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The assessment for the A.Y. 2000-01 was re-opened after the expiry of four years from the end of the relevant assessment year for the reason that though in the tax audit report an amount of Rs.107.70 lakh had been shown u/s.41 of the Act, only Rs.9.23 lakh on account of provision for warranties no longer required was written back under the head ‘Other sources of Income’ leaving a balance of Rs.98.46 lakh resulting in escapement of income. The other reason for reopening was that though dividend income of Rs.188.73 lakh was earned which was exempt u/s.10(33), no disallowance was made of the expenses related to purchase/sale of the investment.
In fact the balance amount of Rs.98.46 lakh was added back under different heads, but was not separately indicated and in its objection the assessee did not take this specific plea. It only stated that Rs.1,07,69,936 was added back/credited to the profit and loss account and one item of Rs.9,23,471 was reflected on the credit side of the profit and loss account. As regards, disallowance of expenses incurred for earning tax-free income it was contended that section 14A was introduced in the statute by the Finance Act, 2001, with retrospective effect from April 1, 1962 and the return was filed on 30-11-2000 and therefore it was not obligatory to make a disallowance and there was no failure on the part of the assessee in disclosing fully and truly the material facts in respect of the expenditure incurred for earning the tax-free income. The assessee also relied upon the proviso to section 14A which prohibited reopening of assessment for any assessment year beginning on or before 1-4-2001.
On a writ challenging the notice issued u/s.148 for want of jurisdiction, the Delhi High Court noted that in reply to the notice issued u/s.154 of the Act the assessee had given the full break-up and specific details with regard to credit/adjustment of Rs.98.46 lakh into profit and loss account and hence it found some merit in the contention of the assessee. However, it did not dwell further on this aspect since the notice was sustainable on the ground of section 14A. According to the High Court the proviso to section 14A only barred the reassessment/rectification and not the original assessment on the basis of retrospective amendment. Since the Assessing Officer had failed to apply section 14A when he passed the original assessment order, it had prima facie resulted in escapement of income. According to the High Court there was an omission and failure on the part of the assessee to point out the expenses incurred relatable to tax-free/exempt income which prima facie have been claimed as a deduction in the income and expenditure account and hence there was omission and failure on the part of the petition to disclose fully and truly the material facts.
On an appeal, the Supreme Court held that in its view the reopening of the assessment was fully justified on the facts and circumstances of the case. However, on merits of the case, it would be open to the assessee to raise all contention with regard to the amount of Rs.98.46 lakh being offered for tax as well as its contention on section 14A of the Act.
[Honda Siel Power Products Ltd. v. Dy. CIT and Others, (2012) 340 ITR 53 (SC)]
