The main legal point established in the judgment is that the re-opening of assessment must satisfy the conditions of reason to believe and income chargeable to tax must have escaped assessment, and the re-opening notice must not be based on change of opinion.

1. This Petition under Article 226 of the Constitution of India challenges the notice dated 30th March, 2007 issued under Section 148 of the Income Tax Act, 1961 (the Act) passed by the Assessing Officer. The impugned notice dated 30th March, 2007 seeks to re-open the assessment for Assessment Year 2002-03.

2. This Petition was admitted on 23rd January, 2008. At that time, the impugned notice was stayed pending the disposal of the Petition.

3. On 30th October, 2002, the Petitioner filed its return of income for Assessment Year 2002-03. In its return of income, the Petitioner had inter alia claimed deduction on interest paid as revenue expenditure of an amount of Rs.35.62 lakhs under Section 36 (i)(iii) of the Act. This being interest paid on borrowed capital for the purpose of expanding its existing business which had been capitalized in its books of Account. The Petitioner had also claimed depreciation on its intangible assets i.e. Good will and Non-compete fees as a part of its block of intangible assets claiming depreciation at 25%.

4. During the course of assessment proceedings, the Assessing Office called upon the Petitioner to give detailed break up of interest expenditure, interest capitalized and also detailed working of the claim for depreciation. The Petitioner responded to the same by its letter dated 27th January, 2005 furnishing the details as sought. The Assessing Officer satisfied with the Petitioner's response, inter alia, passed an order on 28th January, 2005, accepting the Petitioner's claim on account of interest expenditure as well as on account of depreciation, save and except reducing depreciation claimed on building from the 10% as claimed to 5% which was the prescribed rate. However, as the tax payable under the normal provisions was nil, the Petitioner was brought to tax under Section 115JB of the Act.

5. On 30th March, 2007, the impugned notice was issued by the Assessing Officer, seeking to re-open the assessment for the Assessment Year 2002-03. The reasons as furnished to the Petitioner for re-opening of the assessment reads as under:—

" On verification of the records it is seen that while computing the income of the year assessee company deducted an amount of Rs.35,62,404/- on account of interest capitalized in accounts. Detailed examination of records shows that the assessee had borrowed funds from State Bank of India towards financing the capital projects and capitalized the interest portion before the assets were put to use. However, in computing the income of the year the assessee decided not to claim depreciation on the interest capitalized but claimed it as revenue expenditure in computing the income. Under the existing provision of the section 43(1) of the I. T. Act, 1961 actual cost means the actual cost of the assets to the assessee. As per explanation-8 to section 43(1), where an amount is paid or payable as interest in connection with the acquisition of an asset so much amount that is relatable to the period after such asset is first put to use shall not be included and shall be deemed never to have been included in the actual cost of the assessee. Conversely, the interest paid in acquisition of an asset before it is put to use to be included in the cost of the assets to the assessee.

It is also seen from the records that assessee had claimed depreciation on Good will and Non-compete fees at 25% treating them as intangible assets. Both these items did not find a place in the list of intangible assets as per I. T. Rules 1961. Hence depreciation claimed on Goodwill of Rs.7,89,915/- and on Non-compete fees of Rs.7,03,125/- needs to be disallowed.

In view of the above, I have reason to believe that income chargeable to tax for A. Y. 2002-03 has escaped assessment for failure on the part of the assessee company to disclose fully and truly all the material facts requiring for assessment for A. Y. 2002-03."

6. From the above, it is clear that the reasons in support of impugned notice are tw