Reassessment – Reason to believe that income had escaped assessment – The subsequent reversal of the legal position by the judgment of the Supreme Court does not authorise the Department to reopen the assessment [beyond a period of four years in a case where original assessment is made u/s. 143(3)], which stood closed on the basis of law, as it stood at the relevant time.

The Respondent-assessee was engaged in the business of civil construction works on contract basis and had claimed deduction u/s. 32A, 32AB, 80HH and 80HHB as under:

Later     on,     6     notices     all     dated     29th     July,     1994    were issued by the Petitioner u/s. 148 for reopening the assessments u/s. 147 for the assessment years 1984-85 to 1989-90, in view of the decision of the Apex Court in N.C. Budharaja and Co. (1993) 204 ITR 412, where the Supreme Court had held that an “article or “things” used in section 32A, 32AB and 80HH refers only to a movable asset and the words “manufacture or construction of an article” cannot be extended to construction of road,   building, dam or bridge, etc. and  Respondent-assessee was therefore not entitled to deduction u/s. 32A, 32AB or 80HH.

The     Respondent-assessee     filed     a    writ     petition     before the Calcutta High Court challenging all the six   notices     issued    u/s.     148.     The     single    bench    of     Judge of the Calcutta High Court (255 ITR 49) dismissed the    writ    petitions    holding    that    the    Assessing    Officer    had prima facie reason to believe that income had escaped assessment. On appeal, the Division Bench of the Calcutta High Court (262 ITR 605) allowed the appeal of the Respondent-assessee. The Division Bench noted that the assessee had claimed benefit u/s. 32A/32AB and section 80HH/80HHB for the relevant assessment years. The Assessing     Officer     had     allowed     the     benefit     under     those    sections, having regard to the law as it stood then governing these provisions.  But there was divergence of opinion in the decision of the various High Courts.  Those benefits would be available only to an industrial undertaking. The assessee had claimed itself to be an industrial undertaking. But this question when came to be considered by the apex court in N.C. Budharaja and Co.’s case (supra), it held that the nature of business as were carried on by Respondent-assessee was not that of an industrial undertaking. The Division Bench held that this decision was rendered in September, 1993. Therefore, admittedly, this was the information on the basis reopening was permissible u/s. 147 but subject to  proviso thereunder. Admittedly, there was no allegation that amounts now sought to be made taxable were not disclosed and therefore it could not be said that there was any omission or failure to disclose fully and truly the materials necessary for assessment. The Petitioner had proposed to reopen the assessment only on the basis of the information derived by it from the decision in N.C. Budharaja’s case and as such the question of four years embargo would not be overcome by the Petitioner.

  On appeal to the Supreme Court by the Petitioner, the Supreme Court held that there was no error in the observation made by the Division Bench of the High Court that once limitation period of 4 years provided in section 149/149(1A) expires then the question of reopening by the Department does not arise. The Supreme Court further held that in any event, at the relevant time, when the assessment order got completed, the law as declared by the jurisdictional High Court, was that the civil construction work carried out by the Respondent-assessee would be entitled to the benefit of   section 80HH which was later reversed in the case of  CIT vs. N.C. Budharaja and Co. The subsequent reversal of the legal position by the judgement of the Supreme Court does not authorise the Department to reopen the assessment, which stood closed on the basis of the law, as it stood at the relevant time. The Supreme Court dismissed civil appeals accordingly.