Return filed without regular balance sheet as well as profit & loss account may be defective but not invalid; Assessing Officer can intimate assessee about defects, rules Top Court
Justices B.V. Nagarathna & Ujjal Bhuyan [23-01-2024]

Read Order: M/S MANGALAM PUBLICATIONS, KOTTAYAM v. COMMISSIONER OF INCOME TAX, KOTTAYAM [SC- CIVIL APPEAL NOS. 8580-8582 OF 2011]

Tulip Kanth

New Delhi, January 24, 2024: The Supreme Court has clarified that ascertaining the defects and intimating the same to the assessee for rectification, are within the realm of discretion of the assessing officer. If he does not exercise the discretion, the return of income cannot be construed as a defective return.

The Division Bench of Justice B.V. Nagarathna & Justice Ujjal Bhuyan was considering the perennial question in income tax jurisprudence, whether reopening of a concluded assessment i.e. reassessment under Section 147 of the Income Tax Act, 1961 following issuance of notice under Section 148 is legally sustainable or is bad in law.

The assessee was a partnership firm at the relevant point of time though it got itself registered as a company since the assessment year 1994-95. The assessee has been carrying on the business of publishing newspaper, weeklies and other periodicals in several languages under the brand name Mangalam. Prior to the assessment year 1994-95 including the assessment years under consideration, the status of the assessee was that of a firm, being regularly assessed to income tax.

The assessing officer had worked out the escaped income for the three assessment years of 1990- 91, 1991-92 and 1992-93 at Rs.50,96,041.00. This amount was further apportioned between the three assessment years in proportion to the sales declared by the assessee.

Against the aforesaid three reassessment orders for the assessment years 1990-91, 1991-92 and 1992-93, assessee preferred three appeals before the first appellate authority i.e. Commissioner of Income Tax (Appeals), IV Cochin. Assessee raised the ground that it had disclosed all material facts necessary for completing the assessments and the assessments could not have been reopened after expiry of four years from the end of the relevant assessment year as per the proviso to Section 147. It was pointed out that the limitation period for the last of the three assessment years i.e. 1992-93, had expired on 31.03.1997 whereas the notices under Section 148 were issued and served on the assessee only on 29.03.2000. Therefore, all the three reassessment proceedings were barred by limitation. However, as against the total escaped income of Rs.50,96,040.00 for the above three assessment years as quantified by the assessing officer, CIT(A) enhanced and redetermined such income at Rs.68,20,854.00.

The Income Tax Appellate Tribunal, Cochin Bench, Cochin (Tribunal hereinafter) had decided in favour of the assessee by setting aside the orders of reassessment. However, the High Court of Kerala in appeals filed by the revenue under Section 260A had reversed the findings of the Tribunal by deciding the appeals preferred by the revenue in its favour. Thus, the assessee approached the Top Court.

At the outset, the Bench expounded on the meaning of disclosure and said, “…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.”

From a reading of the reasons recorded by the assessing officer leading to formation of his belief that income of the assessee had escaped assessment for the assessment years under consideration, it was seen that the only material which came into possession of the assessing officer subsequently was the balance sheet of the assessee for the assessment year 1989-90 obtained from the South Indian 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 assessment year 1993-94. On such comparison, the AO 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. The figure of under assessment was quantified at Rs.1,69,92,728.00.

It was further opined by the Bench that Section 139 places an obligation upon every person to furnish voluntarily a return of his total income if such income during the previous year exceeded the maximum amount which is not chargeable to income tax. The assessee is under further obligation to disclose all material facts necessary for his assessment for that year fully and truly. However, referring to Calcutta Discount Company Limited Vs. Income Tax Officer, the Bench opined 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.

“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”, it added.

“We have already taken note of the fact that an 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). If that be the position and 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”, the Bench further held.

Admittedly, the returns for the three assessment years under consideration were not accompanied by the regular books of account. Though under sub-section (9)(f) of Section 139, such returns could have been treated as defective returns by the assessing officer and the assessee intimated to remove the defect failing which the returns would have been invalid, however, the materials on record did not indicate that the assessing officer had issued any notice to the assessee bringing to its notice such defect and calling upon the assessee to rectify the defect within the period as provided under the aforesaid provision.

“Suffice it to say that a return filed without the regular balance sheet and profit and loss account may be a defective one 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”, the Bench held.

It was further noted by the Top Court that ascertaining the defects and intimating the same to the assessee for rectification, are within the realm of discretion of 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.

The Assessee has asserted both in the pleadings and in the oral hearing that though it could not file regular books of account along with the returns for the three assessment years under consideration because of seizure by the department, nonetheless the returns of income were accompanied by tentative profit and loss account and other details of income like cash flow statements, statements showing the source and application of funds reflecting the increase in the capital and current accounts of the partners of the assessee etc., which were duly enquired into by the assessing officer in the assessment proceedings.

Taking note of such facts and circumstances, the Top Court held that the Tribunal was justified in coming to the conclusion that the reassessments for the three assessment years under consideration were not justified. Consequently, the Bench set aside the common order of the High Court and restored the order of the Tribunal.