2011 (10) TMI 601 - AT - Income Tax

Reopening of assessment - reasons to believe - Held that - Assessing Officer has rightly reopened the assessment in assessment years 2002-03 and 2003-04 and re-opening of assessment in assessment years 2004-05 and 2005-06 are not sustainable Allowability of interest expenses under sec. 24(b) - Held that - he utilization of funds or investment in the construction of the building by the assessee needs not to be explained through the deductive details available in the different balance sheet rather it should produce direct evidence exhibiting the source of fund and its utilization. Learned CIT(Appeals) has observed that assessee has adopted deductive reasoning for explaining its stand. In our opinion it does not make any difference as to how one explain its position i.e. by deductive reasoning on inductive reasoning. One method enables the adjudication to arrive at fair conclusion by drawing inference from the maternal available on record. The other methods provide the external aid for the above object. The idea under both the methods to arrive at just conclusion which is admissible in law. On due consideration of this logic we are of the view that had these details were available then that would be an ideal situation and there may not be any controversy but can the department put the assessee under tax liability on the ground that why it used the funds borrowed by the partners for the construction purposes or whether the partners as well as the assessee must have used this amount for some other activities. The revenue is unable to collect any evidence demonstrating the other activities. As far as other aspects are concerned there is no dispute between the department and the assessee. The interest expenses incurred by the assessee on the borrowed funds if used for the purpose of construction then deduction of such expenses will be admissible to the assessee under sec. 24(b) of the Income-tax Act 1961. The only dispute between the parties relates to the quantification of amounts used for the purpose of construction. On an analysis of the balance sheet we are of the view that the assessee is able to demonstrate utilization of funds for the purpose of the construction. Revenue authorities without specifying any reason refused to take cognizance of the balance sheet of the partners. In view of the above discussion we allow this ground of appeal raised by the assessee in all the assessment years and direct the Assessing Officer to grant deduction of interest expenses with regard to current interest charges also. Addition to the taxable income of the assessee on the ground that on retirement of partner a capital gain has arisen to the assessee - Held that - We allow this ground of appeal raised by the assessee and held that no capital gain tax would be imposeable upon it on account of alleged allegation of distribution of assets.

Issues Involved:
1. Reopening of Assessment
2. Allowability of Interest Expenses under Section 24(b)
3. Addition of Capital Gains on Retirement of Partner

Issue-Wise Detailed Analysis:

1. Reopening of Assessment:
The first common issue raised by the assessee in all the assessment years is that the Learned CIT(Appeals) has erred in upholding the reopening of assessment. The reopening of assessments was based on the belief that income had escaped assessment due to improper disclosure of material facts by the assessee. The assessee argued that the reopening was based on incorrect facts and mere suspicion, without any fresh information coming to the possession of the Assessing Officer after the filing of the return.

The Tribunal observed that the reopening of assessments for the years 2002-03 and 2003-04 was justified as there was no scrutiny assessment in these years, and the information regarding the interest expenses was derived from the inspection report of the CIT. The Tribunal held that the Assessing Officer had the right to reopen the assessment based on the information available in the records, even if it was not from an external source.

However, for the years 2004-05 and 2005-06, the Tribunal found that the reopening was not justified as the assessments were already scrutinized under Section 143(3). The Tribunal held that the reopening was merely based on a change of opinion, which is not permissible. The Tribunal quashed the reopening of assessments for these years.

2. Allowability of Interest Expenses under Section 24(b):
The second issue involved the allowability of interest expenses under Section 24(b) of the Income-tax Act. The assessee claimed deduction for interest on borrowed capital, which was disallowed by the Assessing Officer on the ground that the borrowed funds were not used for the purpose of construction or repayment of existing loans.

The Tribunal observed that the assessee had taken a loan of Rs. 4 crores from Vysya Bank, which was used for various purposes including repayment of Canara Bank loan, unsecured loans, and payments to creditors. The Tribunal found that the assessee was able to demonstrate the utilization of funds for the purpose of construction through the balance sheets of the partners and the firm.

The Tribunal allowed the deduction of interest expenses, holding that the revenue authorities erred in not appreciating the facts in totality and refusing to take cognizance of the balance sheet of the partners. The Tribunal directed the Assessing Officer to grant the deduction of interest expenses in all the assessment years.

3. Addition of Capital Gains on Retirement of Partner:
The third issue was whether the retirement of partners and reconstitution of the firm resulted in the transfer of capital assets, attracting capital gains tax under Section 45(4).

The Tribunal noted that there was a conflict of opinions among various High Courts on this issue. The Tribunal preferred to follow the decisions in favor of the assessee, holding that on the retirement of partners, if the firm continues with the business, there is no distribution of assets, and Section 45(4) would not be applicable.

The Tribunal allowed the ground of appeal raised by the assessee, holding that no capital gains tax would be imposed on the firm on account of the alleged distribution of assets.

Summary of Results:
(a) ITA No. 1464 & 1465/Del/2010 are partly allowed.
(b) ITA No. 1534 & 1535/Del/2010 are allowed.
(c) ITA No. 2303/Del/2010 is dismissed.

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