2018 (12) TMI 1661 - AT - Income Tax

Validity of reopening of assessment - validity of reason to believe -notice beyond the period of 4 years - HELD THAT - A perusal of the assessment order clearly shows that ld. Assessing Officer has issued a notice u/s.148 of the Act beyond the period of 4 years without having any fresh evidences nor pointing out what is the failure on the part of the assessee to truly and fully disclosed material facts required for his assessment. This being so, the reopening of the assessment itself is invalid. Even on merits, it is not disputed that interest receipt has been taxed. Once the interest receipt has been taxed, obviously the expenditure incurred in respect of earning such interest receipt being the interest outgo is also liable to be allowed. This being so, even on merits no addition is called for. - Decided in favour of assessee.

Summary

Issues Involved:
Validity of reopening assessment under section 148 of the Income Tax Act beyond the prescribed period of 4 years; Disallowance of interest payments on the grounds of no business activity; Taxation of interest receipts and allowance of interest expenditure.

Analysis:

1. Validity of Reopening Assessment: The appeal challenged the reopening of the assessment under section 148 of the Income Tax Act beyond the stipulated 4-year period. The appellant contended that the assessing officer lacked fresh material to justify the reopening. It was argued that the company, engaged in the business of purchasing and selling pharma raw materials and health care products, had borrowed funds necessitating interest payments. The appellant emphasized that the interest disallowance was unfounded as the interest expenditure was directly related to the borrowed funds. The tribunal concurred, highlighting the absence of new evidence for the reopening and the taxation of interest receipts. Consequently, the tribunal deemed the reopening of the assessment invalid.

2. Disallowance of Interest Payments: The assessing officer disallowed the interest payments, citing the absence of business activity during the relevant assessment year. However, the appellant stressed that the interest payments were legitimate due to the borrowed funds. The tribunal acknowledged that once interest receipts were taxed, the corresponding interest expenditure should also be allowed. Therefore, the disallowance of interest payments based on the alleged lack of business activity was deemed unjustified by the tribunal.

3. Taxation of Interest Receipts and Allowance of Interest Expenditure: The tribunal noted that the interest receipts had already been taxed, indicating that the interest expenditure should be allowed as a legitimate deduction. By recognizing the interrelation between interest receipts and payments, the tribunal concluded that no additional tax liability should be imposed on the appellant. Consequently, the tribunal allowed the appeal, emphasizing the need for consistency in taxing interest receipts and permitting corresponding interest expenditure deductions.

In conclusion, the tribunal ruled in favor of the appellant, declaring the reopening of the assessment invalid and overturning the disallowance of interest payments. The tribunal's decision underscored the importance of justifying assessment reopens with fresh evidence and ensuring consistency in taxing interest receipts and allowing related expenditures.