CIT vs. FOOD CORPORATION OF INDIA

. 22.08.2012 . . .

Issue Notice. .

Mr. Manoj, Advocate accepts notice on behalf of the respondent. . . .

The appeal is admitted. . . .

The substantial question of law sought to be urged is whether the Tribunal fell into error in not deciding the merits of the ground taken by the Revenue before it questioning the decision of the CIT (Appeals) to delete the disallowance of `593.09 lakhs on account of prior period expenses on the ground that since the reopening of the assessment in respect of prior period expenses has been held by it to be bad in law, the ground had become infructuous. . . .

The brief facts necessary for deciding the appeal are that the assessment of the assessee for the assessment year 2004-05 was reopened for three reasons, which were recorded by the Assessing Officer as follows: - . . . ?On verification of the case records it has been observed that: - . . . (I) The assessee has debited `60099.42 lacs to profit and loss account on account of demurrages. The expenditure being a penalty was inadmissible and should have been disallowed and added back; . . . (II) The assessee has debited `2,70.58 lacs on account of purchase of unconnected wagons which was of capital nature and should have been disallowed subject to allowance of depreciation at the rate of 25 per cent; . . . (III) The assessee has debited prior period expenses of `593.09 lacs.

The assessee is following mercantile system of accounting. Hence, the same should have been disallowed. . . .

In the assessment completed under section 143(3) of the I.T. Act, the same has not been added back/ disallowed.? . . . . .

In the reassessment, all the aforesaid three items were disallowed by the Assessing Officer. The assessee filed an appeal before the CIT (Appeals) who upheld the validity of the reopening of the assessment, but deleted all the three disallowances on merits. The Revenue preferred an appeal before the Tribunal questioning the relief granted by the CIT (Appeals) in respect of the three disallowances. The assessee filed cross-objections before the Tribunal questioning the decision of the CIT (Appeals) upholding the validity of the re-assessment. The Tribunal held that the reopening of the assessment, in so far as it related to the prior period expenses was not valid as it amounted to a change of opinion. It, however, upheld the validity of the reopening of the assessment in so far as the demurrage charges and expenditure in connection with the purchase of unconnected wagons were concerned.

Having held so, the Tribunal held that disallowance of these two items of expenditure was not proper and accordingly affirmed the relief allowed by the CIT (Appeals) in respect of these two items. However, with regard to the merits of the disallowance of the prior period expenses, the Tribunal in para 14 of its order held that since the Assessing Officer did not validly assumed juri iction to reopen the assessment on this point, the Revenue?s ground has become infructuous and accordingly dismissed the same. . . .

The Revenue urges on the strength of the judgment of the Supreme Court in V. Jagmohan Rao and Others v. Commissioner of Income-Tax and Excess Profits Tax, Andhra Pradesh, (1970) 75 ITR 373 that once an assessment is reopened on a particular ground, it is open to the Assessing Officer to rope in all items of income that have escaped assessment and the reassessment proceedings are not confined to the ground or the reason for which the assessment was reopened. In other words, the juri iction of the Assessing Officer in reassessment proceedings is not restricted to the points cited or listed in the notice or reasons. The judgment rested on the wide nature and phraseology of Section 34 of the old Act which corresponds and is identical with to the present Section 147. In this judgment the Supreme Court held as under: - . ?This argument is not of much avail to the appellant because once proceedings under section 34 are taken to be validly initiated with regard to two-thirds share of the income, the juri iction of the Income- tax Officer cannot be confined only to that portion of the income.

Section 34 in terms states that once the Income-tax Officer decides to reopen the assessment he could do so within the period prescribed by serving on the person liable to pay tax a notice containing all or any of the requirements which may be included in a notice under section 22(2) and may proceed to assess or reassess such income, profits or gains. It is, therefore, manifest that once assessment is reopened by issuing a notice under sub-section (2) of section 22 the previous under-assessment is set aside and the whole assessment proceedings start afresh. When . once valid proceedings are started under section 34(1)(b) the Income-tax Officer had not only the juri iction but it was his duty to levy tax on the entire income that had escaped assessment during that year.? . . .

In view of the above authority which continues to bind this Court, this Court is of the opinion that the Tribunal fell into error in not examining the Revenue?s appeal on merits so far as prior period expenses are concerned. The Tribunal failed to appreciate that since the reopening of the assessment on the other two grounds has been held by it to be valid, the Assessing Officer was not precluded from examining the allowability of the prior period expenses, even if the reopening cannot be upheld on the ground of prior period expenses. Accordingly, the appeal of the Revenue is allowed to this extent. The Tribunal is directed to consider and decide the appeal of the Revenue on merits with regard to the issue of prior period expenses. The question of law framed is answered in favour of the Revenue in the manner indicated above. . . . . . S. RAVINDRA BHAT, J . . . . . . . R.V.EASWAR, J . AUGUST 22, 2012 . hs . . . $ 23 . . .