2010 (5) TMI 836 - AT - Income Tax

Validity of reopening of assessment u/s 147 - Interest income on FDR - Income from other sources - Facts of the case , The assessee filed its return of income along with the audit report u/s 44AB.The return of income was processed u/s 143(1). Thereafter the AO recorded reasons for reopening and issued a notice u/s 148 reopening the assessment. the AO considered the interest income received by the firm on bank FDRs, as income from other sources. Thus he reduced amount from the book profits declared by the assessee and thereafter recomputed the allowance of remuneration to partners u/s 40(b) and completed the assessment. Aggrieved, the assessee carried the matter in appeal, inter alia, challenging the reopening of the assessment, assessing the interest income on FDR under the head Income from other sources and not under the head Income from profession as well as the computation of book profits by the AO and addition made on share income relating to an ex partner. On appeal, the first appellate authority held hat reopening was bad in law, as, as per him, he did not see any case for escapement of income. Aggrieved, the Revenue had filed this appeal HELD THAT - In any event, the reopening, if taken to its logical conclusion, would not be revenue-neutral in the hands of this assessee. At the stage of reopening, the AO cannot be expected to verify all the files of the recipients of remuneration and then estimate the escapement of income. This is not contemplated under the Act. Hence in our considered opinion, the order of the CIT(Appeals) is erroneous, on all three counts, on which he held that the reopening is bad in law. In our considered opinion, the decision in the case of Rajesh Jhaveri Stock Brokers P. Ltd. 2007 (5) TMI 197 - SUPREME COURT applies on all fours to the facts of this case. Respectfully following the same, we uphold the validity of reopening of assessment u/s 147 and set aside the order of the CIT(Appeals) on this aspect. In the result, this ground of the Revenue is allowed. As the first appellate authority had not adjudicated the issue on merits, we set aside the matter to the file of the CIT(A) for fresh adjudication of the merits of the case. In the result, the appeal of the Revenue is allowed.

Issues Involved:
1. Validity of reopening the assessment under Section 147 of the Income Tax Act.
2. Classification of interest income from Fixed Deposit Receipts (FDRs) as "Income from other sources" vs. "Income from profession".
3. Computation of book profits and the allowance of partners' remuneration under Section 40(b).
4. Addition made on share income relating to an ex-partner.

Issue-wise Detailed Analysis:

1. Validity of Reopening the Assessment under Section 147:
The primary issue in this appeal is the validity of the reopening of the assessment under Section 147 of the Income Tax Act. The Revenue contended that the CIT(Appeals) erred in holding that it was not a fit case for initiating proceedings under Section 147. The Tribunal held that the Assessing Officer (AO) had a prima facie cause to believe that income had escaped assessment. The AO's opinion that interest income from FDRs should be classified under "Income from other sources" and not under "Income from profession" was deemed reasonable. The Tribunal noted that at the stage of initiation, the AO need not finally ascertain the fact of escapement of income by legal evidence or conclusion. The Tribunal found the reasons given by the CIT(Appeals) for holding the reopening as bad in law to be incorrect. The CIT(Appeals) had considered irrelevant factors such as the AO's inconsistency in previous and subsequent years and the revenue-neutral nature of the interest calculation. The Tribunal clarified that the AO's duty was to form a prima facie opinion based on the material available, and the reopening was justified.

2. Classification of Interest Income from FDRs:
The AO considered the interest income received by the firm on bank FDRs as "Income from other sources" rather than "Income from profession." This reclassification led to a reduction in the book profits declared by the assessee and a recomputation of the allowance of remuneration to partners under Section 40(b). The Tribunal upheld the AO's prima facie opinion, stating that it was reasonable to classify the interest income from FDRs held by a Solicitor and Advocate Firm under "Other Sources."

3. Computation of Book Profits and Allowance of Partners' Remuneration:
The AO recomputed the book profits by excluding the interest income from FDRs, resulting in a lower book profit and consequently a lower allowable remuneration to partners under Section 40(b). The Tribunal noted that the AO's approach was based on the definition of book profits, which should be computed under Section 28 to 44D of the Act. The Tribunal found that the CIT(Appeals) had erred in concluding that the AO's method would be revenue-neutral, as the tax implications for partners could vary.

4. Addition Made on Share Income Relating to an Ex-Partner:
The assessee challenged the addition made on share income relating to an ex-partner. The Tribunal did not specifically address this issue in detail, as the primary focus was on the validity of the reopening and the classification of interest income. However, the Tribunal's decision to uphold the AO's approach indirectly impacted the computation of share income and remuneration to partners.

Conclusion:
The Tribunal allowed the Revenue's appeal, upholding the validity of the reopening of the assessment under Section 147. The Tribunal set aside the order of the CIT(Appeals) and remanded the matter for fresh adjudication on the merits of the case, particularly regarding the classification of interest income and the computation of book profits and partners' remuneration. The Tribunal emphasized that the AO's prima facie opinion was reasonable and based on relevant material, and the CIT(Appeals) had erred in considering irrelevant factors and concluding that the reopening was bad in law.

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