Return filed without balance sheet & profit and loss account may be defective but not invalid – Supreme Court quashes assessment made on the basis of balance sheet submitted to bank.
ABCAUS Case Law Citation:
ABCAUS 3846 (2024) (01) SC
Important Case Laws relied upon by parties:
M/s Phool Chand Bajrang Lal Vs. Income Tax Officer (1993) 4 SCC 77
Srikrishna Private Limited Vs. ITO (1996) 9 SCC 534
Income Tax Officer Vs. Lakhmani Mewal Das, 1976 (3) SCC 757; 1976 (103) ITR 437
CIT Vs. Bimal Kumar Damani, (2003) 261 ITR 87 (Cal)
CIT, Delhi Vs. Kelvinator of India Limited, (2010) 2 SCC 723
The assessee was a partnership firm at the relevant point of time. The assessee was carrying on the business of publishing newspaper, weeklies and other periodicals. The assessee did not file any balance sheet alongwith the return of income for three assessment years on the ground that books of account were seized by the Income Tax Department in the course of search and seizure operations and that those books of account were not yet returned.
In the assessment proceedings, the assessing officer made various addition to the disclosed income vide the assessment order passed under Section 143 (3) of the Act.
From fourth year onwards, the assessee had submitted the profit and loss account as well as the balance sheet along with the return of income. From the balancesheet, the AO observed a steep hike in the balance in the capital account of all the partners and this led to serving of notice for reassessment u/s 148 of the Act.
The re-assessment was completed by the AO determining the escaped income on the basis of the profit and loss account and the balance sheet filed by the assessee before the Bank. Objection of the assessee that the aforesaid balance sheet was prepared only for the purpose of obtaining loan from the Bank and therefore could not be relied upon for income tax assessment was brushed aside.
Before the CIT(A), the assessee contended that it had disclosed all material facts necessary for completing the assessments. The assessments having been completed under Section 143(3) of the Act, the assessments could not have been reopened after expiry of four years and all the three reassessment proceedings were barred by limitation. The assessee also argued that the alleged income escaping assessment could not be computed on an estimate basis.
CIT(A) rejected all the above contentions urged by the assessee. CIT(A) relied on Section 139(9)(f) of the Act and thereafter held that the assessee had not furnished the details as per the aforesaid provisions and therefore fell short of the requirements specified therein.
However, CIT(A) noted in an earlier appellate order in the assessee’s own case it had been held that the profit and loss account and the balance sheet furnished to the Bank were not reliable. CIT(A) in the present proceedings agreed with such finding of his predecessor and held that the unexplained portion, if any, of the increase in capital and current account balance with the assessee had to be analysed on the basis of the difference of the last two actual balance sheets filed before the assessing officer.
The Tribunal allowed the appeals filed by the assessee and set aside the orders. The ITAT held that the re-examination carried out by the assessing officer was not based on any fresh material or evidence. The reassessment orders could not be sustained on the basis of the balance sheet filed by the assessee before the Bank because in an earlier appeal of the assessee itself, CIT(A) had held that such balance sheet and profit and loss account furnished to the bank were not reliable. The original assessments were completed under Section 143(3) of the Act. Therefore, it was not possible to hold that the assessee had not furnished necessary details for completing the assessments at the time of original assessment.
However, the Hon’ble High Court held that the finding of the Tribunal that the assessee had disclosed fully and truly all material facts necessary for completion of the original assessments was not tenable. The High Court set aside the order of the Tribunal and remanded the appeals back to the Tribunal to consider the appeals on merits.
Against the order of remand of the Hon’ble High Court the assessee filed special leave petitions (SLPS) before the Hon’ble Supreme Court.
Before the Hon’ble Supreme Court, the ITD contended that the It is submitted that the assessee had not even had accounts pertaining to the advertisement receipts which is a major source of income of a publication entity; as a matter of fact, the assessee had shown the income from advertisements on estimation basis
The Hon’ble Supreme Court observed that \Section 147 as it stood at the relevant point of time provides that if the assessing officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may assess or re-assess such income and such other income which has escaped assessment and which comes to his notice subsequently in the course of proceedings under Section 147.
The Hon’ble Supreme Court noted that as per the reasons recorded by the assessing officer leading to formation of his belief that income of the assessee had escaped assessment, the only material which came into his possession was the balance sheet of the assessee obtained from the Bank. After obtaining this balance sheet, the assessing officer compared the same with the balance sheet and profit loss account of the assessee for the subsequent assessment year. On such comparison, the assessing officer noticed significant increase in the current and capital accounts of the partners of the assessee. On that basis, he drew the inference that profit of the assessee for the three assessment years under consideration would be significantly higher which had escaped assessment. Therefore, he recorded that he had reason to believe that due to omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessments, incomes chargeable to tax for the three assessment years had escaped assessment
The Hon’ble Supreme Court noted that the assessee had filed its regular balance sheet as while filing the return of income seven years before and one year after the assessment years under question and no balance sheet was filed in the interregnum as according to the assessee, it could not maintain proper books of account as the relevant materials were seized by the department in the course of a search and seizure operation and not yet returned. It was not possible for it to obtain ledger balances to be brought down for the succeeding accounting years.
The case of the assessee was that the balance sheet filed by the assessee before the Bank and which was construed by the assessing officer to be the balance sheet of the assessee for the intervening year, was prepared on provisional and estimate basis and was submitted before the Bank for obtaining credit and therefore could not be relied upon in assessment proceedings.
The Hon’ble Supreme Court further observed that in the first appellate proceedings, CIT(A) in its appellate order held that such profit and loss account and the balance sheet furnished to the Bank were not reliable and had discarded the same. That being the position, the assessing officer could not have placed reliance on such balance sheet submitted by the assessee allegedly for the intervening assessment year to the Bank for obtaining credit. Dehors such balance sheet, there were no other material in the possession of the assessing officer to come to the conclusion that income of the assessee for the three assessment years had escaped assessment.
The Hon’ble Supreme Court noted that is has been held by its constitution bench that while the duty of the assessee is to disclose fully and truly all primary and relevant facts necessary for assessment, it does not extend beyond this. Once the primary facts are disclosed by the assessee, the burden shifts onto the assessing officer. It is not the case of the revenue that the assessee had made a false declaration.
Further, the Hon’ble Supreme Court observed that while framing the initial assessment for the three assessment years in question, the assessing officer had made an independent analysis of the incomings and outgoings of the assessee for the relevant previous years, assessment order under Section 143(3) is preceded by notice, enquiry and hearing under Section 142(1), (2) and (3) as well as under Section 143(2).
In view of the above findings, the Hon’ble Supreme Court opined that when the assessee had not made any false declaration, it was nothing but a subsequent subjective analysis of the assessing officer that income of the assessee for the three assessment years was much higher than what was assessed and therefore, had escaped assessment. This is nothing but a mere change of opinion which cannot be a ground for reopening of assessment.
Further the Hon’ble Supreme Court stated that a return filed without the regular balance sheet and profit and loss account may be a defective return but certainly not invalid. A defective return cannot be regarded as an invalid return. The assessing officer has the discretion to intimate the assessee about the defect(s) and it is only when the defect(s) are not rectified within the specified period that the assessing officer may treat the return as an invalid return. Ascertaining the defects and intimating the same to the assessee for rectification, are within the realm of discretion of the assessing officer. It is for him to exercise the discretion. The burden is on the assessing officer. If he does not exercise the discretion, the return of income cannot be construed as a defective return. As a matter of fact, in none of the three assessment years, the assessing officer had issued any declaration that the returns were defective.
Accordingly, it was held that Tribunal was justified in coming to the conclusion that the reassessments for the three assessment years under consideration were not justified. The High Court has erred in reversing such findings of the Tribunal. Consequently, the order of the High Court was set aside and order of the ITAT was restored.
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