2011 (3) TMI 934 - HC - Income Tax

Reopening - Disallowance - The petitioner filed its return of income on October 31, 1994, for the assessment year 1994-95 along with computation of income accompanied by the audit report and relevant annexures as required under section 44AB of the Act - it is apparent that the assessment of the petitioner for the assessment year 1994-95 is sought to be reopened by issuing the impugned notice on the ground that the petitioner had paid usance interest amounting to Rs. 14,32,469 on purchase of ships and had not complied with the provisions of section 40(a)(i) of the Act - Explanation 2 to section 10(15)(iv)(c) of the Act, which has been made retrospectively effective from April 1, 1962, usance interest payable outside India by an undertaking engaged in the business of ship-breaking in respect of purchase of a ship from outside India is deemed to be interest payable on debt incurred in a foreign country in respect of the purchase outside India and as such the same cannot be included while computing the total income of the petitioner - Decided in favour of the assessee

Summary

Issues:
Challenge to notice under section 148 of the Income-tax Act, 1961 for reopening assessment for the assessment year 1994-95.

Analysis:
The petitioner, a registered firm engaged in ship breaking, challenged a notice dated May 28, 2001, issued by the respondent under section 148 of the Income-tax Act, 1961, reopening the petitioner's assessment for the assessment year 1994-95. The notice was based on the petitioner allegedly not deducting tax on interest paid to non-residents outside India, leading to an escapement of income chargeable to tax. The petitioner argued that the usance interest paid on the purchase of ships from outside India should not be included in computing total income, citing the retrospective effect of Explanation 2 to section 10(15)(iv)(c) of the Act. The petitioner contended that as per the amendment, the usance interest is deemed to be interest payable on a debt incurred in a foreign country, thus not subject to tax deduction.

The High Court analyzed the provisions of section 10(15)(iv)(c) and the retrospective effect of Explanation 2, which deems usance interest payable outside India by an undertaking engaged in ship-breaking as interest on a debt incurred in a foreign country. The Court noted that as per this provision, the usance interest paid by the petitioner should not be included in computing total income. Therefore, the basis for reopening the assessment, i.e., the alleged non-compliance with tax deduction provisions, was no longer valid. Consequently, the Court held that the impugned notice under section 148 of the Act was unsustainable and quashed it. The petition was allowed, and the notice dated May 28, 2001, was set aside with no order as to costs.