2012 (9) TMI 396 - HC - Income Tax

Validity of notice dated 11.03.2002 issued u/s 148 purporting to reopen assessment of AY 1995-96 on principal objection of AO that deduction u/s 57(iii) is not available in respect of interest on the funds borrowed for purchasing shares for investment - Held that - It cannot be stated that the assessee failed in his duty. Assessee had dis-closed primary facts in the returns filed, making requisite disclosure about the investments as well as the interest paid for borrowings for making such investments. Further, AO had raised certain queries about borrowings and the interest paid thereon and the dividend earned. The assessee, on both the occasions, supplied necessary material through letters and documents produced on record. Thus, during the scrutiny assessment proceedings, the AO was actually aware about the claim of the assessee u/s 57(iii). Hence, there was no failure on the part of the assessee to disclose fully and truly all material facts, necessary for assessment. The notices for reopening the assessments beyond a period of four years, from the end of the relevant AY fails on this ground alone - Decided in favor of assessee.

Summary

Issues:
1. Validity of notice for reopening assessment beyond four years.
2. Sufficiency of reasons recorded by Assessing Officer for reopening assessment.
3. Disclosure of material facts by the assessee during original assessment.

Analysis:

Issue 1: Validity of notice for reopening assessment beyond four years
The petitioner sought to quash a notice dated March 11, 2002, which sought to reopen the assessment for the assessment year 1995-96, beyond the four-year period from the relevant assessment year. The petitioner argued that without any failure on their part to disclose all material facts, reopening beyond the four-year period is impermissible. The petitioner contended that the reasons recorded by the Assessing Officer were insufficient to justify the reopening. The High Court noted that the identical issue had been decided previously, where it was held that there was no failure on the part of the assessee to disclose all material facts necessary for assessment. Therefore, the court held that the reopening of assessment beyond four years was not permissible.

Issue 2: Sufficiency of reasons recorded by Assessing Officer for reopening assessment
The reasons recorded by the Assessing Officer for reopening the assessment were related to the interest deduction under section 57(iii) of the Income-tax Act, 1961. The Assessing Officer objected that interest on funds borrowed for purchasing shares would not be deductible under the said section. However, the High Court did not provide detailed reasons for its conclusion, as a similar issue had been previously decided. The court referred to a case where it was held that the Assessing Officer had the duty to inquire further if necessary based on the disclosures made by the assessee. Since the assessee had disclosed primary facts and provided necessary material during the original assessment, the court found that there was no failure on the part of the assessee to disclose all material facts, thereby quashing the impugned notice.

Issue 3: Disclosure of material facts by the assessee during original assessment
The petitioner submitted a detailed rejoinder along with documents to establish that during the original assessment, queries were raised regarding the investment in purchasing shares of a company. The Assessing Officer's principal objection was related to the deductibility of interest on borrowed funds for purchasing shares. The court emphasized that the assessee had disclosed primary facts and provided necessary material during the assessment proceedings. The court held that there was no failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment, leading to the quashing of the notice for reopening the assessment.

In conclusion, the High Court upheld the petitioner's challenge to the impugned notice and quashed the reopening of the assessment, emphasizing the importance of the assessee's duty to disclose material facts and the Assessing Officer's obligation to inquire further based on such disclosures.