1978 (7) TMI 80 - HC - Income Tax

Summary

Issues Involved:
1. Jurisdiction of the ITO to issue notice under section 148 of the I.T. Act, 1961.
2. Validity of reassessment proceedings initiated under section 147(a) of the I.T. Act, 1961.
3. Disclosure of material facts by the petitioner-company.
4. Specific grounds for reassessment: transformer break-down expenses, deferred guarantee commission, start-up and commencing expenses, and excess development rebate.

Issue-wise Detailed Analysis:

1. Jurisdiction of the ITO to Issue Notice under Section 148 of the I.T. Act, 1961:
The petitioner challenged the jurisdiction of the ITO to issue a notice under section 148, claiming that there was no material before the ITO to honestly believe that any income had escaped assessment. The court noted that the ITO issued the notice based on an audit note and subsequent scrutiny, leading to the belief that income had escaped assessment. The court held that the ITO had jurisdiction to issue the notice as he had relevant material and a reasonable belief that income had escaped assessment due to the petitioner's failure to disclose material facts fully and truly.

2. Validity of Reassessment Proceedings Initiated under Section 147(a) of the I.T. Act, 1961:
The court examined whether the conditions for initiating reassessment under section 147(a) were met. The conditions include the ITO having "reason to believe" that income chargeable to tax had escaped assessment due to the omission or failure of the assessee to disclose fully and truly all material facts. The court referred to several Supreme Court decisions, emphasizing that both conditions must coexist for the ITO to have jurisdiction to reassess. The court found that the ITO had a direct nexus and live link between the material from the audit report and the belief that income had escaped assessment, thus justifying the reassessment proceedings.

3. Disclosure of Material Facts by the Petitioner-Company:
The petitioner argued that it had disclosed all material facts and that the reassessment was merely a change of opinion. The court, however, found that the ITO believed the petitioner had not fully and truly disclosed all material facts necessary for the assessment. The court emphasized that the duty of the assessee is not only to disclose material facts fully but also truly. The court concluded that the ITO's belief was based on the petitioner's failure to make a true and full disclosure, thus justifying the reassessment proceedings.

4. Specific Grounds for Reassessment:

a. Transformer Break-Down Expenses:
The revenue claimed these expenses were capital in nature and wrongly claimed as revenue expenses. The court found that the original assessment had already disallowed these expenses as capital expenditure. Since there was no non-disclosure of primary facts by the petitioner, section 147(a) was not applicable for this item.

b. Deferred Guarantee Commission:
The revenue argued that the commission paid to the United Commercial Bank was capital expenditure erroneously claimed as revenue expenditure. The court noted that the petitioner had disclosed all relevant facts, and any error was due to the ITO's failure to draw proper inferences. This amounted to a change of opinion, making section 147(a) inapplicable for this item.

c. Start-Up and Commencing Expenses:
The petitioner claimed these expenses as revenue expenditure based on the commissioning date of the first generator. The revenue contended that the commercial production started later, making these expenses capital in nature. The court found that the reassessment was based on the petitioner's failure to disclose the true date of commercial production. This justified the reassessment under section 147(a).

d. Excess Development Rebate:
The petitioner claimed a development rebate at 35%, which was only applicable to priority industries. The court found that the petitioner knew it was not a priority industry but still claimed the higher rebate. This non-disclosure of material facts justified the reassessment under section 147(a).

Conclusion:
The court partially allowed the writ petition, restraining the ITO from reassessing the petitioner on the grounds of transformer break-down expenses and deferred guarantee commission. However, the reassessment on the grounds of start-up and commencing expenses and excess development rebate was justified. Each party was ordered to bear its own costs.