Whether assessment can be re-opened beyond four years when all primary facts for making the claim were disclosed to the AO

Kimplas Trenton Fittings Ltd Vs ACIT (Bombay HC) – In the present case, admittedly, the reopening of the assessment is beyond a period of four years of the end of the relevant Assessment Year. The jurisdictional condition under Section 147 in such a case is that there must be a failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment for that Assessment Year. As noted earlier, in the narration of facts, there was a disclosure by the assessee during the course of the assessment proceedings of the fact that

(i) During the previous year ending 31 March 2004, a Memorandum of Understanding (MOU) was entered into with a Swiss Company;

(ii) Under the MOU, the outstanding balance of the loan was settled at Swiss Francs 480,000 as against the outstanding balance of 800,000 Swiss francs;

(iii) The assessee has written back an amount equivalent to Swiss Francs 320,000 equivalent to Rs.1.10 crores as a loan not payable. The assessee relied upon a decision of the Gujarat High Court in CIT v/s. Chetan Chemicals Pvt. Ltd. 267 ITR 770 in support of the submission that the writing back of a loan did not constitute income. Whether the assessee is right in making this submission would assume significance if the jurisdictional requirement is met. The reopening of the assessment is not within a period of four years. Where the re-opening is beyond four years, the escapement of income is not sufficient in itself to validate the reopening. The jurisdictional requirement where an assessment is opened beyond four years is a failure to disclose all material facts necessary for the assessment. Unless that condition is fulfilled, the re-opening cannot be sustained. All material facts were within the knowledge of the Assessing Officer and were placed on the record by the assessee. The reasons which have been recorded by the Assessing Officer for reopening the assessment purport to state that subsequently, that is to say after the order of assessment under Section 143(3) was passed on 29 September 2006, it has come to notice that the assessee had entered into an MOU with the Swiss Company for settlement of the outstanding loan which was however not offered to tax. Ex-facie, this reason is contrary to the record. This is not a fact which has subsequently come to notice but is something which was within the knowledge of the Assessing Officer. The Revenue has not either by filing an affidavit or in the submissions of Counsel disputed that a disclosure was made in the assessee’s letter dated 14 September 2006. Explanation 1 to Section 147 which is sought to be relied upon by the Assessing Officer has no application. This is not a case where an assessee has merely produced account books and other evidence from which material evidence could have with due diligence been gathered by the Assessing Officer. The assessee had both in a note appended to the computation of income and in its letter dated 14 September 2006 brought the attention of the Assessing Officer to bear on the primary facts. Hence for this case, the correctness of the claim of the assessee, as granted upon the acceptance of the computation in the original order of assessment, does not fall for determination here. All primary facts for making the claim were disclosed to the Assessing Officer. Even assuming that there was an error on the part of the Assessing Officer, that cannot legitimately be the basis for re-opening assessment beyond four years unless a failure of the assessee to disclose truly all material facts for the assessment caused it. That is not the case here.

IN THE HIGH COURT OF BOMBAY

Writ Petition No. 2140 of 2011

KIMPLAS TRENTON FITTINGS LTD

Vs

ASSTT COMMISSIONER OF INCOME TAX, MUMBAI

D Y Chandrachud and A A Sayed, JJ

Dated: November 22, 2011

JUDGEMENT