2016 (10) TMI 96 - HC - Income Tax

Reopening of assessment - assessee company had borrowed huge loans - Held that - There is a thin line between the disclosure which disguises a material fact and therefore would be in terms of the proviso read with explanation 1 would amount to failure of disclosure and one where it would be the duty of the Assessing Officer on the basis of primary facts disclosed by the assessee to draw further inferences on facts and or in law. Significantly, explanation 1 refers to discovery by the Assessing Officer while exercising due diligence. In the present case, what formed part of the record was that the assessee company had borrowed huge loans from said two persons. What did not form part of the record was whether on such loans any interest was paid or not, a fact which could not have been evident or visible to the Assessing Officer unless he had made further inquiries. Undoubtedly, the Assessing Officer could have made further inquiries and ascertained for his satisfaction whether on such borrowings any interest was paid or not and had he done so, as is referred to in explanation 1 to Section 147, he would have discovered a material fact viz. of the company not paying interest on sizeable borrowings. In fact, the fact that the said two lenders were the Directors of the Company is not appearing in the annexures D and E to the audit report where the figures of loans are mentioned. Thus, the assessing officer would have to correlate different documents only upon which, if at all, he would learn that the two directors had advanced huge loans to the company. Thus, this case clearly fell within the scope of explanation to Section 147 of the Act. This would not therefore prevent the assessing officer from reopening the assessment beyond a period of four years from the reign of assessment year. - Decided against assessee

Issues Involved:
1. Validity of notice for reopening assessment beyond four years.
2. Full and true disclosure of material facts by the assessee.
3. Claim of exemption under Section 10B of the Income Tax Act for FDR interest.
4. Non-charging of interest on loans advanced by directors and its impact on profits.

Detailed Analysis:

1. Validity of Notice for Reopening Assessment Beyond Four Years:
The petitioner challenged the notice dated 31.3.2014 issued by the Assessing Officer to reopen the assessment for the year 2007-08, arguing it was beyond the permissible period of four years. The petitioner contended there was no failure to disclose truly and fully all material facts. The court examined whether the conditions for reopening beyond four years were met, focusing on whether there was a failure to disclose material facts necessary for assessment.

2. Full and True Disclosure of Material Facts by the Assessee:
The petitioner argued that all necessary facts were disclosed, including the loans from directors, which were part of the audited accounts. The court, however, noted that while the loans were disclosed, the fact that no interest was paid on these loans was not evident from the records. The court emphasized that the duty of the assessee is to disclose primary facts, and the omission to disclose that no interest was paid constituted a failure to disclose fully and truly all material facts.

3. Claim of Exemption Under Section 10B of the Income Tax Act for FDR Interest:
The court found that the claim of exemption for FDR interest under Section 10B was part of the original return and accompanying documents. The Assessing Officer could have disallowed this claim during the original assessment. Thus, reopening the assessment on this ground beyond the four-year period was not permissible.

4. Non-Charging of Interest on Loans Advanced by Directors and Its Impact on Profits:
The Assessing Officer argued that the profits of the eligible unit under Section 10B were artificially inflated because the directors did not charge interest on the loans advanced to the company. The court noted that under Sub-section (10) of Section 80IA, applicable to Section 10B, the Assessing Officer could adjust the profits if the business arrangement produced more than ordinary profits due to close connections. The court held that the non-charging of interest by the directors and the resultant higher profits were material facts that were not disclosed, justifying the reopening of the assessment.

Conclusion:
The court dismissed the petition, ruling that the notice for reopening the assessment was valid. The court concluded that the petitioner failed to disclose fully and truly all material facts, particularly regarding the non-payment of interest on loans from directors, which justified the reopening of the assessment beyond the four-year period. The claim of exemption for FDR interest under Section 10B, however, could not be a ground for reopening the assessment beyond four years.

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