Whether reassessment of escaped income without any express finding or direction can be made under explanation (2) to Sec 153(3) - YES: HC

THE issues before the Bench are - Whether reassessment of the escaped income without any express finding or direction can be made under explanation (2) to Section 153(3) and Whether when the opening stock value is increased, the closing stock will necessarily be enhanced in the preceding year. And the verdict goes in favour of the Revenue.

Facts of the case

The AO held that the closing stock could not be valued without taking into account the work in

progress, the cost of labour and office expenses and added the said amount to the income of the assessee. Assessee contended that in case the closing stock is revalued, the opening stock is also required to be revalued.

AO rejected the claim of assessee stating that the assessee has been following wrong method of accounting in respect of closing stock and if it is allowed to adjust the difference in opening stock, the profit & loss account would not reflect the true picture of the profit during the year because all along these years the assessee has been unilaterally suppressing its value of work-in-progress and thereby the profit of the year.

CIT (A) accepted the contention of the assessee that the opening stock of the assessment year 1997-98 could be revised, but he was of the opinion that a corresponding revision of the closing stock of the assessment year 1996-97 was necessary in that case. ITAT also directed AO to recomputed the opening stock. AO while re-computing the same stated that no specific deletion of income has been ordered and both the appellate authorities have observed that the same yardstick should be applied to the OS which will obviously reduce the net addition in the year under consideration but will correspondingly & equally enhance the income of the preceding year i.e. AY 1996-97. Due to addition in the value of closing stock of W.I.P. as on 31.3.1997, the opening stock value of W.I.P. as on 1.4.1998 i.e. for the assessment year 1998-99 was enhanced equally and correspondingly. Thus, the assessee is trying to take double & undue benefit in the assessment year 1998-99 as well as in the assessment year 1997-98.

Against the said order CIT (A) held that AO is bound to give effect to the directions of the Hon'ble ITAT so long as the orders of the Tribunal are not reversed by the Higher Judiciary, irrespective of the fact that the assessed income comes down below the returned income. The AO is directed to give effect to the directions of the Hon'ble ITAT and if he is not satisfied, it can file an appeal before High Court. ITAT also confirmed the order of CIT (A).

In order to give effect to the said order, Revenue recomputed the opening stock value as per the direction of revenue but simultaneously issued notice u/s 148 for the preceding assessment year and enhanced the income for the preceding year.

Assessee contended that as per section 150(2), the Appellate Authority could give directions for the re-assessment only in respect of that assessment year in respect of which re-assessment proceedings could be initiated on the date of passing of order under appeal. In the case of appellant company, it is apparent that the order under appeal before ITAT was order of the CIT(A) which was passed against the order of the A.O. giving effect to the order of Tribunal. The order under appeal was A.O.’s order and as on that date the time limit for reopening of assessment for A.Y. 1996-97 was already lapsed. Hence, as per the provisions of section 150(2), the ITAT could have not given the direction u/s. 150(1) of the Act. Consequently notice issued u/s. 148 for A.Y. 1996-97 was time barred u/s. 149 and without jurisdiction. Therefore, order passed u/s 147 must be annulled. ITAT observed that in view of the specific provisions contained in sub-section (2) of section 150 the issuance of notice of section 148 in pursuance of the order of the Tribunal for A.Yr. 1996-97 is bad in law and untenable.

Revenue contended that the prayer of the assessee to have the opening stock for the assessment year 1997-98 revalued was allowed on the condition that the closing stock of the assessment year 1996-97 would correspondingly be enhanced. The assessee from the day one accepted the position that the order directing revaluation both of the opening stock of the 1997-98 and the closing stock of 1996-97 was a valid and legal order. It was no longer open to the assessee to turn round and challenge the legality of the order directing the revaluation of the closing stock of the assessment year 1996-97.

After hearing both the parties, the Hon’ble High Court held that,

++ whenever an income is deleted or excluded from one year a corresponding inclusion in the appropriate year by resorting to reopening the assessment for that year is specifically permitted by the Explanation 2 to Section 153 (3) of the Act. Therefore the limitation provided under Section 148 and 149 of the Act has to be considered in the light of Section 150 and Sub-section (3) of Section 153 read with Explanation 2. The reassessment of the escaped income of the assessment year 1996-97, without any express ‘finding’ or ‘direction’ can be made under Explanation (2) to Section 153 (3) and in a case where no express finding or direction is there, like the one in the order dated 12th August, 2002, the reassessment could be made under Section 153 (3) (ii);

++ the assessee has not challenged the appellate order on the ground of increasing the closing stock in the preceding year. Therefore, the assessee is deemed to have accepted the finding or direction that “thus closing stock value of work in progress, will necessarily be enhanced in the preceding year i.e., assessment year 1996-97.” Thus, the assessee is estopped from challenging the same