Tax Return Filed Without Regular Books Of Account Not Invalid, Burden To Call For Curing Of Defects On Assessing Officer: Supreme Court

While deciding the question as to whether reopening of a concluded assessment under Section 147 of the Income Tax Act (“Act”) was legally sustainable or not, the Supreme Court recently held that for the purposes of tax assessment, an assessee's obligation is limited to making a "full and true" disclosure of all "material" or primary facts, and thereafter, the burden shifts on the assessing officer. If a return is defective, it is upto the officer that he intimate the assessee in order that defects may be cured. But if the officer fails to do so, the return cannot be called defective.

"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," the Bench of Justices BV Nagarathna and Ujjal Bhuyan said.

Briefly put, the issue pertained to assessment of the appellant, a partnership firm at the relevant time, for 3 years i.e. 1990-91, 1991-92 and 1992-93 (“the 3 AYs”). The appellant, while filing return for the same, had not filed balance sheet/regular books of account because of a search and seizure operation by the Revenue.

Be that as it may, assessment orders under Section 143(3) of the Act were passed. In years subsequent to the 3 AYs, the appellant ultimately filed profit and loss account as well as balance sheet. While examining the same, the assessing officer found a discrepancy, following which the assessment of the appellant and its partners was sought to be reopened for AYs 1988-89 to 1993-94.

Eventually, the assessing officer took cognizance of profit and loss account as well as balance sheet filed by the appellant before South Indian Bank to avail credit, based on which assessment for AYs 1988-89 and 1989-90 was completed. Reassessments were also made on the basis of the accounts submitted to the Bank.

Against the reassessment orders, the appellant approached the Commissioner of Income Tax (Appeals), averring that as the assessments were sought to be reopened after expiry of 4 years from the end of the relevant AY, reassessment was barred by limitation as per proviso to Section 147. It was further argued that income escaping assessment could not be computed on estimate basis. Yet, the assessing officer had allocated the alleged escaped income for the 3 AYs in proportion to the corresponding sales turnover.

The CIT(A), rejecting the appellant's contentions, enhanced the quantum of escaped income. However, it noted that the assessing officer had taken the balance sheet filed by the appellant in 1989 as the base for reconciling accounts of appellant's partners. It was further observed that the profit & loss account and the balance sheet furnished to the South Indian Bank were not reliable.

Aggrieved, the appellant moved the Income Tax Appellate Tribunal, which held that the reassessments for the 3 AYs was not based on any fresh material or evidence, and thus, not justified. The case of the appellant was held to be covered under proviso to Section 147 and the reassessment declared barred by limitation.

In appeals filed by the Revenue, the High Court reversed the finding of the Tribunal. Challenging the order of the High Court, the appellant and its partners approached the Supreme Court.

At the outset, the Supreme Court Bench analyzed Section 147, which provides that if the assessing officer has “reason to believe” that any income chargeable to tax has escaped assessment for any AY, he may re-assess such income, and such other income which has escaped assessment and comes to his notice subsequently.

As per a proviso appended to Section 147, re-assessment shall not be made after the expiry of 4 years from the end of the relevant AY, unless income chargeable to tax has escaped assessment owing to failure on the part of assessee to respond to a notice under Section 148 or to disclose fully and truly all material facts necessary for the assessment.

On perusing the facts, the court noted that thought the appellant could not file regular books of account with its return for the 3 AYs, it had provided tentative profit and loss account as well as incomings and outgoings for each of the 3 AYs, which were duly verified and enquired into by the assessing officer and thereafter, assessment orders under Section 143(3) were passed.

It was concluded that the assessing officer erred in relying on the “balance sheet” submitted by the appellant to South Indian Bank to initiate reassessment.

“On the basis of the “balance sheet” submitted by the assessee before the South Indian Bank for obtaining credit which was discarded by the CIT(A) in an earlier appellate proceeding of the assessee itself, the assessing officer upon a comparison of the same with a subsequent balance sheet of the assessee for the assessment year 1993-94 which was filed by the assessee and was on record, erroneously concluded that there was escapement of income and initiated reassessment proceedings”, the court said.

It was opined that the assessing officer could have issued notice to the appellant for not filing regular books of account with its return for the 3 AYs, however the same was not done. In none of the 3 AYs, the assessing officer issued any declaration that the returns were defective.

“A return filed without regular balance sheet and profit and loss account may be a defective one but certainly not invalid”, the court remarked.

In arriving at a decision, a plethora of judicial precedents were considered, including the decision by a Constitution Bench of the court in Calcutta Discount Company Limited v. Income Tax Officer (1960). It was explicated that "full and true disclosure" is the voluntary filing of a return of income that the assessee earnestly believes to be true.

“Production of books of accounts or other material evidence that could ordinarily be discovered by the assessing officer does not amount to a true and full disclosure.”

In the facts of the case, it was observed that even as per the Revenue, the assessee had not made a “false” declaration.

In closing, the court expressed that the case reflected a "change of opinion", which could not be a ground for reopening assessment.

“…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.”

Accordingly, the common order of the High Court was set aside and that of the Tribunal restored.

Counsel for appellant (assessee): Senior Advocate Raghenth Basant; Advocates Kaushitaki Sharma and Prerna Acharya

Counsel for respondent (revenue): ASG N. Venkataraman, Advocates Shyam Gopal, Prahlad Singh, Shashank Bajpai, Suyash Pandey, Prashant Singh Ii, and TS Sabarish; AOR Raj Bahadur Yadav

CASE TITLE: M/S MANGALAM PUBLICATIONS, KOTTAYAM V. COMMISSIONER OF INCOME TAX, KOTTAYAM, CIVIL APPEAL NOS. 8580-8582 OF 2011 (AND CONNECTED MATTERS)

Citation : 2024 LiveLaw (SC) 55

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