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High Court Of Calcutta
GHOSH, R. N. PYNE
INCOME-TAX OFFICER, "B" WARD - Appellant
Versus
BRITISH PAINTS INDIA LTD. - Respondent
Appeal 159 Of 1973
Decided On : 03/06/1978
INCOME TAX - REOPENING OF ASSESSMENT - NON-DISCLOSURE OF MATERIAL FACTS - VALUATION OF STOCK-IN-TRADE AND WORK-IN-PROGRESS - SECTION 147(a) OF THE INCOME-TAX ACT, 1961 - WHETHER THERE WAS NON-DISCLOSURE OF MATERIAL FACTS JUSTIFYING REOPENING OF ASSESSMENT - HELD, NO.
Fact of the Case:
The assessee, a company engaged in the manufacture and sale of paints and resins, was issued notices under Section 148 of the Income-tax Act, 1961, seeking to reopen its assessments for the assessment years 1956-57 to 1959-60. The reason for reopening the assessments was that the assessee had undervalued its stock-in-trade and work-in-progress, resulting in under-assessment of profits. The assessee challenged the notices, contending that it had disclosed all relevant information regarding the valuation of its stock-in-trade and work-in-progress in its balance sheets and profit and loss accounts, and that the reopening of the assessments was merely due to a change of opinion by the subsequent ITO.
Finding of the Court:
The court held that the assessee had disclosed all relevant primary facts necessary for the valuation of its stock-in-trade and work-in-progress to the ITO making the assessment. It was the duty of the concerned ITO to find out, when all the primary facts were disclosed by the assessee and were before him as to what was the correct principles of valuation to be adopted in the instant case. The court further held that the method adopted by the assessee was one of the recognized methods of valuation and that the subsequent change of opinion by the ITO did not confer jurisdiction upon him to reopen the assessment.
Issues: 1. Whether there was non-disclosure of material facts by the assessee justifying the reopening of assessment under Section 147(a) of the Income-tax Act, 1961? 2. Whether the method of valuation adopted by the assessee was a recognized method of valuation?
Ratio Decidendi: 1. The court held that there was no non-disclosure of material facts by the assessee. The assessee had disclosed all relevant primary facts necessary for the valuation of its stock-in-trade and work-in-progress to the ITO making the assessment. It was the duty of the concerned ITO to find out, when all the primary facts were disclosed by the assessee and were before him as to what was the correct principles of valuation to be adopted in the instant case. 2. The court held that the method adopted by the assessee was one of the recognized methods of valuation. The method adopted by the assessee is one of the recognised methods of valuation. But what is being disputed is that the assessee did not indicate to the officer making the assessment the correct method of valuation applicable to the facts of this case and it was the duty of the assessee to satisfy the ITO that the method of valuation adopted by the assessee was the correct method. We are unable to accept this contention of the department.
Final Decision: The court dismissed the appeal filed by the revenue and upheld the judgment and order of the lower court, which had quashed the notices issued by the ITO seeking to reopen the assessments for the assessment years 1956-57 to 1959-60.
( 1 ) THIS appeal is directed against a judgment and order dated January 17, 1973, of T. K. Basu J. [1974] TLR 115 allowing the respondent company's application made under art. 226 of the Constitution challenging the validity of five notices all dated 14th December, 1964, issued under Section 148 of the Income-tax Act, 1965 (hereinafter referred to as "the Act") in respect of the assessment years 1956-57, 1957-58, 1958-59, 1959-60 and 1961-62. By the aforesaid notices the appellant sought to reopen the respondent's assessments in respect of the aforesaid years.
( 2 ) OUT of the aforesaid five notices the learned judge of the court of first instance cancelled and rescinded four notices relating to the assessment years 1956-57 to 1959-60 and directed the appellant to forbear from giving effect thereto in any manner whatsoever. The learned judge however upheld the notice for the assessment year 1961-62 and as there is no appeal against that decision it is not necessary for us to refer to the said notice for the assessment year 1961-62.
( 3 ) AS the learned judge of the court of the first instance in his judgment has set out the relevant facts of this case in detail, to avoid prolixity, it is not necessary to recite the same. It appears that the assessments in respect of the said years were sought to be reopened by the I. T. department on the ground that there was escapement of income from the assessment because of the fact that the assessee's stock-in-trade and work-in-progress were not correctly assessed due to non-disclosure of material facts by the assesses. The department's case and the reasons for reopening of the assessments and issuance of the said notices would appear from the affidavit of one Mohamed Maraikayar affirmed on the 22nd May, 1964, which was used in opposition on behalf of the department in the court of the first instance and the material portion of the recorded reasons which were disclosed pursuant to the court's order and set oat by the said deponent in his another affidavit affirmed on the 1st December, 1972.
( 4 ) THE reasons given by the said Maraikayar in his original affidavit mentioned above were summarised by the learned judge of the court of first instance in his judgment, as would appear from pages 80-81 of the paper book of the instant appeal, in the following terms : In the original affidavit in answer to the rule which is
affirmed by Mohammad Maraikayar on the 22nd May, 1965, it was stated that from the facts now available it appears that all the items were valued at cost is not correct. It also appears that the company's claim that it valued its finished goods on the basis of the actual cost is also not correct. It appears that the stock-in-trade and work-in-progress were valued by the company very much below the cost, viz. , at percentages ranging between 80 and 84%. Whatever may be the position of the manufacturing charges to the total cost, the company, according to the deponent, should have valued its closing stock either at cost or at market value, whichever is lower. It is further alleged that the company had changed its method of valuation of stocks without ever drawing the attention of the ITO to this fact. The following significant sentence in para. 4 of the affidavit may be noted : "whatever disclosure that was made by the company was a mere description in the balance-sheet and no more. "
( 5 ) AS the recorded reasons for the respective years were identical except for the amount which according to the said deponent have been under-assessed the learned judge of the court of the first instance quoted in his judgment the relevant portion of the recorded reasons for one particular year, namely, assessment year 1956-57, The recorded reasons read as follows (see [1974] TLR 115, 117):"the company carries on business in manufacture and sale of paints and resins. In the course of assessment proceedings for 1963-64, it was noticed that the company had valued the closing stock
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