Burden to call for curing of defects in tax return on assessing officer: Supreme Court [24.1.2024]

The Supreme Court on Tuesday stated that if a tax return is defective, it is up to the officer to inform the assessee to correct the defects and if the officer fails to do so, the return cannot be called defective.

"Ascertaining the defects and intimating the same to the assessee for rectification are within the realm of discretion of the assessing officer. It is for him to exercise discretion. The burden is on the assessing officer. If he does not exercise the discretion, the return of income cannot be construed as a defective return," the Bench of Justices BV Nagarathna and Ujjal Bhuyan said.

The question before the bench was whether the reopening of a concluded assessment, that is, reassessment under Section 147 of the Income Tax Act, 1961 (the Act) following the issuance of notice under Section 148 of the Act is legally sustainable or is bad in law.

In this case, a partnership firm, at the relevant time for three assessment years (1990-91, 1991-92, and 1992-93), while filing returns had not filed a balance sheet/regular books of account because of a search and seizure operation by the Revenue.

The assessment orders under Section 143(3) of the Act were passed, and in years subsequent to the three assessment years, the firm ultimately filed a profit and loss account as well as a balance sheet. While examining it, the assessing officer found a discrepancy, following which the assessment of the appellant and its partners was sought to be reopened for AYs 1988-89 to 1993-94.

Eventually, the assessing officer took cognizance of the profit and loss account as well as the balance sheet filed by the appellant before South Indian Bank to avail credit, based on which assessment for AYs 1988-89 and 1989-90 was completed. Reassessments were also made on the basis of the accounts submitted to the Bank.

Against the reassessment orders, the firm approached the Commissioner of Income Tax (Appeals), averring that as the assessments were sought to be reopened after the expiry of four years from the end of the relevant AY, reassessment was barred by limitation as per the proviso to Section 147. They argued that income escaping assessment could not be computed on an estimated basis. Yet, the assessing officer had allocated the alleged escaped income for the three assessment years in proportion to the corresponding sales turnover.

The CIT(A), rejecting the appellant's contentions, enhanced the quantum of escaped income. However, it noted that the assessing officer had taken the balance sheet filed by the appellant in 1989 as the base for reconciling accounts of the appellant's partners. It was further observed that the profit & loss account and the balance sheet furnished to the South Indian Bank were not reliable.

Aggrieved, the appellant moved the Income Tax Appellate Tribunal, which held that the reassessments for the three assessment years were not based on any fresh material or evidence, and thus, not justified. The case of the appellant was held to be covered under the proviso to Section 147, and the reassessment was declared barred by limitation.

In appeals filed by the Revenue, the High Court reversed the finding of the Tribunal. Challenging the order of the High Court, the firm and its partners moved the Supreme Court.

The Supreme Court also said, “A return filed without a regular balance sheet and profit and loss account may be a defective one but certainly not invalid.”

“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,” the court added.

25 Jan 2024