The Judgment of the Court was delivered by

Indira Banerjee, J.:— In this writ application, the petitioner has inter alia challenged a notice dated 28th August, 2003 issued to the petitioner by the Assessing Officer under Section 148 of the Income Tax Act, 1961, hereinafter referred to as the I.T Act, for reopening the assessment of the petitioner for the Assessment Year 1999-2000.

On 28 December, 1999, the petitioner submitted a return of its income for the Assessment Year 1999-2000 under Section 139 of the I.T Act, disclosing total income of Rs. 6,76,22,600/-. The petitioner later filed a revised return on 29 March, 2001 disclosing an income of Rs. 3,48,84,790/-.

The reduction of income was, according to the petitioner, by reason of decrease in the value of the stock in trade of Rajdoot Paints Ltd., which had been amalgamated with the petitioner, upon change in the accounting method and adoption of the accepted method of valuation of stocks, followed by the petitioner.

The Assessing Officer did not issue any notice of inquiry in respect of the return under Section 142(1) of the I.T Act. Nor did the Assessing Officer issue any notice under Section 143(2) of the I.T Act calling upon the petitioner to substantiate any claim in the return of any loss, exemption, deduction, allowance or relief.

The Assessing Officer issued an intimation under Section 143(1) of the I.T Act on 20 November, 2001, accepting the original return filed by the petitioner and informing the petitioner that Rs. 2,61,50,812/- was refundable to the petitioner along with interest of Rs. 79,75,994/- after giving credit for advance tax paid and taxes deducted at source.

On or about 3rd January, 2003, the petitioner received a notice under Section 154 of the I.T Act dated 24 December, 2002, whereby the Assessing Officer proposed to rectify mistakes which had allegedly occurred in an intimation issued under Section 143(1) dated 27 March, 2002.

According to the petitioner, the petitioner had not, till then been served with any intimation dated 27 March, 2002, under Section 143(1) of the I.T Act.

After receipt of the said notice dated 24 December, 2002, the petitioner made enquiries and came to learn that the Assessing Officer had issued a revised intimation dated 27 March, 2002, accepting the revised return filed by the petitioner on 29 March, 2001.

The alleged reasons for rectification of the intimation dated 27 March, 2002, as disclosed in the notice, are as follows:

i) The difference of unpaid customs and excise duty of Rs. 307.56 lacs between opening and closing stock, at the end of the Accounting Year was not deductible.

ii) Deduction of Rs. 25.97 lacs towards Sales Tax liability was inadmissible.

iii) Taxable income of Rs. 30 lacs was suppressed by inadmissible debits in the Profit and Loss Account.

iv) The reduction in income of Rs. 327.38 lacs, on account of alleged change in accounting policy was liable to be disallowed.

By a letter dated 28 July, 2003, the petitioner submitted a detailed reply to the rectification notice dated 24 December, 2002 dealing with all the allegations/contentions therein.

The Assessing Officer did not pass any order under Section 154 of the I.T Act and the proceedings for rectification were dropped. In other words, the Assessing Officer, after considering the submissions of the petitioner, in the reply to the show cause, was of the view that rectification of the Assessment Order was not called for.

However, the same officer issued the impugned notice dated 28 August, 2003 under Section 148 of the I.T Act for reassessment of income for the year in question under Section 147 of the said Act, and called upon the petitioner to file a revised return. The impugned notice does not disclose the reasons for the belief that income had escaped assessment.

By a letter dated 26 September, 2003, the petitioner requested the Assessing Officer to withdraw the notice, inter alia contending that no income of the petitioner had escaped assessment. The petitioner also called upon the Assessing Officer to furnish reasons to the petitioner for the decision to reassess income under Section 147 of the I.T Act.

On 30 September, 2003, the petitioner filed its revised return under protest, pursuant to the impugned notice under Section 148.

The petitioner was later furnished with reasons for reopening assessment, which are practically the same as the reasons for the notice under Section 154 of the I.T Act, for rectification of the alleged mistakes in the Revised Assessment Order. The rectification notice had been dropped by the same Assessing Officer.

In brief, the reasons were as follows:

(i) The difference of Rs. 307.56 lacs between unpaid customs and excise duty on opening stock at the beginning of the Accounting Year and closing stock at the end of the Accounting Year, was not allowable in view of Section 43B of the I.T Act. The Department contended that the issue was squarely covered by the decision of this Court in CIT v. Berger Paints Ltd. reported in 254 ITR 498.

(ii) Claim of the petitioner to reduction of income by Rs. 3,27,37,810/-, on account of difference in valuation of the stock in trade of Rajdoot Paints Ltd. not debited to the Profit and Loss Account, allegedly upon change in accounting procedure and adoption of the procedure followed by the petitioner, after amalgamation of Rajdoot Paints Ltd. with the petitioner. It was alleged that the accounting procedure followed by Rajdoot Paints Ltd. had not been disclosed, and the deduction was in violation of Section 145 of the I.T Act.

(iii) Deduction of Rs. 12.50 crores under Section 80(1A) of the I.T Act, showing the same to be income of the Pondycherry unit, could not be allowed as the profit of the Pondycherry unit had been inflated by manipulating allocation of expenses.

(iv) The allowable deduction from income from technical services being 50% of the net income, deduction of Rs. 10.25 crores, which was 50% of the gross consultancy charges in convertible foreign exchange, could not be allowed.

(v) Debit of Rs. 194.6 lacs on account of payment of sales tax in the Profit and Loss Account without corresponding credit of sales tax receipts resulted in excessive deduction and understatement of income, which could not be allowed.

(vi) Deduction of Rs. 25.97 lacs credited in the Profit and Loss Account on account of cessation of sales tax liability, could not be allowed, as the contention of the petitioner that the amount had already disallowed under Section 43B in the respective year was incorrect. It is alleged that the said amount of Rs. 25.97 lacs was paid by the assessee and allowed as deduction in the year of payment.

(vii) Income of Rs. 30 lacs had escaped assessment by reason of inadmissible debits in the Profit and Loss Account.

The petitioner submitted a detailed representation dealing with each of the grounds disclosed by the Assessing Officer for the impugned notice under Section 148 of the I.T Act.

Dr. Debi Prasad Pal appearing on behalf of the petitioner submitted that the grounds disclosed by the respondents were misconceived, against settled principles of law and no grounds in law for reopening assessment.

As pointed out by Dr. Pal, the first ground, of the difference between the unpaid excise and customs duty on the opening stock at the start of the Accounting Year and the closing stock at the end of the Accounting Year, not being deductible was also the first ground for the rectification notice dated 24 December, 2002 under Section 154 of the I.T Act, which had been dropped. Moreover, the decision of this Court in C.I.T v. Berger Paints Ltd. (supra) on which this ground is based, has been reversed by the Supreme Court in Berger Paints Ltd. v. C.I.T reported in 266 ITR 99.

Dr. Pal rightly argued that the second ground disclosed for issuance of the impugned notice is the same as the fourth ground disclosed in the rectification notice under Section 154 of the I.T Act, which had been dropped upon consideration of the submission of the petitioner, in its reply thereto.

Dr. Pal submitted that the contention of the Assessing Officer, that the petitioner had not disclosed the difference in the Accounting Procedure of Rajdoot Paints, was unfounded.

Dr. Pal further submitted that the stocks of Rajdoot Paints Ltd. a company incorporated under the Companies Act, 1956 which was amalgamated with the petitioner with effect from 1st October, 1998, had earlier been valued as per the Accounting Methods of Rajdoot Paints Ltd. After amalgamation there was a change in the Accounting Method and the more acceptable method of accounting so long followed by the petitioner was applied for valuation of the stocks of Rajdoot Paints Ltd.

Dr. Pal argued that the difference in the accounting procedure had been discussed in the Auditor's note to the Statement of Accounts filed with the Assessing Officer along with the revised return. The petitioner had also explained the difference in its reply. The Assessing Officer was duly satisfied with the petitioner's reply and accordingly dropped the proceedings under Section 154 of the I.T Act.

Dr. Pal submitted that the Assessing Officer was in effect trying to revive the said Section 154 proceedings, on the basis of the same materials, which had earlier been considered and/or in other words, on mere change of opinion, which was not permissible in law.

With regard to the third ground of the deduction of Rs. 12.50 crores on account of income from the Pondicherry unit under Section 80 IA being disallowable, Dr. Pal pointed out that the method of allocation of expenses for computation of the income of the Pondicherry unit during the financial year in question was followed in subsequent years.

The issue is now covered by a decision dated 17 October, 2006 of the Income Tax Appellate Tribunal, ‘E’ Bench, Kolkata in favour of the petitioner in respect of the Assessment Year 2000-2001.

The Tribunal inter alia held as follows:

“On going through the basis of allocation of the said common head office and selling expenses adopted by the assessee consistently from the AY 98-99, we are of the considered view that the said basis adopted by the assessee for allocation of common expenses is a reasonable and scientific basis and does not call for any modification. The basis accepted by the AO is arbitrary as he has not stated the reason for rejection of the assessee's method, he has not stated how he arrived at 20% for allocating common HO exp. which shows he has taken an adhoc figure & we accept that profit ratio cannot be applied consistently in all years. Moreover, in addition to the audited accounts of the company, the assessee maintains separate accounts for the Pondicherry unit to ascertain its profit & which again is certified by the auditors. The same should be accepted. We are in agreement with the contention of the Ld. A/R which is supported by the decisions of the Hon'ble Supreme Court as stated above that once the Department has accepted a decision on a particular issue by not challenging the same before any higher forum it is not open for it to contend in the contrary on the same issue in a later year. We would reiterate that in the present case the Department has accepted the basis of allocation of common head office and selling expenses in the AY 98-99 and there is no dispute as to the fact that the same basis has been adopted by the assessee in AY 2000-01 which are before us. Following the ratio laid down in the decisions rendered by the Hon'ble Supreme Court, we uphold the decision of the CIT (A) on this issue and thus dismiss Ground Nos. (iii) & (iv) raised by the Department.”

By an order dated 4 January, 2006 passed in exercise of power under Section 263 of the I.T Act, the Commissioner of Income Tax (Appeals) disallowed the deduction of Rs. 12.39 crores claimed by the petitioner for the Assessment Year 2003-2004 under Section 80(1B) of the I.T Act in respect of the Pondicherry and Goa units.

The Income Tax Appellate Tribunal, ‘E’ Bench, Kolkata relying on its earlier order dated 17 October, 2006, set aside the order dated 4 January, 2006 of the Commissioner of Income Tax (Appeals). The Tribunal held as follows:

“In our considered opinion the claim u/s 80-1B for Pondicherry unit has already been considered and the facts of the claim of deduction u/s 80-1B for Goa unit are also similar to that of Pondicherry unit. Respectfully following the decision of the ITAT dated 17 October, 2006 (supra) in the case of the assessee, we are of the considered opinion that the department should have accepted the allocation made by the assessee and the order of the AO, in any case, could not be considered erroneous in so far as it was prejudicial to the interest of the revenue. The order u/s 263 cannot, therefore, be sustained. The appeal of the assessee is, therefore, allowed.”

As pointed out by Dr. Pal, the Department did not appeal against the aforesaid orders of the Income Tax Appellate Tribunal referred to above, which have assumed finality. In view of the categorical finding of the Income Tax Appellate Tribunal that the allocation of common expenses for the Assessment Year 1998-1999 was reasonable and scientific, it is not open to the Department to open reassessment on the ground of the income of the Pondicherry unit having been inflated by manipulation in allocation of expenses. The decision of the Tribunal is binding on the Department.

The fourth ground disclosed by the Assessing Officer for reopening assessment, that the petitioner had claimed deduction under Section 80-O of 50% of the gross income in convertible foreign exchange, without deduction of expenses was, categorically denied by the petitioner in its reply to the impugned notice. Dr. Pal pointed out that the categorical assertion of the petitioner that it had claimed deduction of only net income in convertible exchange, computed by exclusion of expenses in accordance with the decision of this Court in C.I.T v. M.N Dastoor & Co. (P) ltd. reported in 243 ITR 10 had not been dealt with by the Assessing Officer.

The Assessing Officer had issued the intimation dated 20 November, 2001 under Section 143(1) of the I.T Act and the revised intimation dated 27 March, 2002 under the same Section, accepting that Rs. 194.6 lacs deducted towards sales tax in the Profit & Loss Account, had not been realized from customers and there was no excess debit.

The petitioner, in dealing with the 5 reason for reopening assessment, made a categorical assertion that sales tax realized from customers was neither credited nor debited in the Profit & Loss Account. Nor was any deduction claimed in respect of the same.

The petitioner was, apparently liable to turn-over tax, under the sales tax laws, based on its aggregate turn-over during the financial year. Turnover tax is not recoverable from customers separately. The petitioner claims to have debited turn-over tax of Rs. 194.61 lacs, paid by the company, which had not been recovered from customers, in the Profit & Loss Account.

It is patently clear that assessment has been sought to be reopened on the basis of the same materials, on change of opinion. From the reasons, it is apparent that there were no new materials before the Assessing Officer wherefrom it could be deduced that the sum of Rs. 194.61 lacs, claimed as deduction or any part thereof was realized from customers.

As argued by Dr. Pal, the 6 and 7 grounds disclosed by the Assessing Officer for reopening assessment, were also the 2nd and 3 grounds for the notice under Section 154 for rectification of the assessment order. The rectification proceedings having been dropped, reassessment proceedings could not have been started on the basis of the same materials.

As rightly pointed out by Dr. Pal mere change of opinion was no ground for reassessment, as held by a Full Bench of the Delhi High Court in Commissioner Of Income-Tax v. Kelvinator Of India Ltd. reported in 256 ITR 1 (Del.) cited by Dr. Pal.

In Damodar H. Shah v. Assistant Commissioner of Income Tax reported in 246 ITR 774 a Division Bench of the Gujarat High Court lucidly explained the difference between the power of rectification of a mistake under Section 154 and the power of reopening assessment under Section 147 of the 1947 Act and held that the scope of the two proceedings being different, the Assessing Officer could take recourse to either, having regard to the facts and circumstances of the case.

In cases of apparent mistake resulting in escapement, the Assessing Officer could invoke Section 154. In cases of mere mistake resulting in assessment, which was not apparent from record, the Assessing Officer might reopen assessment under Section 147.

The Court inter alia held as follows:

“…Mistake apparent from the record which has the effect of enhancing assessment ought to be rectified by resorting to this special and speedy procedure when in the view of the Assessing Officer it is unnecessary to resort to reopening of the assessment. In the field of chargeable income escaping assessment, however, section 147 is very widely worded and would include even escapement due to any mistake in the assessment order. But, when even according to the Assessing Officer himself there is a mistake, apparent from the record as it exists, committed in the order of assessment, which is rectifiable on the basis of the existing record under section 154 being a special provision made for the purpose, and that there is no need to resort to reopening of the assessment as contemplated by section 148 read with section 147 of the Act, then he must resort to the provision and cannot wantonly or arbitrarily and without valid reason resort to reopening of the assessment.

…..The function of the Assessing Officer acting under section 147 is not limited, as under section 154, merely to rectifying the result which may have been vitiated due to mistake apparent from the record. It would therefore follow that in cases of mistake resulting in escapement, which is the area where both the provisions would become relevant, the Assessing Officer will have to consider whether he was required by the nature of escapement to reconsider the question of how he would ascertain and assess income that has escaped assessment and reopen the assessment or if that is not required then merely to rectify the mistaken result on the basis of the existing record. If he chooses to resort to the former, i.e, section 147 read with section 148 proceedings, he cannot be compelled to resort to section 154 because that would impinge upon his subjective satisfaction under section 147. But if he resorts to section 154 on the ground that the mistake in the order apparent from the record has resulted in escapement which could be rectified by amending the order and enhancing the assessment, then he, on finding that there is no such mistake apparent from the record warranting rectification since the view taken is plausible, cannot in the absence of any other ground on the basis of which he has still reason to believe that the income has escaped assessment, start proceedings again under section 147. If he finds that there is no such mistake since the result was warranted from the record, there would be no occasion to amend the assessment order. where the rectification could not be done on the ground that there were two views possible or that there was discretion lawfully exercised, then the same will also be true even when the Assessing Officer starts the proceedings under section 147 on the same material, because, that power cannot be invoked when there is only a mere change of opinion and in case where in the proceedings under section 154 it is found that what was thought to be a mistake was not a mistake because that view was warranted or permissible from the existing record, then the same finding will bind the Assessing Officer when trying to exercise powers under section 147. In such a case, it would be incumbent on the part of the Assessing Officer who had chosen to resort to section 154 to demonstrate why he is now for the same purpose resorting to section 147. There has to be some compelling reason in such a case for him still to believe that the income that was the subject-matter of rectification has escaped assessment though that was not due to any obvious mistake borne out from the existing record, which could be rectified under section 154. ……………………………..It will not be open to the Assessing Officer to arbitrarily or wantonly resort to the provisions of section 147 where the process of rectification under section 154 fails on the merits.”

As argued on behalf of the respondents, the Assessing Officer has jurisdiction under Section 148 of the I.T Act to issue notice of reassessment, upon reason to believe that any income chargeable to tax has escaped assessment.

However, if the Assessing Officer is of the view that income has escaped assessment by reason of a mistake apparent from records, and takes recourse to Section 154, but finds later, that there is no apparent mistake, then he cannot, in the absence of any other ground on the basis of which he still has reason to believe that the income has escaped assessment, start reassessment proceedings under Section 147 of the Act. In other words, the Assessing Officer cannot again start reassessment proceedings on the basis of the same reasons.

The Assessing Officer has not disclosed the reasons for the Assessing Officer to still believe that income that was the subject matter of rectification had still escaped assessment though that was not due to any obvious mistake, borne out from existing records.

The judgment in GKN Driveshafts India Ltd. v. Income Tax Officer reported in 259 ITR 19, cited by Mr. Bhowmik was rendered by the Supreme Court in the particular facts of that case. The Supreme Court held:

“We see no justifiable reason to interfere with the order under challenge. However, we clarify that when a notice under section 148 of the Income-tax Act is issued, the proper course of action for the noticee is to file a return and if he so desires, to seek reasons for issuing notices. The Assessing Officer is bound to furnish reasons within a reasonable time. On receipt of reasons, the noticee is entitled to file objections to issuance of notice and the Assessing Officer is bound to dispose of the same by passing a speaking order. In the instant case, as the reasons have been disclosed in these proceedings, the Assessing Officer has to dispose of the objections, if filed, by passing a speaking order, before proceeding with the assessment in respect of the abovesaid five assessment years.”

The condition precedent for initiation of reassessment proceedings is, in any case, the formation of the belief, based on new materials that any income had escaped assessment. A notice under Section 148 of the I.T Act may not be issued merely on change of opinion.

In normal circumstances, on receipt of a notice of reassessment under Section 148 of the I.T Act, the assessee should file a return, ask for the reasons and then file its objection. However, where the condition precedent for issuance of a notice are absent, the notice might be challenged by filing a writ petition under Article 226 of the Constitution of India.

In Calcutta Discount Co. Ltd. v. Income Tax Officer, Companies District 1, Calcutta reported in 41 ITR 201, the Supreme Court held that in exercise of power under Article 226, the Court might examine whether the conditions precedent for exercise of jurisdiction to reassess existed. The Supreme Court inter alia held as follows:

“…..The existence of such alternative remedy is not however always a sufficient reason for refusing a party quick relief by a writ or order prohibiting an authority acting without jurisdiction from continuing such action.

In the present case the company contends that the conditions precedent for the assumption of jurisdiction under section 34 were not satisfied and came to the court at the earliest opportunity. There is nothing in its conduct which would justify the refusal or proper relief under article 226. When the Constitution confers on the High Courts the power to give relief it becomes the duty of the courts to give such relief in fit cases and the courts would be failing to perform their duty if relief is refused without adequate reasons….”

Moreover, in this case, where the writ petition had been entertained and kept pending for about six years and directions issued for filing of affidavits, this Court is not inclined to decline relief only on the ground of existence of an alternative remedy of filing an objection before the Assessing Officer and then taking recourse to an appeal upon reassessment.

In Raymond Woolen Mills Ltd. v. Income Tax Officer reported in 236 ITR 34 cited by Mr. Bhowmick, the Supreme Court was satisfied on facts that jurisdiction to reassess had validly been assumed.

If there are reasons to believe that income has escaped assessment, and jurisdiction to issue notice of reassessment under Section 148 of the I.T Act has been exercised, the Court ought not to weigh the sufficiency of the reasons in exercise of its extraordinary writ jurisdiction under Article 226 of the Constitution of India.

The Court may, however, in exercise of its power of judicial review examine whether the conditions precedent for exercise of jurisdiction to reopen assessment at all exist. In the absence of any new and/or fresh materials, on the basis of which the Assessing Officer could have formed the opinion that income has escaped assessment, the Assessing Officer lacked jurisdiction to re-open assessment.

The reassessment notice has been issued for virtually the same reasons for which rectification proceedings had earlier been initiated but dropped. The Assessing Officer has not disclosed any new materials for reopening assessment. Assessment cannot be re-opened merely on change of opinion, as has apparently been done in this case. The Assessing Officer on being satisfied that there was no apparent error in computation of income, on the basis of existing records, dropped the rectification proceedings. In the absence of any new and/or fresh materials and in the absence of any reason for formation of belief that even otherwise, income had escaped assessment even though there was no apparent mistake or error, the Assessing Officer lacked jurisdiction to issue the impugned notice.

For the reasons discussed above, the impugned notice under Section 148 of the I.T Act is set aside. The writ petition is disposed of accordingly.