1. Reassesment – Reassessment order passed without furnishing the reason recorded to issue notice under section 148(1) is invalid

Alliance Cold Storage Ltd. vs. ITO [2006] 287 ITR 1 (Mum.)

The Notice under section 148(1) was issued and served on the assessee and in response to the same the assessee filed a letter and sought the reasons recorded for issuing the notice. In spite of repeated requests for furnishing the reasons recorded the same were not furnished. The assessee was served with the notice under section 143(2) but the reasons were not furnished to it. The assessee, filed its objections for reopening the assessment. However, the Assessing Officer passed the Assessment Order in which he also dealt with the objections filed by the assessee. The assessee challenged the notice issued under section 148(1) before the Hon’ble Bombay High Court. The Department opposed the Writ Petition on the ground that the assessee has availed alternative remedy by filing appeals against the Assessment Orders, thus, the Writ Petitions are not maintainable.

The Hon’ble Court set aside the orders as invalid and directed the Assessing Officer to pass separate speaking orders on the objections filed by the assessee with the observations that in “the proper course will be to interfere with the assessment orders passed in all four matters by the concerned officer. We are aware that when an alternative remedy is resorted to, the writ jurisdiction is not be exercised, but that is a rule of self-limitation. The orders challenged in the present matter are clearly against the law laid down by the apex court and, therefore, the exercise of writ jurisdiction is called for. That being so, we allow all these petitions and quash and set aside the orders of assessment passed in all these four petitions”.

2. Decision of the High Court binding on income tax authorities

Om Prakash Trivedi vs. UOI [2006] 287 ITR 11 (All.)

The assessee for the Assessment Years 1990-91 to 1992-93 filed returns pursuant to a search action. After completion of the assessment the assessee moved an application for waiver of the interest levied under sections 234A, 234B and 234C of the Act. The application was rejected by CCIT. The assessee challenged the same before the Hon’ble High Court through a Writ Petition. The Hon’ble Court allowed the Writ Petition with following observations:

“From a bare reading of the aforesaid clause, it is clear that the detection is to be made by the Assessing Officer and not by any other officer. In the present case we find that the detection as mentioned by the Chief Commissioner of Income-tax, Kanpur, has been made by the Additional Director of Income-tax (Investigation), Unit-I, Kanpur, who is not the Assessing Officer of the petitioner. Further, in view of the Full Bench decision of this court in the case of Bhairav Lal Verma vs. Union of India [1998] 230 ITR 855, the word ‘voluntarily’ occurring in section 273A of the Act has been interpreted to mean `out of free will without any compulsion’ and it cannot be held as a principle of law that the disclosure of concealed income after the raid or search cannot be said to be voluntary. In the present case as we have held that the disclosure of concealed income after the raid or search cannot be said to be voluntary. In the present case as we have held that the detection was not made by the Assessing Officer but by a different officer and, therefore, the precondition mentioned in clause (e) stands fulfilled the return of income would be treated to have been filed voluntarily and without detection by the Assessing Officer. Further, we find that reduction/waiver of interest is permissible under all the sections, namely, section 234A of the Act. Since the Chief Commissioner of Income-tax had rejected the application for waiver on the only ground that the return was filed after the detection by the Additional Director of Income-tax (Inv.), Unit-I and, therefore, it cannot be said to have been filed voluntarily is on an erroneous assumption of facts of law, the same cannot be sustained in the eyes of law.

In view of the foregoing discussion, the order dated January 31, 2000 cannot be sustained and is hereby set aside. As the petitioner has fulfilled the condition mentioned in clause (e) of the Board’s instructions dated May 23, 1996, the petitioner has made out a case of reduction/waiver of interest.”

The CCIT passed an order pursuant to the above-mentioned order of the Hon’ble High Court and rejected the application for the waiver of interest on the ground that the clause 2(e) of the Board instruction dated May 23, 1996 is not applicable in this case. The Hon’ble Court set aside second order passed by the CCIT with following observations:

It is not pleasure for this court to comment or pass strictures. But a glaring infraction of settled principle of law by the higher authorities of the Department of Revenue cannot be ignored. The higher the authority/officer, the more onerous duties and expectancy to act cautiously so that the faith of the public in the administration is not jeopardized and there is no breach of settled principle of procedural rules/laws.

3. Business expenditure – Capital or Revenue – Expenditure on chicks before they lay eggs is Revenue Expenditure
   
   CIT vs. Vasu Farms Pvt. Ltd. [2006] 287 ITR 38 (Mad.)

The assessee, engaged in the business of production and sale of eggs, claimed the expenditure towards feed, medicines, etc. on birds before they reached the stage of laying eggs as revenue expenditure. However, the Assessing Officer as well as the CIT(A) treated the same as capital expenditure. The assessee’s Second Appeal was allowed by the Appellate Tribunal.

The Hon’ble High Court upheld the Appellate Tribunal order holding that the assessee incurred expenditure for the purpose of earning income for poultry farming and merely because a part of the expenditure was relatable to the chicks in their re-layer stage, that could not be a reason to disallow the claim of the assessee. From the totality of the circumstances, it could be presumed that the feed and medicines given to the birds would only constitute revenue expenditure.

4. Interest – Income or capital – Interest on seems placed with banks is capital

CIT vs. Saraswati Kunj Co-operative House Building Society [2006] 287 ITR 22 (Del.)

The assessee, a co-operative house building society established with the specific objective of purchasing agricultural land for development as plots to be allotted to its own members, entered into an agreement with the Government of Haryana which stipulated that the society shall keep 30 per cent of the amount realized by it from the plot holders from time to time in a deposit for being utilized by the society towards meeting the cost of internal development work in the colony, that the society shall not derive any profit out of the sale of the plots to its members and that it shall allot plots only to its members. The Commissioner (Appeals) and the Tribunal concluded that the utilization of moneys received from time to time from members and kept in a savings bank account was directly linked with the activity of purchasing agricultural land, developing it and converting it into residential plots after obtaining approval of the Government for allotment to its members and held that the interest on the savings bank account was a capital receipt that went to reduce the cost of the land and was not to be treated as income in the assessee’s hands.

On an appeal by the Department the Hon’ble Court considered the decisions of the Apex Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT [1997] 227 ITR 172 (SC) as well as CIT vs. Bokaro Steel Ltd. [1999] 236 ITR 315 (SC) and CIT vs. Karnal Co-operative Sugar Mills Ltd. [2000] 243 ITR 2 (SC) and upheld the decision of the Appellate Tribunal.

5. Surcharge – section 113 – Block Assessment – Surcharge not leviable in Block Assessment where search is prior to 1-6-2002

CIT vs. Roshan Singh Makkar [2006] 267 ITR 160 (P & H)

The search in the case before the Hon’ble Court the search action under section 132(1) was conducted on 6-4-2000. The Hon’ble court observed that a new proviso was inserted in section 113 of the Income-tax Act, 1961, with effect from June 1, 2002, by the Finance Act, 2002. It provides for levy of a surcharge. The provision has not been given retrospective effect. Therefore, surcharge is not leviable in those case where search action was conducted prior to 1-6-2002.

6. Penalty – Section 272a(2)(g) – Penalty not issuing tds certificate not leviable when assessee has suffered penalty for non-deduction of tax at source under section 271C

CIT vs. Sri Ram Memorial Education Promotion Society [2006] 287 ITR 155 (All.)

The assessee trust failed to deduct tax on the salary paid to the principal of the school run by it. The assessee had suffered penalty under section 271C. The Assessing Officer further levied penalty for not issuing the Certificate as per section 203. The penalty was cancelled by the CIT(A) and the action of CIT(A) was confirmed by the Appellate Tribunal.

On an appeal by the Department the Hon’ble Court held that once a person prescribed or concerned or the assessee has been subjected to a penalty under section 271C, for not deducting the tax at source, there would not arise any occasion for levying a penalty under sections 272A(2)(c) and 272A(2)(g) for non-compliance with the provisions of sections 203 and 206. In other words, in case the tax has not been deducted at source, the question of issuing the certificate of tax under section 203 or that of filing of return under section 206 would not arise at all. That being so, the question of imposing penalty for violation of the aforesaid provisions, would also not arise

7. un – Reported reassessment – Reason to believe should be of the Assessing Officer – Not at the instance of the superior authorities and on charge of opinion

IL & FS Investment Managers vs. ITO W. P. No. 2703 of 2006 dated 27-11-2006

The assessee claimed depreciation on certain intangible assets. The claim of the assessee was allowed in the original assessment after making certain preliminary investigations. After completion of assessment an audit objection was raised for allowing the claim of depreciation on intangible assets. In reply to the audit objection the Assessing Officer filed an explanation and justified his action. However, he issued a notice under section 1 48(1) to reopen the assessment.

The assessee challenged the action of the Assessing Officer and contended that the Assessing Officer had no reason to believe that the income has escaped assessment. The action of the Assessing Officer is at the behest of the higher authorities. The reason recorded to issue notice under section 148(1) show that the notice under section 148(1) has been issued merely on change of opinion. Thus, there is no jurisdiction to issue notice under section 148(1) and the same may be quashed as bad-in-law.

The Hon’ble Court quashed the notice under section 148(1) with the observations that “we have considered the submissions of both the Counsel. In the facts of the present case, it is quite clear that the petitioner was granted depreciation allowance on the intangible assets in the nature of know-how purchased by it. A regular assessment order was passed under section 143(3) of the Income-tax Act. In reply to the Director of Audit, the Assessing Officer had opposed the reopening. In spite of the same, he has formed his own opinion that the income has escaped assessment.

Secondly, it is not at all a case that the petitioner has not disclosed anything to the respondents. The petitioner has given full particulars of the intangible assets and it has maintained that it is eligible for the depreciation. Mr. Mistri has submitted that, in fact, section 32(1)(i)(ii) of the Income-tax Act permits depreciation in respect of know-how, franchises, copyrights, any other business or commercial rights which are intangible assets. We may not express our opinion on the merits of the claim of the petitioner. But the fact remains that as far as this Assessment Year 2003-04 is concerned, the stand taken by the Petitioner was accepted by the respondents on merits and even after disagreeing with the audit objection, as a second thought on the objections from the auditors, he has reopened the assessment. In the reasons to reopen as well as in the decision on the objections, he has nowhere stated as to how the income has escaped assessment. In our view, reopening of the assessment without any basis and merely a change of opinion is not permissible while exercising the powers under section 147 read with section 148 of the Income-tax Act.”

8. Reassessment – ‘Reason to believe’ should be the basis same material or information which is real and not vague

Vijaykumar M. Hirakhanwala vs. ITO WP Nos. 1355 to 1358 of 2006 dated 5th September, 2006

The assessee a Hindu Undivided Family was assessed to tax since the year 1922. The assessee was carrying on the business of cotton ginning and pressing from its four factories located at Jalna, Latur, Deulgaon Raja and Kurduwadi in Maharashtra. The head office of the assessee is situated at Mumbai. The returns of income filed by the assessee for the assessment years in question were processed and accepted under section 143(1)(a) of the Income-tax Act, 1961. In the said returns of income the assessee as in the past had sought the expenditure incurred at the head office at Mumbai to be set off against the other income and the same was allowed on processing the returns of income.

The Notice under section 148(1) was issued on the ground that during the course of assessment for A. Y. 2001-02, it was noticed that there was hardly any activity at the Mumbai office and the loss from the Mumbai office was disallowed. The jurisdiction to issue notice under section 148(1) was challenged before the Hon’ble Bombay High Court.

The notices issued under Section 148(1) were quashed. The Hon’ble court observed that notice under section 148 of the I.T. Act can be issued for reopening the completed assessment only if the assessing officer has ‘reason to believe’ that any income chargeable to tax has escaped assessment. The word ‘reason to believe’ presupposes existence of some material or information based on which a reasonable belief regarding income escaping assessment could be entertained. In the absence of any material or information which prima facie suggests that the income has escaped assessment, the action of the assessing officer in invoking the jurisdiction to reopen the assessment cannot be sustained. The material or the information relied upon by the assessing officer must be real and not vague or imaginary. In other words, the existence of some material or information to show prima facie that the income has escaped assessment is a must before reopening the assessment.

The assessments for the years in question are sought to be reopened on the ground that in A. Y. 2001-02 the assessing officer has disallowed such expenditure on the ground that there is ‘hardly any activity from the Mumbai Office”. The words ‘hardly any activity’ does not mean that there is not activity carried on at Mumbai. It simply means that the business activity carried on from the Mumbai office is negligible. The contention of the assessee has always been that the Mumbai office is the liaison office and the same has been scrutinized and approved in the regular assessments passed under section 143(3) of the I. T. Act for several assessment years including A. Y. 1992-93 and A. Y. 1995-96. Therefore, when the expenditure incurred at the Mumbai officer has been consistently allowed to be deducted for several decades, in the absence of any specific material to show that in the part the said expenditure has been erroneously allowed, the assessing officer could not have reopened the assessments by merely stating that ‘there is hardly any activity from the Mumbai office’.