2016 (10) TMI 214 - AT - Income Tax

Reopening of assessment - disallowance of expenses towards the interest paid to the partners of the firm - Held that - Once neither the question was asked from the assessee nor any enquiry was conducted by the Assessing Officer nor he applied his mind on the deductibility of the interest to the partners, therefore in our view, no opinion was formed by the Assessing Officer in the original assessment proceedings in this regard. Since we have held that no opinion was formed by the Assessing Officer in the original assessment proceedings, therefore, the reopening made by the Assessing Officer on the same facts cannot be said to be bad in law and is in accordance with law mentioned hereinabove. By respectfully following the judgment of Full Bench of Hon ble Delhi High Court in the case of Usha International (2012 (9) TMI 767 - DELHI HIGH COURT ) we uphold the reopening proceedings for the reassessment. Moreover, in the light of the above judgment referred hereinabove, it does not matter even if the reopening/reassessment are sought to be initiated on the basis of the material already available on the record in the original assessment proceedings. - Decided against assessee Disallowance of interest paid to the partners towards the capital contribution - Held that - Since the assessee had admitted that the amount of ₹ 62,65, 456/- as unexplained cash deposits of the assessee, though, the said amount was applied by the assessee to the capital account of the partners. In our view, the assessee cannot claim the interest on its own amount. The interest is only payable to the assessee if the amount is brought in by the partners as a capital or the capital is borrowed by the assessee from the third party. Since the assessee has admitted that the amount brought in was the bogus capital of the assessee, therefore, the assessee is not liable to the deduction in the payment of the interest to its partners. In our view, the income tax is required to be calculated in the right hands i.e assessee and the submissions of the assessee that the said amount has already been declared by the assessee s partners in the individual returns of income is of no consequences. For the default or wrong application of the interest by the partners in their returns of income will not be come in the way to tax the assessee for wrong deduction in the return of income of the assessee. The income tax is tax on the person who is in law duty bound to pay the interest. The plea of the double tax, in our view, is also not maintainable as the assessee is claiming the deduction of the interest paid in its account whereas the partners are paying the tax on the interest earned on the alleged capital introduced by the company in the capital account of the partners. As we have already held unexplained amount deposited in the accounts of the partners was the cash deposit of the assessee firm, therefore, merely deposit of the said amount in the accounts of the partners, do not make the assessee liable to pay the interest to its partners on its own money. In the light of the above, the income chargeable to tax as escaped assessment has the interest of ₹ 8,66,831/- was not brought to tax in the case of assessee and the assessee has wrongly claimed the deduction in the original assessment proceedings. In view of the above discussion, we also dismiss this ground No. 2 of the assessee s appeal.

Summary

Issues Involved:
1. Validity of reopening the assessment under Section 148 of the Income Tax Act, 1961.
2. Disallowance of interest paid to partners on unexplained cash credits.

Issue-wise Detailed Analysis:

1. Validity of Reopening the Assessment Under Section 148 of the Income Tax Act, 1961:

The assessee argued that the reopening of the assessment was solely based on audit objections without independent application of mind by the Assessing Officer (AO). It was contended that the AO did not record subjective satisfaction based on evidence and relied on borrowed satisfaction from other officials. The assessee also claimed that the information from the audit party on the issue of law could not be a ground for reopening the assessment, thus making the order invalid.

The Tribunal examined the facts and legal precedents, including the Full Bench judgment of the Delhi High Court in CIT Vs. Usha International and the Supreme Court's observations in A.L.A. Firm. It was noted that the AO had not conducted any enquiry or applied his mind to the issue of payment of interest on the cash credits introduced by the firm in the partners' accounts during the original assessment proceedings. Therefore, no opinion was formed by the AO in the original assessment, and the reopening was not merely a change of opinion but was based on the discovery of an error in the original assessment.

The Tribunal upheld the reopening of the assessment, stating that it was in accordance with the law and did not matter even if the reassessment was initiated based on the material already available on record during the original assessment proceedings.

2. Disallowance of Interest Paid to Partners on Unexplained Cash Credits:

The assessee firm had introduced capital in the accounts of its partners and surrendered the amount as unexplained cash deposits under Section 68 of the Act. The AO disallowed the interest paid to partners on these unexplained credits, amounting to ?8,66,831/-, which was initially allowed in the original assessment.

The Tribunal held that since the assessee admitted the amount as unexplained cash deposits, it could not claim interest on its own money. The interest is payable only if the capital is brought in by the partners or borrowed from a third party. The Tribunal emphasized that the income tax should be calculated in the right hands, and the wrong application of interest by the partners in their returns of income does not affect the tax liability of the assessee firm.

The plea of double taxation was also dismissed, as the interest claimed as a deduction by the assessee firm was different from the interest income declared by the partners. The Tribunal concluded that the income chargeable to tax had escaped assessment due to the wrongful claim of interest deduction in the original assessment.

Conclusion:

The Tribunal dismissed the appeal of the assessee, upholding the reopening of the assessment under Section 148 and the disallowance of interest paid to partners on unexplained cash credits. The order was pronounced in the open court on 16/08/2016.