2016 (6) TMI 337 - HC - Income Tax

Reopening of assessment - payment of interest to the partners on the capital investment and the remuneration to the working partners - as opined by AO by not providing for either of these two payments, the firm had artificially increased its profit which was otherwise exempt under Section 80(IA) - Held that - To begin with, we fail to see how even if such facts are established, it can be said that income chargeable to the tax of the assessee had escaped assessment. The artificially inflated profit and what in the opinion of the Assessing Officer would be the correct profit; both were fully exempt under Section 80(IA) of the Act. Quite apart from these prima facie observations, we notice that it is not observed by the Assessing Officer in his reasons recorded for issuance of the notice that there was any failure on the part of the assessee to disclose true and full material facts. In fact, in the reasons recorded itself, he himself has stated subsequently on verification of the case record and material available on record, it is found that. . This would clearly demonstrate that all necessary facts were already on record and it was only on the basis of the case record that Assessing Officer formed the reason to believe that income chargeable to tax had escaped assessment. Thus we cannot uphold the notice for re-opening which was issued beyond period of four years without there being even remote element of failure on the part of the assessee to disclose true and full facts necessary for assessment - Decided in favour of assessee.

Summary

Issues:
Challenging notice under Section 148 for reopening assessment for AY 2009-10 beyond the prescribed period.

Analysis:
The petitioner, a partnership firm, filed its income tax return for AY 2009-10, which was scrutinized by the Assessing Officer leading to an assessment order under Section 143(3) of the Income Tax Act. Subsequently, the Assessing Officer issued a notice dated 27.3.2015 to reopen the assessment, which was beyond the four-year period from the end of the relevant assessment year.

Upon the assessee's request, the Assessing Officer provided the reasons for the reopening. The reasons highlighted two main issues: first, the non-provision for partners' capital interest leading to higher profits and excessive deduction claims under Section 10B of the Act; second, the failure to provide for remuneration to working partners resulting in inflated profits eligible for deduction under Section 10B.

The assessee objected to the reopening process, which was rejected by the Assessing Officer. The High Court noted that the Assessing Officer needed to establish a belief that income chargeable to tax had escaped assessment due to the assessee's failure to disclose material facts. However, the reasons provided for reopening did not demonstrate any failure on the part of the assessee to disclose relevant facts. The court observed that all necessary facts were already on record, and the Assessing Officer formed his belief based on existing information.

The court concluded that there was no basis for the reopening as there was no failure on the part of the assessee to disclose true and full material facts necessary for assessment. As a result, the notice dated 27.3.2015 for reopening the assessment beyond the prescribed period was quashed, and the petition was disposed of.