Income-tax---

----Reassessment---Condition precedent---Reason to believe that income has escaped assessment---Reason must be based on material---Change of opinion will not justify reassessment ---Assessee allowed adjustment in valuation of his closing stock---Subsequent reassessment proceedings on ground that adjustment was erroneous---Reassessment proceedings were not valid-- Indian Income Tax Act, 1961, Ss. 147 & 148.

However, wide the scope of taking action under section 148 of the Income Tax Act, 1961, it does not confer jurisdiction on change of opinion on the interpretation of a particular provision earlier adopted by the assessing authority. For coming to the conclusion that there has been excessive loss or depreciation allowance or that there has been under assessment or assessment at a lower rate or for applying other provisions of Explanation 2 to section 147, it must be on material and it should have nexus for holding such opinion contrary to what has been expressed earlier. Even after the amendment of section 147 mere change of opinion does not confer jurisdiction on the Income-tax Officer to initiate proceedings for reassessment merely by resorting to Explanation 1 to section 147:

Held, that, in the instant case, the reason in terms disclosed that on an earlier occasion the assessee had claimed the amount of customs duty forming part of the closing stock value, by way of a deduction in the computation of set taxable income on the ratio in the case of Lakhanpal National Ltd. v. ITO (1986) 162 ITR 240 (Guj.). It was allowed by the Income-tax Officer. Without there being any material before the Assessing Officer on the basis of which he could hold belief about the correctness of the decision rendered in Lakhanpal's case (1986) 162 ITR 240 (Guj.) which was the decision of the jurisdictional High Court and binding on him otherwise, the Assessing Officer could not have reason to believe that the income had escaped assessment due to application of Lakhanpal's case (1986) 162 ITR 240 (Guj.) by the original Assessing Officer. For the like allowance claimed by the assessee for the assessment year 1992-93 after the issuance of the notices in question in this case, the Assessing Officer had allowed the very same claim notwithstanding the issuance of notice under section 148 in spite of a like claim: The notice for initiating reassessment proceedings for the assessment year 1986-87 was not valid.

Birla VXL Ltd. v. CIT (Asstt.) (1996) 217 ITR 1 (Guj.); CIT v. British Paints India Ltd. (1991) 188 ITR 44 (SC); CIT v. Cadila Chemicals (Pvt.) Ltd. (1998) 230 ITR 885 (Guj.); Garden Silk Mills Ltd. v. Deputy CIT (Assessment) (No. 1) (1996) 222 ITR 27 (Guj.); Garden Silk Mills Ltd. v. Deputy CIT (No.2) (1996) 222 ITR 68 (Guj.); Lakhanpal National Ltd. v. ITO (1986) 162 ITR 240 (Guj.); Praful Chunilal Patel .v. Makwana (M.J.) (Asstt. CIT) (1999) 236 ITR 832 (Guj.) and VXL India Ltd. v. CIT (Asstt.) (1995) 215 ITR 295 (Guj.) ref.

J. F. Shah for Applicant.

B. B. Naik for R. P. Bhatt for Respondent No. 1.

JUDGMENT

R. BALIA, J.---In identical facts and circumstances, an identical issue has been raised in-all these three petitions, the same are being heard and decided together.

For the purpose of revealing the controversy raised in all these petitions, we shall refer to the facts of Special Civil Application No.3257 of 1991.

The petitioner is a private limited company and an assessee under the Income Tax Act, 1961. The petitioner challenges notices under section 148, for reassessment of its income for the assessment year 1986-87. The notices were issued on March 7,1990. The petitioner had submitted the return of its income for the assessment year 1986-87 on January 30, 1987, disclosing an income of Rs.4,46,04,420 as per the statement of income filed alongwith the return. Thereafter, the petitioner-company filed a re-computation of total income alongwith the revised return. In the said re-computation, the petitioner added to the total income of original return a sum of Rs.18,76,126 which it had claimed by way of deduction for the assessment year 1985-86 which was the component of the valuation of the closing stock for that year by. way of adjustment as a result of operation of section 43B of the Income-tax Act and was allowed for that year. As the aforesaid amount as component of the closing stock for the assessment year 1985-86 had been allowed as deduction for that year, to make necessary adjustment in the computation of total income for the assessment year 1986-87, the said amount was sought to be added in the total income of the assessment year 1986-87. The second modification which was sought through the revised return was for adjusting the value of closing stock for that year by excluding the component of customs duty as a consequence of its treatment under section 43B of the Income-tax Act. Thus, the revised return was in respect of adjusting the value of opening stock as well as closing stock by giving effect to adjustments already made in the previous year in the light of provisions of section 43B and for making the same adjustment for the current year's closing stock. During the course of assessment proceedings an inquiry into this claim was directed towards the assessee by the Assessing Officer which was replied to by letter, dated March 9, 1987, which included explaining the reason for claiming modification in adjustment of value of opening stock as well as closing stock. This claim was in consonance with a Bench decision of this Court in Lakhanpal National Ltd. v. ITO (1986) 162 ITR 240. Thus, in the assessment for the assessment year 1986-87 customs duty included in the opening stock having been paid in the assessment year 1985-86 but excluded from the valuation of the closing stock for 1985-86 in the assessment of that year which resulted in reducing the value of closing stock in the assessment year 1985-86 was adjusted by reducing opening stock in trade for the assessment year 1986-87 by the like amount to make it in consonance with the closing stock of the previous year taken into account for the purposes of computing income of that year. Likewise, on the same principle, customs duty paid on closing stock was deleted reducing the value of the closing stock for the assessment year 1986-87 which may result in reduction of the value of opening stock for the assessment year 1987-88.

In the first instance notice under section 147, dated March 7, 1990, was issued for the assessment year 1986-87 which was challenged by the present petitioner byway of S.C.A. No.3557 of 1990. After issuance of rule, on submission being made by the Department that the impugned notice shall be withdrawn, S.C.A. No.3557 of 1990 was not pressed at that time. As the petition was dismissed with liberty to issue proper notice in accordance with law, the impugned notices were issued on March 27, 1991, which has been challenged by way of this petition.

The petitioner contends that the question about-operation of section 43B in the case of the petitioner who is maintaining his books of account on the mercantile basis and as result of its applicability adjustment in the value of closing stock as disclosed in the books of account while computing income chargeable to tax under the provisions of the Income-tax Act had been duly considered by making inquiry into the claim of the petitioner on that basis and hats been allowed by the Assessing Officer after application of mind. The claim of the assessee was supported by a Bench decision of this Court in Lakhanpal's case (1986) 162 ITR 240. That decision has not been reversed or overruled in any other decision, in fact, this Court recently in CIT v. Cadila Chemicals (Pvt.) Ltd. (1998) 230 ITR 885 has reiterated that the issue decided in Lakhanpal's case (1986) 162 ITR 240 does not require re-consideration when a similar question was again sought to be raised by way of reference application under section 256(2) in Cadila Chemicals' case (1998) 230 ITR 885 (Guj.). This being a case of mere change of opinion it was not open to the Assessing Officer to have recourse to section 147. Section 147 does not confer any jurisdiction on the Assessing Officer to review his own order on a mere change of opinion.

Learned counsel for the Revenue has urged that the Income-tax Officer, for reasons recorded in writing, had reason to believe that income of the assessee had escaped assessment which is attributable to under-assessment as a result of wrong allowance of deduction by way of adjustment of the value of closing stock of the customs duty payable on that stock and once that conclusion is reached, no further enquiry into the validity of the reason is envisaged at this stage. This is not the stage to examine the correctness or otherwise of the opinion so held by the Assessing Officer which is in the domain of subjective satisfaction.

We have carefully considered the rival contentions. This Court had occasion to consider the scope of section 147 as amended with effect from April 1, 1989. It would be profitable to have reference to it. In VXL India Ltd. v. Asst. CIT (1995) 215 ITR 295 (Guj.) the Court opined (page 297):

"We are also of the opinion that, howsoever, wide the scope of taking action under section 148 of the Act, it does not confer jurisdiction on change of opinion on the interpretation of a particular provision earlier adopted by the assessing authority. For coming to the conclusion whether there has been excessive loss or depreciation allowance or there has been under-assessment or assessment at a lower rate or for applying other provisions of Explanation 2, it must be material and it should have nexus for holding such opinion contrary to what has been expressed earlier. The scope of section 147 of the Act is not for reviewing its earlier order suo motu irrespective of there being any material to come to a different conclusion apart from just having second thoughts about the inferences drawn earlier."

The principle was reiterated in Birla VXL Ltd. v. Asst. CIT (1996) 217 ITR 1 (Guj.), in which the petitioner's own case for a subsequent assessment year relevant to the assessment year 1992-93 when notices under section 148 were issued on February 5, 1995, relating to escapement of income which included an issue similar to the one at hand about allowance of adjustment in respect of excise duty paid on yarn included in the closing stock of yarn, the Court opined, after holding that there has been no failure on the part of the assessee to disclose truly and correctly material for the purpose relevant for assessment; "the Assessing Officer cannot take any action under this section merely because lie happened to change his opinion or to hold an opinion different from that of his predecessor on the same set of facts. From the earlier assessment which clearly assumes that the Assessing Officer applied his mind to the computation of income and therefore, in a case like this it would not be open to the Assessing Officer to issue notice under section 148 of the Act".

The fact that the present case relates to like adjustment of the customs duty and not the excise duty will make no difference.

The question was again discussed at some length by another Division Bench of this Court in Praful Chunilal Patel v. M. J. Makwana, Asst, CIT (1999) 236 ITR 832. It was a case in which notice under section 147 had been issued. Recording of reasons disclosed that a part of item of income though disclosed as per information submitted by the assessee, had remained to be considered for assessment and, therefore, the income has been under assessed. It was submitted on behalf of the assessee that all facts were correctly disclosed and were on record during the assessment proceedings relevant to the assessment year 1991-92 and the order was made by the Assessing Officer after seeking details. It should be assumed that he has consciously not taxed the income which is now sought to be looked into by him. It was emphasised that it should be assumed that the Assessing Officer had formed an opinion that there was no transfer and hence, no capital gains accrued.

The case of the Revenue had been; on the other hand, that the facts about the valuation of bungalow and distribution of such value among partners of Krishnan Enterprises, of which the petitioners in that case were partners, were found in the assessment of the firm and protective assessment was made and the Assessing Officer had observed that proceedings under section 148 of the Act are separately required to be taken. In a nutshell, the case of the Revenue was that the erroneous nature of the original assessment order and reasons to believe about underassessment of the income of the relevant assessment year was entertained as result of detection about its erroneous nature on the facts which have been referred to in the assessment order of the firm. It was also the case disclosed in the reasons that it was a case of the assessee, who by appending a note to his return, has tried to mislead the Assessing Officer; at the time of the original assessment about the nature of transaction.

The first premise which the Court took into consideration is that the cases of underassessment or excessive relief which are deemed cases of escapement of income leave no scope for an argument that they are not cases of income having escaped assessment. There cannot be any doubt about this proposition. It arises in every case where an assessment results in lesser collection of revenue than what it ought to be. But, as it is noticed, reason to believe that there has been escapement of assessment must not be pretence for change of opinion but must be founded on material having reasonable nexus to the formation of opinion about escapement of income. The sufficiency or adequacy of such material, so for there exists some nexus between the material and the formation of opinion, is not the subject-matter of judicial scrutiny nor holding of such belief on that basis can be challenged which is' subjective in nature, giving jurisdiction to issue notice and initiate proceedings for reassessment. However, the Court, while considering the contention about change of opinion observed, "while considering the cases referred to above change of opinion would mean where, if there is conscious application of mind on the earlier occasion and the assessment is result of such conscious application of mind to the issue which is sought to be reopened. That there has been no conscious application of mind, in the first instance, the question of change of opinion would not arise. It would be then formation of opinion for the first time about the erroneous nature of assessment resulting in escapement".

The Court, while considering the earlier decisions of this Court in Garden Silk Mills Ltd. v. Deputy CIT (Asst.) (No. 1) (1996) 222 ITR 27 and of the same assessee in another case reported in the same volume at page 68 (Garden Silk Mills Ltd. v. Deputy CIT (No. 2). (1996) 222 ITR 68), said (at page 844 of (1999) 236 ITR): .

"Even the decision of this Court in Garden Silk Mills Ltd. v. Deputy CIT (Asst:) (No. 1) (1996) 222 ITR 27 cannot assist the petitioner because in that case it was held that the Assessing Officer was aware about the investment and fluctuations in the exchange rate and depreciation had been allowed after considering the material on record and further that the notice was issued after four years and there was no failure on the part of the assessee to disclose material facts necessary for assessment. Reliance placed on the case of that very assessee, reported in the same volume at page 68-Garden Silk Mills Ltd. v. Deputy CIT (No.2) (1996) 222 ITR 68 (Guj.), also cannot help the petitioner, because in that case the Court found that in the first assessment the Assessing Officer had applied his mind in the computation of income and that there cannot be a mere change of opinion. When, at the first assessment all the relevant aspects are considered and there is proper application of mind for ascertainment of the amount of taxable income and of the tax payable thereon, then in the absence of any error or mistake being discovered or found, the Assessing Officer later on cannot merely for the sake of giving a different opinion, change the earlier opinion. However, in cases where an error or mistake is detected, it can never be said that there is only a mere change of opinion. The mistake or error which is detected and which constituted a valid decision or cause to form a belief in the first assessment as a result of which the income has escaped assessment, would constitute a reason to believe that the income had escaped assessment and such cases where mistakes and errors are detected and which constitute a valid justification or cause to form a belief sought to be corrected, cannot be said to be cases of mere change of opinion. "

We are in respectful agreement with the aforesaid enunciation of distinction between change of opinion and finding erroneous nature of earlier assessment on detection of mistake on an issue which was not earlier considered by the Assessing Officer. The present case may be examined in the light of the principles noticed above. No return has been filed. However, the reasons recorded by the Assessing Officer has been placed on record which are identical in all the three cases except for the amount and the name of the assessee.

The reason in terms disclosed that on an earlier occasion the assessee has claimed the amount of customs duty forming part of closing stock value, by way of a deduction in the computation of net taxable income on the ratio in the case of Lakhanpal (1986) 162 ITR 240 (Guj.) and it was not disallowed by the Assessing Officer while completing the assessment under section 143(3). It further refers that for the reason that due diligence was not exercised by the Assessing Officer. This part of non-exercise of due diligence on the part of the Assessing Officer firstly excludes the possibility of want of true and correct disclosure on the part of the assessee being the cause of such escaped assessment. However, non-exercise of due diligence cannot be equated with lack of application of mind on the part of the Assessing Officer, particularly in view of the fact noticed in the reasons that the claim of the assessee was founded on a decision of this Court and the allowance was in accordance with it.

The reasons recorded by the Assessing Officer which led to the belief about the escapement of assessment disclose that the present case is nothing but mere change of opinion on the facts which were already before the Assessing Officer while making the first assessment to which conscious application of mind is reflected from the proceedings, and allowed in the computation and which has not been disputed by the Revenue. The claim of the assessee has been accepted after considering in the light of the decision rendered by this Court. The reasons do not even disclose that the Assessing Officer issuing notice even entertained doubt about the applicability of the ratio of Lakhanpal's case (1986) 162 ITR 240 (Guj.) to the facts of the case, nor it entertained any belief that the decision has since ceased to be operative. The reference to a later decision of the Supreme Court in CIT v. British Paints India Ltd. (1991) 188 ITR 44, in our opinion, has no relevance or bearing on the controversy with reference to which the assessment for the assessment year 1986-87 is sought to be reopened by the Assessing Officer. Learned counsel for the Revenue has not been able to point out how and in what manner the decision in British Paints' case (1991) 188 ITR 44(SC) has any relevance to the controversy about the claim of the assessee seeking adjustment in the valuation of closing and opening stocks in the computation of taxable income pursuant to operation of section 43B which has been decided by this Court in Lakhanpal's case (1986) 162 ITR 240. The reasons recorded by the Assessing Officer do not even reflect that he has any reason to believe that the earlier decision of this Court in Lakhanpal's case (1986) 162 ITR 240 has been rendered ineffective by any later decision. On the contrary, as we have noticed above, the decision has been reiterated and held to be beyond reconsideration by this Court in a recent decision in Cadila Chemicals' case (1998) 230 ITR 885.

Without there being any material before the Assessing Officer on the basis of which he could hold a belief about the correctness of the decision rendered in Lakhanpal's case (1986) 162 ITR 240 (Guj.), which is the decision of the jurisdictional High Court and binding on him otherwise, the Assessing Officer could not hold reason to believe that the income has escaped assessment due to application of Lakhanpal's case (1986) 162 ITR 240 (Guj.) by the original Assessing Officer.

It may further be noticed that for the like allowance claimed by the assessee for the assessment year 1992-93 after the issuance of the impugned notice in. this case, the Assessing Officer has allowed the very same claim notwithstanding issuance of notices under challenge in respect of a like claim. When the assessment for 1992-93 was sought to be reopened on the alleged erroneous nature of the allowance made in the original assessment, this Court in the assessee's own case has quashed the notice on the ground that it is a mere change of opinion in Garden Silk Mills Ltd. v. Deputy CIT (No.2) (1996) 222 ITR 68 (Guj.).

Reference to an unsustainable claim of deduction of the said amount put forward by the assessee not forming part of the audited profit and loss account of the assessee is also a non-existent reason for the purpose of giving jurisdiction to the Assessing Officer. It is not the case that by not disclosing the audited profit and loss account the assessee laid a claim de hors his account books. As noticed while narrating the facts, the assessee has sought adjustment in the valuation of stock-in-trade as disclosed in-the audited books of account on the ground of applicability of section 438 of the Income-tax Act -as the assessee' is maintaining his books of account on the mercantile system. It is on that premise the enquiry was made and claim was investigated and allowed. Camouflaging language of framing reason the Assessing Officer cannot confer upon himself jurisdiction which does not exist. The consistent view of this Court is that even after the amendment of section 147, mere change of opinion does not confer jurisdiction on the Income-tax Officer to initiate proceedings for reassessment merely by resorting to Explanation 1 on the basis of change of opinion. On the facts of this case the reasons recorded by the Assessing Officer disclose no more than a mere change of opinion.

As a result, these petitions succeed. The impugned notices in each case for initiating reassessment proceedings for the assessment year 1986-87 are quashed. Rule is made absolute in each case. There shall be no order as to costs.

M.B.A./50/FCPetitions allowed