The validity of reopening an income tax (I-T) assessment has to be determined on the basis of the law as it stands on the date of reopening and not on the basis of a retrospective amendment in the law, the Bombay High Court has said. The recent court order came in a case involving Rallis India and assistant commissioner of income tax. The assessing officer (AO) reopened Rallis India’s assessment for the year 2004-05, four years later on the ground that provisions for doubtful debts, which the assessee had claimed as deduction from book profit, had to be added back to its book profit. This was done before the amendment to a Section of the Income-Tax Act (Section 115JB) under which provisions had to be added back to the book profits. The relevant section deals with minimum alternate tax that is levied on companies, which are exempt from paying corporate tax due to a number of exemptions. A company can make a provision for a doubtful debt, if it has not received payment for goods sold or services rendered. However, the Bombay HC ruled in favour of Rallis India on the ground that the AO had reopened the case before the amendment to Sec 115JB by the Finance Act of 2009, with retrospective effect from April 2001. The court ruled that the retrospective amendment to the section “was not and could not” form the basis of the reopening because it was enacted after the case was reopened. “The validity of the reopening notice must be determined with reference to the reasons recorded by the assessing officer and the same cannot be allowed to be supplemented on a basis which was not present to the mind of the AO and could not have been so present on the date on which the power to reopen the assessment was exercised,” said Bombay-based counsel Bhupendra Shah. “Consequently, the reopening was without jurisdiction.” In the past many companies claimed deductions for provisions for doubtful debt from book profits so as not to pay MAT. On the other hand, assessing officers held that these provisions could be added to book profits by a clause under Section 115 JB. However, in the case of HCL Comnet Systems, the Supreme Court ruled that a provision for doubtful debts was a provision for diminution in the value of the assets and did not fall under Section 115 JB. It was to supercede the SC judgement that the Finance Act 2009 amended the section to provide that even amounts set aside as provisions for diminution in the value of an asset had to be added to the book profits.
