2012 (10) TMI 742 - HC - Income Tax

Reopening period of limitation deduction of interest expenditure from income from other sources under section 57(iii) of the Act Difference of opinion - third member decision - Held that - Assessee had disclosed primary facts in the returns filed. Further, the Assessing Officer 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 - during the scrutiny assessment proceedings, the Assessing Officer was actually aware about the claim of the assessee under section 57(iii) of the Act - primary onus to provide such details even if not disclosed cannot be shifted on the assessee - reopening of assessment beyond a period of four years - interest paid on borrowed funds, which were utilized for the purpose of shares for earning dividend would fall within the parameters of section 57(iii) of the Act - 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 assessment years, must fail on that ground alone in favor of assessee

Summary

Issues Involved:
1. Validity of reopening assessments under section 148 of the Income-tax Act, 1961.
2. Whether the assessee failed to disclose fully and truly all material facts necessary for assessment.
3. Whether the interest expenditure claimed under section 57(iii) of the Income-tax Act was allowable.

Issue-wise Detailed Analysis:

1. Validity of Reopening Assessments under Section 148 of the Income-tax Act, 1961:
The petitions challenge the reopening of assessments for the years 1995-96 and 1996-97 under section 148 of the Income-tax Act. The reopening was based on the belief that the assessee had not disclosed all material facts fully and truly, leading to escapement of income chargeable to tax. The Assessing Officer (AO) issued notices on March 11, 2002, which were beyond four years from the end of the relevant assessment years. The AO justified reopening by stating that the assessee did not provide details on how the interest expenditure claimed under section 57(iii) was laid out wholly and exclusively for earning dividend income. The AO relied on various judicial decisions to support the reopening, arguing that the assessee's investments were for acquiring controlling interest in Mastek Ltd. and not solely for earning dividend income.

2. Whether the Assessee Failed to Disclose Fully and Truly All Material Facts Necessary for Assessment:
The AO contended that the assessee did not submit essential details such as balance sheets, capital accounts, and specifics of shareholding in Mastek Ltd. The assessee countered that all necessary documents were submitted during the original assessment proceedings. The court examined whether the assessee had a duty to disclose such details and whether the AO could have called for additional information during the original assessment. The court noted that the primary duty of the assessee is to disclose all material facts, and once done, it is the AO's responsibility to draw correct inferences. The court found that the assessee had provided sufficient information, including details of loans, investments, and interest payments, during the original assessment proceedings.

3. Whether the Interest Expenditure Claimed under Section 57(iii) of the Income-tax Act was Allowable:
The AO argued that the interest expenditure was not incurred solely for earning dividend income but for gaining controlling interest in Mastek Ltd., making it ineligible for deduction under section 57(iii). The court examined whether the expenditure was laid out wholly and exclusively for earning income. It was noted that the assessee had invested in shares and incurred interest expenditure, which yielded dividend income. The court emphasized the distinction between the purpose and motive of expenditure, stating that the expenditure must be for earning income, not for acquiring controlling interest. The court found that the assessee's investments were for earning dividend income, and the interest expenditure was allowable under section 57(iii).

Judgment:
The court held that the reopening of assessments was not justified as the assessee had disclosed all primary facts necessary for assessment. The court quashed the impugned notices issued under section 148, stating that there was no failure on the part of the assessee to disclose fully and truly all material facts. The court also clarified that the AO could not reopen assessments based on a mere change of opinion without new tangible material. The petitions were allowed, and the reopening notices were set aside.