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Revathy C.P. Equipments Ltd. v. Deputy Commissioner Of Income Tax & Ors.

Madras High Court

Oct 23, 1998

Judgment

Subsequent
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Factual and Procedural Background

The assessee challenged notices dated 19 June 1992 issued under section 148 of the Income Tax Act, 1961, calling upon it to submit returns for the assessment year 1983-84. The notices were issued on the basis that the assessing officer had reason to believe that income chargeable to tax for the years 1983-84 to 1988-89 (excluding 1984-85) had escaped assessment within the meaning of section 147.

The assessee's position was that it had fully disclosed all material facts necessary at the time of the original assessments, and therefore notices issued beyond four years from the end of the relevant assessment years were illegal. The Revenue, via a counter-affidavit of the Dy. CIT, stated that during assessment proceedings for 1989-90 material relevant to the allowability of deduction under section 80-1 for 1983-84 was neither produced nor examined earlier; only in 1989-90 were those primary facts and reasons examined and recorded. The 1989-90 assessment order set out facts (dates of commissioning, capacity figures, production figures, incorporation and licence dates, commissioning of a new production bay in 1984 and machinery expenditure of Rs. 18.76 lakhs) which the Revenue relied upon as information for reopening prior years.

The writ petitions sought to quash the reassessment notices. The High Court considered whether the notices under section 148 could be sustained when issued after the expiry of four years and whether the assessee had failed to disclose primary facts at the original assessments.

Legal Issues Presented

Whether notices under section 148 issued after the expiry of four years from the end of the relevant assessment year can be validly issued where the assessing officer relies on information that came to light only in a later assessment (1989-90) concerning primary facts relevant to deduction under section 80-1.
Whether the proviso to section 147 (requiring disclosure of all relevant material facts fully and truly) must be satisfied in addition to compliance with the time-limits and monetary limits in section 149 when reopening assessments after four years.
Whether the assessee had, at the time of the original assessments, made a true and full disclosure of the primary facts necessary for the assessing officer to determine the eligibility for deduction under section 80-1, such that the reassessment notices would instead amount to mere change of opinion and be invalid.

Arguments of the Parties

Assessee's Arguments

The assessee contended it had fully and truly disclosed all material facts necessary for the original assessments and therefore notices issued after four years were illegal.
Learned senior counsel argued the assessee could not be expected to furnish materials not required by the return form and relied on the fact that assessing officers had made detailed computations of amounts allowed under section 80-1, suggesting that the assessing officer had applied his mind to eligibility and that the present action amounted to a change of opinion.
Reliance was placed on a Division Bench decision (Arvind Boards & Paper Products v. M. T Keshruwala) to support the submission that the assessee had disclosed all relevant facts and that the reassessment represented only a change of opinion.

Revenue's Arguments

The Revenue relied on the 1989-90 assessment order and the counter-affidavit which set out that material relevant to the allowability of section 80-1 for 1983-84 had not been produced or examined earlier; those primary facts were first considered in 1989-90.
Counsel for the Revenue contended that, notwithstanding the proviso to section 147, a notice could be issued under section 148 if permissible under any clause of section 149, and therefore a specific finding of failure to disclose fully and truly was not necessary in every case where a notice is issued under section 148.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Income Tax Officer v. Lakhmani Mewal Das, 1976 CTR (SQ) 220 : (1976) 103 ITR 437 (SC)	The duty on the assessee to make a true and full disclosure of the primary facts at the time of original assessment; production of documents from which material could have been discovered by due diligence does not necessarily amount to disclosure contemplated by law.	The Court used this precedent to emphasize that the assessee cannot rely on the form of the return or on incomplete statements to avoid disclosure obligations; absence of primary facts in original assessment records can justify reopening beyond four years.
Arvind Boards & Paper Products v. M. T Keshruwala, (1980) 124 ITR 626 (Guj)	Case where the court found, on its special facts, that there was no warrant for holding the assessee had failed to disclose relevant material facts.	The Court acknowledged the assessee's reliance on this decision but noted it turned on special facts; it did not accept that decision as determinative on the present facts where primary facts did not appear in the original assessment orders.
A.L.A. Firm v. Commissioner of Income Tax, Madras, (1991) 93 CTR (SC) 133 : (1991) 189 ITR 285 (SC)	The Supreme Court set out situations in which assessments can be reopened and observed that material on the basis of which reassessment is sought need not be extraneous to the record; it may be material that came to the notice of the Income Tax Officer subsequent to the original assessment.	The High Court applied the law in A.L.A. Firm to hold that the information contained in the 1989-90 assessment order constituted "information" for the purpose of section 147 and provided grounds for the reasonable belief required to initiate reassessment proceedings.
Indian and Eastern Newspaper Society v. CIT, (1979) 12 CTR (SQ) 190 : (1979) 119 ITR 996 (SQ)	Emphasised that the Income Tax Officer must have some information which makes him realise that an earlier assessment was in error; such information need not be extraneous to the record.	The Court relied on this principle to support the view that material coming to the assessing officer's notice subsequently (as in the 1989-90 order) can justify reopening prior assessments.

Court's Reasoning and Analysis

The Court began by stating the statutory framework: section 147 deals with income escaping assessment and its proviso requires certain conditions where notices are issued after four years; section 149 prescribes time-limits (and monetary limits) for action under section 147. The Court held that compliance with section 149 is not a substitute for satisfying the requirements of section 147; where a notice is issued after four years, both the proviso to section 147 and the limits in section 149 must be simultaneously complied with.

On the facts, the Court examined the assessment records for the relevant years and found no indication that the primary facts necessary to determine eligibility for deduction under section 80-1 were disclosed to the assessing officer at the time those assessments were made. The assessee did not place before the Court any material outside those assessment orders showing that the assessing officer had knowledge of the primary facts.

The 1989-90 assessment order, however, expressly set out primary facts and reasons relevant to the allowability of the assessee's claim under section 80-1 (including commissioning dates, capacity and production figures, licence date, commissioning of a new production bay in 1984, and machinery expenditure). The Court treated those facts contained in the 1989-90 order as "information" for the purposes of section 147 and as providing the grounds for the reasonable belief which the assessing officer must entertain before initiating reassessment under that section.

The Court considered precedent, notably Lakhmani Mewal Das, to restate that the assessee's duty is to disclose primary facts and that mere production of documents does not necessarily amount to adequate disclosure. It acknowledged the assessee's reliance on Arvind Boards but distinguished that decision as turning on its special facts. Applying the principles in A.L.A. Firm and Indian and Eastern Newspaper Society, the Court concluded that material coming to the assessing officer's notice after the original assessments (as in the 1989-90 order) can validate reopening of earlier assessments.

On this basis, the Court found the reassessment notices issued under section 148 (dated 19 June 1992) were not vitiated by illegality: they were based on information that had not been placed before the assessing officer at the time of the original assessments and which provided reasonable grounds for belief under section 147.

Holding and Implications

Holding: The writ petitions are dismissed; the notices issued under section 148 of the Income Tax Act, 1961, are upheld. The Court ordered dismissal of the writ petitions and all connected writ miscellaneous petitions, and directed that there be no costs.

Implications:

Direct effect on the parties: The reassessment notices may be proceeded with by the assessing officer. The assessee is not prevented by this judgment from challenging the correctness of the contents of the 1989-90 assessment order; the Court expressly left open the assessee's right to urge its contentions before the assessing officer.
Broader implications: The Court applied established precedents (including Lakhmani Mewal Das and A.L.A. Firm) to affirm that where material constituting primary facts comes to the assessing officer's notice after the original assessment, it can justify reopening assessments even if the reopening occurs beyond four years; the decision is an application of existing law rather than a pronouncement of a new principle. The opinion does not assert that it sets a new precedent.

Order concluded: The writ petitions fail and are dismissed; no costs. The assessee remains entitled to challenge the contents of the 1989-90 assessment order before the assessing officer.

Show all summary ...

Order R. JAYARMHA BABU, J:

The assessee is aggrieved by the notices dt. 19th June, 1992, issued under section 148 of the Income Tax Act, 1961, calling upon the assessee to submit a return of its income for the assessment year 1983-84, as the assessing officer had reason to believe that the income in respect of which assessee was chargeable to tax for the years 1983-84 to 1988-89 excluding 1984-85 had escaped assessment within the meaning of s. 147 of the Income Tax Act, 1961. According to the assessee it had fully disclosed all the material facts necessary at the time the original assessments were made and, therefore, the notices issued beyond the period of four years from the end of the relevant assessment years were wholly illegal.

2. Though the notices do not set out the reasons, in the counter- affidavit of the Dy. CIT, Coimbatore, at para. 5, the reasons for the issuance of those notices have been set out as under :

"....... It has been found during the course of the assessment proceedings for the assessment year 1989-90, that the material evidence relevant for the allowability of deduction under section 80-1 of the Act during the assessment year 1983-84 was neither produced by the petitioner nor examined by the assessing officer. Thus, the materials relevant for the claim of deduction under section 80-1 of the Act was never considered from the beginning, but only the quantum of relief was questioned. It is only in the assessment year 1989-90, that the Dy. CIT has gone into the assessee's eligibility to the relief under section 80-1 on a consideration of the relevant materials furnished at the instance of the Dy. CIT. Thus, it was not a question of change of opinion on the same set of facts, since the facts were never considered in the first instance.

3. In the order of assessment for the year 1989-90, the assessing officer has with regard to the assessee's claim for deduction under section 80-1 of the Act noted that in response to his question to the assessee as to when the industrial undertaking in question was established, the assessee had claimed that no industrial undertaking was commissioned in the calendar year 1982; that it had claimed deduction under section 80-1 of the Act from 1983-84; that the licenced capacity of the assessee remained at 100 from the asst. yrs. 1980-81 to 1989-90, while the installed capacity increased from 10 to 20 in 1983-84; that the production increased from 4 in the year 1980-81 to 52 in the year 1989-90 (21 months period); that the assessee was incorporated on 30th May, 1971; that the industrial licence pursuant to which the industrial undertaking was established was issued on 22nd Jan--- 1977; that the assessee was engaged in the manufacture of blast hole and water wen drilling rigs, that the assessee- company in the assessment year 1983-84 constructed a new production bay with a dimension larger than the existing one and capable of taking up manufacture of 1W sized drills which were till that point of time being imported,- that the new bay was commissioned in 1984, when commercial production began in the newly constructed bay and that new machineries have been installed at a total cost of Rs. 18.76 lakhs. 4. In the assessment orders for the year for which notices have been issued under section 148 of the Act, there is no indication that any material was produced before the assessing officer for the relevant years and that the assessing officer was fully aware of all the materials at the time the assessments were made. 5. Learned senior counsel for the assessee Mr. V. Ramachandran submitted that the assessee could not possibly be expected to furnish materials which the form or return did require; that the assessing officer for all these assessment years had made a detailed computation of the amounts to be allowed as deduction under section 80-1 of the Act, which would prima facie indicate that he had applied his mind as to the eligibility of the assessee for relief under section 80-1 and that therefore, the present notices are only to be regarded as the result of a change of opinion. It was further submitted that the assessee had made full and true disclosure of all the relevant material facts necessary for the assessment during all these years. 6. Learned counsel referring to ss. 147 and 149 of the Act, submitted that where the assessing officer wishes to reopen an assessment after the expiry of four years from the end of the relevant assessment year, the conditions set out in the proviso to s. 147 of the Act must be satisfied in addition to the action being initiated within the time-limit set out in s. 149 of the Act, having regard to the extent or income alleged to have accepted tax. Learned counsel placed reliance on the concluding part of the main proviso to s. 147 of the Act, which refers to the disclosure of all the relevant materials facts fully and truly for assessment for the assessment year. It was submitted that the proceedings had been initiated in all these cases only in June, 1992, long after the expiry of four years from the end of the relevant assessment year.

7. Counsel for the Revenue relied upon the assessment order for the assessment year 1989-90 as well as the contents of the counter- affidavit. Counsel further asserted that notwithstanding the proviso to s. 147 of the Act, notice could be issued under section 148 of the Act, if it is permissible to do so in terms of any of the clauses of s. 149 of the Act and that, therefore, it was not necessary for a finding that there had been failure on the part of the assessee to fully and truly disclose all the material facts at the time of reassessment.

8. Sec. 147 of the Act deals with the income escaping assessment. Before a notice under section 148 of the Act can be issued, all further requirements of s. 147 of the Act must be fully met. The time-limits specified in s. 149 of the Act is not a substitute for what has been stated in s. 147 of the Act. Sec. 149 of the Act merely stipulates the time-limits: within which action can be taken under section 147 of the Act and a notice issued under section 148 of the Act. In other words, where a notice issued under section 148 of the Act is after the expiry of a period of four years from the end of the relevant assessment year, the conditions set out in the proviso to s. 147 of the Act must be satisfied. Such a notice also should conform to the time-limits and the monetary limits set out m s. 149 of the Act. There is no option given to the assessing officer to comply with either s. 149 of the Act or to the proviso to s. 147 of the Act, Both of them are to be simultaneously complied with and the requirements therein are to be fulfilled before a valid notice can be issued under section 148 of the Act.

9. In all these cases the notices have been issued after the expiry of the period of four years. The notices can be sustained only if it can be held that there had been failure on the part of the assessee to disclose fully and truly all material facts that were necessary for the assessment for these assessment years.

10. In the case of Income Tax Officer v. Lakhmani Mewal Das 1976 CTR (SQ) 220 : (1976) 103 1M 437 (SC) the Supreme Court observed in the context of s. 148 of the Act that

"We may add that the duty which is cast upon the assessee is to make a true and full disclosure of the primary facts at the time of the original assessment. Production before the Income Tax Officer of the account books or other evidence from which material evidence could with due diligence have been discovered by the Income Tax Officer will not necessarily amount to disclosure contemplated by law."

10. In the case of Income Tax Officer v. Lakhmani Mewal Das 1976 CTR (SQ) 220 : (1976) 103 1M 437 (SC) the Supreme Court observed in the context of s. 148 of the Act that

"We may add that the duty which is cast upon the assessee is to make a true and full disclosure of the primary facts at the time of the original assessment. Production before the Income Tax Officer of the account books or other evidence from which material evidence could with due diligence have been discovered by the Income Tax Officer will not necessarily amount to disclosure contemplated by law."

It is thus clear that the assessee cannot take shelter under the plea that the return did not require a particular fact to be set out and therefore, the failure to disclose the facts will provide immunity to the assessee from any notice being issued under section 148 of the Act after a period of four years. The duty that is cast upon the assessee is to disclose the primary facts on the basis of which the assessing officer can decide as to whether the assessee is entitled to. the deduction claimed or not. The mere fact that the Income Tax Officer had reached some conclusions and had allowed the deduction does not necessarily imply that the Income Tax Officer had been provided with the primary facts required for making a decision as to whether the deduction claimed was allowable in terms of the relevant statutory provisions.

11. The assessment orders for all these years do not indicate that the primary facts required for claiming the relief under section 80-1 of the Act had been disclosed, at the time the assessment orders were made. The assessee has not placed any materials de hors those assessment orders which would indicate such knowledge on the part of the assessing officer.

12. It is only in the assessment order for the year 1989-90, along with the material facts, the reasons relevant to the allowability or otherwise of the assessees' claim for deduction under section 80-1 of the Act have been set out. The facts stated therein would constitute information for the purpose of s. 147 of the Act and would provide grounds for the reasonable belief which the assessing officer is required to entertain before initiating proceedings under that section.

13. Learned counsel for the assessee relied on a Division Bench judgment of Gujarat High Court in Arvind Boards & Paper Products v. M. T Keshruwala (1980) 124 ITR 626 (Guj) 5 in support of his submission that the assessee had disclosed all the facts and all that the assessing officer had now done is to change his opinion thereon. The decision relied upon turned on the special facts in that case. The Court herein had found that there was no warrant for holding that the assessee therein had failed to disclose the relevant material facts.

14. The Supreme Court in A.L.A Firm v. Commissioner Of Income Tax, Madras. (1991) 93 CTR (SC) 133 : (1991) 189 ITR 285 (SC) 13 elaborately considered the circumstances in which assessments can be reopened- The apex Court set out four situations in which notices under section 34(1)(b) of the Income Tax Act, 1922, which corresponds to s. 147 to 1961 act could be validly issued. The Court also noticed the fact that in the case of Indian and Eastern Newspaper Society v. CIT (1979) 12 CTR (SQ) 190 : (1979) 119 ITR 996 (SQ) 1, it was emphasised that the Income Tax Officer must have some information which makes him to realise that he has committed an error in the earlier assessment and such information need not necessarily be extraneous to the record. It would be enough if the material on the basis of which the reassessment proceedings are sought to be initiated came to the notice of the Income Tax Officer subsequent to the original assessment.

15. Applying the law laid down by the apex Court in A.L.A. Firm's case (supra), the only conclusion possible on the facts of these cases is that the notices issued to the assessee under section 148 of the Act do not suffer from any infirmity, as they are based on the information contained in the assessment order for the year 1989-90 which information, though material and concerned to the primary facts had not been placed by the assessee at the time of assessment for the relevant assessment years for reopening when those notices had been issued.

16. The writ petitions, therefore, fail and they are dismissed. No costs. All the connected writ miscellaneous petitions are also dismissed. However, the references made in the earlier part of this order with regard to the contents of the assessment order for the assessment year 1989-90 are not to be treated as preventing the assessee from challenging the correctness of the contents of that assessment order. It is open to the assessee to urge all his contentions before the assessing officer.