2013 (3) TMI 32 - HC - Income Tax

Reopening of assessment completed under section 143(1) - as per AO deduction on account of guest house maintenance expenses to be disallowed - Held that - It is not in dispute that the assessment was completed under section 143(1) on 6th January, 1987 & subsequently AO noticed that the guest house maintenance expenses had been claimed which was not allowable, therefore, he had reason to believe that the income had escaped assessment. It is note worthy to mention that the assessment order framed u/s 143(1) did not require any application of mind as the same is subject to certain adjustment. The return was accepted and the order was passed. Thus, it cannot be said that there was any application of mind while passing the assessment order and if subsequently it comes to the notice on the basis of the material already on record that an item of expenditure has wrongly been allowed which is against the specific statutory provision then certainly it is not a case of change of opinion but there was reason to believe that the income had escaped assessment. Thus reopening of the assessment completed under section 143(1) by issue of a notice under section 148 was valid. Claim of expenses on the maintenance of guest house - Held that - As decided in Britannia Industries Ltd.(2005 (10) TMI 30 - SUPREME COURT) in view of specific provision of section 37(4) expenses incurred on the maintenance of guest house is not to be allowed - appeal decided against the assessee.

Summary

Issues:
1. Validity of re-opening assessment under section 148 of the Income Tax Act, 1961.
2. Allowability of payment of rent under section 37(4) of the Income-tax Act, 1961.

Validity of Re-opening Assessment under Section 148:
The case involved a company whose assessment for the year 1987-88 was initially completed under section 143(1) of the Income Tax Act, 1961. Subsequently, a notice under section 148 was issued to re-open the assessment due to the claim of a sum of Rs. 79,670 as deduction for guest house maintenance expenses. The assessing officer disallowed this amount, leading to an appeal. The Commissioner of Income Tax (Appeals) upheld the addition, stating that the clarification provided by the statutory auditors did not adequately explain the mistake in the audit report. The Tribunal rejected the challenge to the validity of the re-opening under section 148, emphasizing that the original assessment under section 143(1) did not require any application of mind. The High Court concurred with the Tribunal, noting that there was a valid reason to believe that income had escaped assessment, justifying the re-opening under section 148.

Allowability of Payment of Rent under Section 37(4):
Regarding the claim of expenses on the maintenance of the guest house, the High Court referred to a decision by the Supreme Court in Britannia Industries Ltd. The Court highlighted that section 37(4) of the Act specifically excludes expenses incurred on the maintenance of a residential nature of a guest house. Consequently, the Tribunal's decision to disallow the payment of rent of Rs. 4,000 towards maintenance of the guest house under section 37(4) was upheld. The High Court affirmed the Tribunal's decision to initiate proceedings under section 148 and disallow the rent payment under section 37(4) in favor of the Revenue and against the assessee.

In conclusion, the High Court answered the questions referred in the affirmative, supporting the Revenue's position on both issues. The judgment highlighted the specific provisions of the Income Tax Act, relevant case law, and the reasoning behind the decisions made regarding the validity of re-opening assessments and the disallowance of expenses under section 37(4).