2011 (4) TMI 967 - HC - Income Tax

Reopening of assessment - Exclusion of interest income while computing book profit Change of opinion - according to the respondent the interest of Rs. 2, 43, 927/- which is earned out of business receipt is not business income. It was submitted that while framing the original assessment the petitioner claimed this interest of Rs. 2, 43, 927/- to be business income which came to be accepted by the then Assessing Officer. Now the present Assessing Officer on a mere change of opinion seeks to reopen the assessment on the ground that the said interest is taxable under other sources hence to that extent the business income is less and therefore to that extent remuneration payable to the partners is to be reduced Held that - Once the view taken by the Assessing Officer is a plausible view reopening of assessment on the ground that another view which is more beneficial to the revenue is possible is nothing but a mere change of opinion. In the circumstances in the light of the decision of the Supreme Court in the case of Kelvinator of India Ltd. (2010 -TMI - 35201 - SUPREME COURT OF INDIA) wherein it has been held that one needs to give a schematic interpretation to the words reason to believe failing which section 147 would give arbitrary powers to the Assessing Officer to reopen assessments on the basis of mere change of opinion which cannot be per se reason to reopen; the reopening of assessment is bad in law petition succeeds and is accordingly allowed notice issued by the respondent under section 148 of the Act is hereby quashed and set aside

Issues Involved:
1. Validity of the notice issued under Section 148 of the Income Tax Act, 1961.
2. Whether the reopening of the assessment constitutes a mere change of opinion.
3. Whether the interest income from FDRs should be considered as business income.

Detailed Analysis:

Issue 1: Validity of the notice issued under Section 148 of the Income Tax Act, 1961

The petitioner challenged the notice dated 5th February 2010, issued under Section 148, which sought to reopen the assessment for the assessment year 2005-06. The petitioner argued that the notice was invalid as it was based on a mere change of opinion. The court examined the reasons for reopening provided by the Assessing Officer, which included the exclusion of FDR bank interest of Rs. 2,43,927/- from the book profit for computing partners' salary under Section 40(b). The court found that the reasons for reopening were misconceived as the total income had increased due to disallowance under Section 40(a)(ia), making the claimed partners' salary still allowable. Therefore, the notice under Section 148 was quashed.

Issue 2: Whether the reopening of the assessment constitutes a mere change of opinion

The petitioner contended that the reopening of the assessment was based on a change of opinion, which is not permissible under the law. The court referred to the Supreme Court's decision in CIT v. Kelvinator of India Ltd., which held that reopening based on a mere change of opinion is not valid. The court noted that the original assessment order under Section 143(3) had considered all material facts, including the interest income from FDRs, and the Assessing Officer had applied his mind to the issue. Therefore, the court concluded that the reopening was indeed based on a mere change of opinion and was invalid.

Issue 3: Whether the interest income from FDRs should be considered as business income

The respondent argued that the interest income from FDRs should not be considered as business income and should be excluded while computing book profit under Section 40(b). The petitioner, however, maintained that the interest income was business income as it was earned from deposits made out of business receipts. The court referred to the decision of the Bombay High Court in CIT v. Paramount Premises (P.) Ltd., which held that interest from deposits of business receipts is business income. The court found that the Assessing Officer's original view of considering the interest income as business income was a plausible view. Reopening the assessment on the ground that another view is more beneficial to the revenue was deemed a mere change of opinion.

Conclusion:

The court allowed the petition, quashing the impugned notice dated 5th February 2010, issued under Section 148 of the Income Tax Act. The court held that the reopening of the assessment was based on a mere change of opinion and that the interest income from FDRs was rightly considered as business income in the original assessment. The rule was made absolute with no order as to costs.

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