's decisions in Calcutta Discount Co. Ltd. vs. ITO and CIT vs. Sun Engineering Works (P) Ltd., to emphasize that the term "escaped assessment" includes both non-assessment and under-assessment. The court noted that the Assessing Officer had reason to believe that the income chargeable to tax had escaped assessment due to the petitioner's incorrect set-off of brought forward business losses against income from other sources, contrary to the provisions of Section 72. The court concluded that the notice under Section 148 was valid as the Assessing Officer had a prima facie reason to believe that certain income chargeable to tax had escaped assessment.

2. Whether the conditions precedent for the exercise of jurisdiction under Section 147 of the Income Tax Act, 1961 were satisfied:
The court examined the conditions necessary for the exercise of jurisdiction under Section 147, which requires the Assessing Officer to have reason to believe that income chargeable to tax has escaped assessment. The court referenced several judgments, including CIT vs. A.Raman & Co. and Sheo Nath Singh vs. Appellate Assistant Commissioner of Income Tax, which elucidated that the belief must be honest and reasonable, based on reasonable grounds, and not on mere suspicion. The court further cited the Supreme Court's decision in GKN Driveshafts (India) Ltd. vs. Income Tax Officer, which outlined the procedure to be followed when a notice under Section 148 is issued, including the requirement for the Assessing Officer to furnish reasons for issuing the notice and to pass a speaking order disposing of any objections.

The court found that the Assessing Officer had reason to believe that the petitioner had claimed expenses unrelated to the earning of interest income and had incorrectly set off brought forward losses. The court held that the reasons recorded by the Assessing Officer were neither vague nor irrational. The court distinguished the present case from the decisions in KLM Royal Dutch Airlines vs. Assistant Director of Income Tax and Sterlite Industries (India) Ltd vs. Assistant Commissioner of Income Tax, noting that the reasons recorded by the Assessing Officer in the present case were specific and based on concrete findings from the petitioner's return of income.

The court concluded that the conditions precedent for the exercise of jurisdiction under Section 147 were satisfied, as the Assessing Officer had a valid reason to believe that income chargeable to tax had escaped assessment. Consequently, the court dismissed the writ petition, allowing the reassessment proceedings to continue, and emphasized that the petitioner had statutory remedies available to challenge the final assessment order.