2010 (1) TMI 730 - HC - Income Tax

Income escaping assessment u/s 147/148 - Interest paid on loans borrowed - interest free loans given to sister concerns - deduction under Section 36(1)(iii) of the Act - Held that - Tribunal has wrongly assumed that reassessment was completed beyond four years from the end of the relevant assessment year and there is no failure on the part of the assessee to make full and true disclosure of material facts necessary for assessment as referred to in the first proviso to the Section. In this context Explanation 2 to Section 147 has to be referred to which exhaustively states certain cases where income chargeable to tax has escaped assessment. Under sub-clause (iii) of clause (c) of Explanation 2, if income has been made the subject of excessive relief under the Act, then the same is one of the circumstances of income escaping assessment. Therefore if excessive deduction of interest is allowed under Section 36(1)(iii) then certainly it is a case of income escaping squarely covered by Explanation 2 to Section 147 of the Act. - While deciding the issue in favor of revenue, matter remanded back to tribunal.

Summary

Issues:
- Validity of reassessment completed under Section 147 of the Income Tax Act for the assessment year 2001-02.

Analysis:
1. The appeal filed by the revenue challenged the order of the Tribunal confirming the cancellation of reassessment under Section 147 for the respondent-assessee. The assessing officer reopened the assessment due to excess deduction of interest granted under Section 36(1)(iii) as interest-free loans were given to sister concerns. The CIT (Appeals) allowed the appeal, stating the reassessment under Section 147 was invalid. The Tribunal upheld this decision, citing it as a change of opinion by the assessing officer regarding the deduction of interest claimed and allowed in the original assessment.

2. The revenue contended that the Tribunal dismissed the appeal based on a decision of the Delhi High Court, which was later overruled by the Supreme Court. The High Court examined the regular assessment completed under Section 143(3) and found that the assessing officer did not discuss the excess relief under Section 36(1)(iii) in detail. The High Court held that the reassessment was not based on a change of opinion as the matter was not thoroughly considered in the original assessment.

3. The High Court analyzed Section 147 of the Income Tax Act, emphasizing that the assessing officer can reassess income if there is a reason to believe that income has escaped assessment. The Court noted that the Tribunal wrongly assumed the reassessment was beyond the four-year limit and that the conditions for reopening an assessment were met in this case.

4. The High Court referred to Explanation 2 of Section 147, which includes cases where income has been made the subject of excessive relief under the Act as a circumstance of income escaping assessment. The Court rejected the argument that subsequent disallowance of relief granted originally should be considered a change of opinion, stating that the assessing officer has the authority to reexamine and revise assessments under Section 147.

5. The High Court allowed the appeal, reversing the Tribunal's decision and restoring the departmental appeal for further consideration on merits. The Court clarified that the assessing officer has the power to reassess income if excessive deductions have been granted, and the Tribunal cannot restrict this power based on the concept of change of opinion.

By analyzing the issues involved in the validity of the reassessment under Section 147, the High Court provided a detailed examination of the statutory provisions, case law, and the assessing officer's authority to reassess income based on the circumstances of the case.