The judgment emphasizes the requirement for the Assessing Officer to have a reason to believe that income has escaped assessment due to the failure to disclose fully and truly all material facts necessary for assessment, as well as the importance of filing a return and seeking reasons before challenging a notice under section 148.

Headnote:
Income Tax - Reopening of Assessment - Section 148 - 143(2) - 143(3) - 147 - 36(1)(iii) - 43-B - GKN Driveshafts (India) Ltd. v. Income-Tax Officer and others - Ipca Laboratories Ltd. v. Gajanand Meena, Deputy Commissioner of Income-Tax - Failure to disclose fully and truly all material facts necessary for assessment
Fact of the Case:

The petitioner, engaged in the business of manufacture of P.V.C. Sheets and Industrial Laminates, challenged an impugned notice issued under section 148 of the Income Tax Act, 1961 for the assessment year 1997-98, alleging escapement of income.
Finding of the Court:

The Court found that the reasons disclosed by the Assessing Officer did not indicate failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. The Court also noted that the reasons were based on erroneous assumptions and, therefore, made the rule absolute in favor of the petitioner.
Issues: Premature filing of the petition, failure to disclose fully and truly all material facts necessary for assessment, and erroneous assumptions made by the Assessing Officer.
Ratio Decidendi: The Court held that the proviso to section 147 of the Income Tax Act prohibits reopening after four years unless there is a reason to believe that income has escaped assessment due to the failure to disclose fully and truly all material facts necessary for assessment. The Court also emphasized the importance of filing a return pursuant to a notice under section 148 and seeking reasons before challenging the notice.
Final Decision: The rule was made absolute in favor of the petitioner, and the petition was dismissed.

JUDGMENT - KAPADIA S.H., J.:---Rule. Respondents waive service.

2. By consent, writ petition is taken up for final hearing.

3. Heard learned Counsel on both sides. In this case, arguments were heard by us on 24-7-2003. After hearing the arguments, the following order was passed:

"For the reasons to be given subsequently rule is made absolute in terms of prayer Clause (a) with no order as to costs."

4. Accordingly, we propose to give reasons for allowing the petition.

REASONS

5. By this petition under Article 226 of the Constitution, petitioner seeks to challenge impugned notice dated 22-1-2003 issued under section 148 of the Income Tax Act, 1961 for accounting year ending 31-3-1997 corresponding to the relevant assessment year 1997-98.

FACTS:

6. Petitioner is engaged in the business of manufacture of P.V.C. Sheets and Industrial Laminates. The petitioner filed its return of income for the assessment year 1997-98. This was on 28-11-1997. The return was initially processed under section 143(1)(a). This was on 17-12-1997 accepting the returned loss. Thereafter, the A.O. issued notice under section 143(2) calling upon the petitioner to give certain details. Thereafter, he completed the assessment vide order dated 31-1-2000 made under section 143(3) of the Act and assessed the petitioner to a total loss of Rs. 6.39 lacs. Subsequently, by the impugned notice dated 22-1-2003 issued under section 148, the A.O. stated that he had reason to believe that the petitioner's income chargeable to tax for the assessment year 1997-98 had escaped assessment and the A.O. called upon the petitioner to file its return of income within 30 days. By letter dated 14-2-2003, the petitioner-assessee called upon the A.O. to furnish copy of reasons in order to enable the assessee to furnish return of income. These reasons were not furnished, inter alia, on the ground that the petitioner had failed to file its return of income after receipt of the impugned notice. In the circumstances, the present petition came to be filed on 6-3-2003. Since reasons were not given, the petitioner assumed the alleged reasons for issuing impugned notice. However, the department has now filed its affidavit dated 15-7-2003 disclosing reasons for reopening assessment under section 147 of the Act. As per the said reasons, it is stated that on the A.O. going through the case records, he had observed escapement of income amounting to Rs. 34.92 lacs. According to the A.O., as per the case records, an amount of Rs. 194 lacs had been shown by the petitioner as capital work-in-progress and also interest payment on account of borrowed funds. According to the A.O., proportionate interest expenditure relating to capital work-in-progress should have been capitalized to the cost of assets and the said expenditure should have been disallowed. That, since it was not disallowed, there has been an escapement of income amounting to Rs. 34.92 lacs on this count. Secondly, according to the A.O., on his going through the balance sheet, it was detected that the assessee had received a subsidy of Rs. 20 lacs during the accounting year ending 31-3-1997 relevant to the assessment year in question which amount has not been used to reduce the cost of assets and, therefore, the said amount should have been taxed as revenue receipts. Thirdly, on going through the case records, the A.O. found that an amount of Rs. 3.42 lacs pertaining to provident fund, which amount was disallowed during the earlier assessment year 1996-97, had been allowed during the assessment year in question and, therefore, according to the A.O., this issue was also required to be looked into. At this stage, it may be noted that if one goes through the reasons annexed to the affidavit, there is no clear prima facie finding that the petitioner had failed to make true and full disclosure of the material facts. The A.O. merely states that certain issues need to be looked into. This aspect is important because we are concerned with assessment year

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