Reopening Based on Information in Audited Statements Invalid: Madras HC Finds No Failure by Company to Disclose Material Facts
The Madras High Court quashes reassessment against Sterling Tree Magnum, holding reopening invalid as disclosures were already made in audited statements.
In a recent ruling, the Madras High Court held that reopening the assessment of Sterling Tree Magnum India Ltd was invalid as the reassessment was based solely on information already available in the company’s audited statements and reports, with no failure on the company’s part to fully and truly disclose material facts necessary for the original assessment.
Sterling Tree Magnum India Ltd, a company engaged in developing and selling teak trees on a unit basis, filed a tax return for the assessment year 2002-03, disclosing a change in its accounting policy to align with SEBI’s Collective Investment Scheme regulations.
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The change meant that the amounts collected from customers were treated as liabilities until the trees were sold, instead of being recognised as income upfront. This change was disclosed in the company’s balance sheet, auditor’s report, and directors’ report filed along with the return.
The assessment was initially completed under scrutiny with certain disallowances. After four years, the department issued a notice under Section 148 of the Income Tax Act to reopen the assessment, arguing that income had escaped assessment due to the company’s change in accounting treatment of receipts. The department argued that the change in the method of accounting was not evident to the Assessing Officer during the original assessment, justifying the reopening.
The company’s counsel argued that all material facts regarding the accounting change were clearly disclosed in the financial statements and reports submitted with the return. They argued that the reopening was based entirely on information already available on record, and there was no failure on the company’s part to disclose material facts as required under the law.
A division bench led by Chief Justice K.R. Shriram and Justice Sundermohan observed that the reasons for reopening were based on the company’s audited statements and reports already available with the department during the original assessment.
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The court observed that the Assessing Officer had the opportunity to examine these details during the initial scrutiny, and the reopening was not justified merely because the officer did not notice or interpret the disclosures earlier.
The court held that in the absence of failure on the part of the company to fully and truly disclose material facts, the reopening of assessment after four years was invalid and barred by limitation. The court allowed the tax case appeal and set aside the reassessment proceedings against Sterling Tree Magnum India Ltd.
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