Supreme Court: ITR Filed Without Regular Balance Sheet And Profit & Loss Account May Be Defective But Not Invalid

Supreme Court: ITR Filed Without Regular Balance Sheet And Profit & Loss Account May Be Defective But Not Invalid

Rules that the Assessing Officer could have informed the assessee about the defects

The Supreme Court has clarified that ascertaining the defects and intimating the same to the assessee for rectification is at the discretion of the Assessing Officer (AO). If he does not follow it, the Income Tax Return (ITR) cannot be construed as defective.

The Division Bench of Justice BV Nagarathna and Justice Ujjal Bhuyan was considering whether in income tax jurisprudence, the re-opening of a concluded assessment, meaning, the re-assessment under Section 147 of the Income Tax Act, 1961, following the issuance of notice under Section 148, was legally sustainable.

The assessee, a partnership firm, during the Assessment Year 1994-1995, was later registered as a company. It has been carrying on the business of publishing newspapers, weeklies, and periodicals in several languages under the brand name Mangalam.

Before 1994-1995 including the assessment years 1990-1991, 1991-1992, and 1992-1993, it was regularly assessed to income tax.

The AO noted the escaped income for the three assessment years at Rs.50,96,041.00. The amount was further apportioned between those years in proportion to the sales declared by the assessee.

The assessee, against the aforesaid three re-assessment orders, appealed before the first Commissioner of Income Tax (Appeals), IV Cochin. It stated disclosing all material facts necessary for completing the assessments, which could not have been re-opened after the expiry of four years from the relevant assessment year as per the proviso to Section 147.

The assessee pointed out that the limitation period expired on 31 March 1997, whereas the notices under Section 148 were issued and served to it on 29 March 2000. Therefore, the re-assessment proceedings were barred by limitation. Against the total escaped income of Rs.50,96,040.00 for the three assessment years (as quantified by the AO) the CIT(A) enhanced and re-determined the income at Rs.68,20,854.00.

However, the Income Tax Appellate Tribunal (ITAT) decided in favor of the assessee by setting aside the re-assessment orders.

In the appeals filed under Section 260A by the revenue department, the Kerala High Court reversed the findings of the ITAT and ruled in favor of the IT department. Thereafter, the assessee approached the Supreme Court.

The judges, right in the beginning, explained, “The full and true disclosure is the voluntary filing of the ITR by the assessee, believing it’s true. The production of the account books or other material evidence that could ordinarily be discovered by the assessing officer does not amount to a true and full disclosure.”

Thus, it was seen that, subsequently, the only material that came in possession of the AO was the balance sheet of the assessee for the assessment year 1989-1990 obtained from the South Indian Bank.

The AO compared it with the balance sheet and profit loss account for the Assessment Year 1993-1994. He noticed a significant increase in the current and capital accounts of the assessees’ partners. Thus, he inferred that the company’s profit for the three assessment years was significantly higher and escaped assessment. The under-assessment figure was quantified at Rs.1,69,92,728.00.

The top court stated that Section 139 placed an obligation upon every person to voluntarily furnish an ITR. If the income during the previous year exceeded the maximum amount, it was not to be taxed. Furthermore, the assessee must disclose all material facts necessary for that year’s assessment.

To cite its point, the bench referred to the Calcutta Discount Company Limited vs. Income Tax Officer case. It stated that while it was the assessees’ duty to truly disclose all primary and relevant facts, it did not extend beyond that. Once the assessee disclosed the primary facts, the burden shifted to the AO.

The court added, “Based on 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, the AO, upon comparing it to the assessees’ subsequent balance sheet, erroneously concluded that there was escapement of income, and initiated re-assessment proceedings.”

The bench held, “We have noted that an assessment order under Section 143(3) is preceded by a notice, inquiry, and a hearing under Section 142(1), (2), and (3) and 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 AO that the assessee’s income for the three assessment years was much higher than assessed and escaped assessment. This is a mere change of opinion, which cannot be a ground for re-opening of assessment.”

Incidentally, the three-year ITRs did not include the regular books of account. Though under sub-section (9)(f) of Section 139, the ITRs could have been treated as defective by the AO. The assessee would have to be informed to remove the defects, failing which the ITRs would become invalid. However, the materials on record did not indicate that the AO issued any notice to the assessee to inform it about the defects, directing him to rectify the same.

The apex court stated, “A return filed without the regular balance sheet and profit and loss account may be defective but certainly not invalid. A defective return cannot be regarded as invalid. The AO 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 AO may treat it as invalid.”

The bench further noted that ascertaining the defects and intimating the same to the assessee for rectification were within the realm of discretion of the AO. By failing to exercise his power, the ITR could not be construed as defective. In none of the three assessment years, the AO issued any declaration that those were defective.

On the other hand, the assessee asserted both in the pleadings and in the oral hearing that it could not file the regular account books with ITRs for the three assessment years. It was because of the seizure by the department. Still, those were accompanied by tentative profit and loss accounts and other details of income, including the statements of cash flow and statements showing the source and application of funds. It reflected the increase in the capital and current accounts of the assessees’ partners, all of which the AO enquired about during the assessment proceedings.

The court thus held that the tribunal had correctly justified that the re-assessments for the three assessment years were not justified. It set aside the common order of the high court and restored the order of the ITAT.