• Income Tax Act, 1961 – Reassessment u/s 147 causing Notice u/s 148 – Whether reopening of a concluded assessment i.e. reassessment following issuance of notice is legally sustainable or is bad in law. ITAT decided in favor of the assessee and set aside the orders of reassessment of AO upheld by the CIT(A) – Appeals preferred before Kerala High court favored the revenue by setting aside the orders of the ITAT – (Assessment years in Consideration 1990-91, 1991-92 and 1992-93)

The assessee is carrying on the business of publishing newspaper, weeklies and other periodicals in several languages under the brand name “Mangalam” : Brief of assessment u/s143 (3) and reassessment orders u/s 144/147 related to AY’s 1990-91 , 1991-92 and 1992-93 are :  

For Asst Year 1990-91  – Revised Computation showing income of Rs.5,63,920/- on/against the return filed on 22.10.1991 showing loss of Rs.5,99,390/-, without books of account since under seize by the income tax department in the course of search and seizure operations on 03.12.1995.

Section 143 (3) – AO vide the assessment order dated 29.01.1992 made a lumpsum addition of Rs. 1 lakh to the disclosed income.

For Asst year 1991-1992 – Return filed on 22.10.1991 showing a loss of Rs.21,66,760/- without balance sheet for the same reason mentioned for the assessment year 1990-1991. As per the revised P&L, the sale proceeds of the publications were shown at Rs.8,21,24,873/-.

Section 143 (3) – vide the assessment order dated 29.01.2022 AO scrutinised net sale proceeds as per Audit Bureau of Circulation figure and the Certified Performance Audit Report and on that basis accepted the sale proceeds of Rs.8,21,24,873/- as correct. Further AO found deficiency of Rs.29,17,931/- due to unexplained incoming and outgoing statement therefore amount was added to the total income. A further addition of Rs.1,50,000/- to the total income, due to  non production of proper vouchers in respect of a number of items of expenditure.

For Asst year 1992-1993 – Return filed on 07.12.1992 showing a loss of Rs.10,50,000/- and a revised return on 28.01.1993 showing loss of Rs.44,75,212/- without balance sheet for the same reason mentioned for the assessment year 1990-1991 and 1991-1992. Total sale proceeds of the weeklies disclosed at Rs.7,16,95,530/- and advertisement receipts to the extent of Rs.40 lakhs. The profit was estimated at Rs.41,63,500.00 before allowing depreciation –

Section 143 (3) – vide the assessment order dated 26.03.1993 AO scrutinised performance certificate issued by the Audit Bureau of Circulation and observed that total sale proceeds of the weeklies after allowing sale commission came to Rs.7,22,94,757/- and by following the profit percentage adopted in earlier years, estimated the income from the weeklies and other periodicals at 7.50% before depreciation, adding the estimated advertisement receipts of Rs.40 lakhs to the total sale receipts came to Rs.7,62,94,757/-. The profit earned before depreciation at the rate of 7.50% on the turnover came to Rs.57,22,106/-. AO worked out the loss at Rs.22,95,872.00 as against Rs.41,23,500.00 claimed by the assessee w.r.t. daily newspaper. Taking an overall view AO estimated the business income of the assessee during at Rs.10,00,000/-.

Asst year 1993-1994 – While examining the balance sheet filed by the assessee, AO noticed that balance in the Capital Account of all the partners of firm together was Rs.1,85,75,455/- as on 31.03.1993 whereas the capital of the partners as on 31.12.1985 was only Rs.2,55,117/-. None of the partners had any other source of income apart from one of the partners, Smt. Cleramma Vargese, who had a business under the name and style of “Mangalam Finance”. Therefore reassessment for the Asst Years 1988-1989 to 1993-1994 and  notice u/s 148 on dated 29.03.2000.

Section 144/147 – Reassessment Order w.r.t. Asst Years 1988 – 1989 and 1989 – 1990, AO quantified the total income at Rs.29,66,910/-, for Asst. year 1991-1992 quantified total income at Rs.13,91,700/-  and Asst Year 1992-1993 determined total income at Rs.25,06,660/-.

Therefore the escaped income quantified as : 

Sr. No.                  Assessment year                             Amount              

1.                            1990-91                                                Rs.19,05,476.00

2.                            1991-92                                                Rs.16,83,910.00

3.                            1992-93                                                Rs.15,06,655.00

Total Escaped Income                    =  Rs.50,96,040.00

Proviso to Section 147 r/w Section 148 – Reassessment barred by limitation – First Appeals preferred before “CIT(A) IV Cochin” on following grounds :

1. That assessments having been completed u/S 143(3) could not have been reopened after expiry of four years from the end of the relevant Asst Year. Limitation for the last of three Asst Years i.e. 1992-93 had expired on 31.03.1997 however notices under Section 148 issued only on 29.03.2000. 
2. Notices u/s 148 not valid as issued to the partnership firm however required to be issued to member of the firm as per Section 282(2).
3. Alleged Income Escaping Assessment could not be computed on an estimate basis.

A common order dated 26.02.2004 passed by the CIT(A), held that, the assessee had failed to disclose all material facts necessary to make assessments, therefore it could not be said that the reassessment proceedings were barred by limitation u/proviso to section 147. Further re-determined the total escaped income to Rs.68,20,854/-.  CIT(A) also upheld the finding that the unexplained portion of the increase in capital and current account balance with the assessee had to be analysed on the basis of the balance sheet filed before the assessing officer as on 31.12.1985 and as on 31.03.1993.

ITAT sets aside order of reassessment as affirmed and enhanced by the CIT(A) by allowing Second Appeal of the assessee. Tribunal held that the re-examination carried out by AO was not based on any fresh material or evidence. Therefore the case squarely fell within the four corners of the proviso to Section 147 and reassessments were held to be barred by limitation.

Law Points :

1. Income Tax Act – Section 260A – Appeals before the High Court – Held – findings of the ITAT that the assessee had disclosed fully and truly all material facts necessary for completion of the original assessments, not tenable and remanded the appeals back to the Tribunal to consider the appeals on merit after issuing notice to the parties – No material available before the Tribunal to come to conclusion that the assessee had disclosed fully and truly all material facts required for completion of original assessments. Assessee approached the Supreme Court against the remand order of the High court – Held – Section 139 obligates assessee to furnish voluntarily a return and to disclose all material facts necessary for his assessment for that year fully and truly. Constitution Bench in Calcutta Discount Company Limited v ITO (1961) 41 ITR 1991 held that while the duty of the assessee is to disclose fully and truly all primary and relevant facts necessary for assessment, it does not extend beyond this. Once the primary facts are disclosed by the assessee, the burden shifts onto the AO. Further, it is not the case of the Revenue that assessee had made any false declaration. Therefore it is erroneous to concluded that there was escapement of income on basis of balance sheet” submitted by the assessee before the South Indian Bank for obtaining credit which was discarded by the CIT(A) in an earlier appellate proceeding. Moreover the AO before passing the assessment orders under Section 143(3) assessing officer had made an independent analysis of the incomings and outgoings of the assessee for the relevant previous years which is preceded by notice, enquiry and hearing under Section 142(1), (2) and (3) as well as under Section 143(2). Therefore mere a change of opinion cannot be a ground for reopening of assessment.
2. Income Tax Act – Section 139 (9)(f) – Whether Defective Returns furnished without Books of Account are Invalid – Books of Account not furnished along with Returns –  AO failed to issue any notice to indicate such defect and calling upon to rectify the defect, however had accepted the returns submitted for the relevant Asst Years. Further, orders u/s 143(3) duly verifies the details of accounts as well as incomings and outgoings filed by the assessee. Suffice it to say that a return filed without the regular balance sheet and profit and loss account may be a defective one but certainly not invalid. A defective return cannot be regarded as an invalid return unless AO exercises discretion to intimate the assessee about the defect(s) and assessee fails to rectify the same within the specified period since both the intimation of the defect(s) and its rectification are within the realm of discretion of the assessing officer. Therefore the burden lies on the AO – In the matter at hand in none of the three assessment years, the assessing officer had issued any declaration that the returns were defective. On the other hand assessee / appellant asserted that the returns of income were accompanied by tentative P&L account along with other details of income like cash flow statements, statements showing the source and application of funds reflecting the increase in the capital and current accounts of the partners of the assessee etc., which were duly enquired into by the assessing officer in the assessment proceedings. Held – The reassessments for the three assessment years under consideration were not justified therefore the common order of the Tribunal dated 29.10.2004 is restored as High Court erred in reversing findings of the Tribunal.

For Full Tet of Judgment :

https://main.sci.gov.in/supremecourt/2010/25389/25389_2010_7_1501_49749_Judgement_23-Jan-2024.pdf