2018 (12) TMI 626 - AT - Income Tax

Validity of re-opening proceedings u/s 147 - addition towards interest income on loan advanced to Six Sigma Gases Pvt. Ltd. on notional basis - Held that - When a regular assessment u/s 143(3) has been made earlier, a presumption can be raised that such an order has been passed on due application of mind. It is well known that a presumption can also be raised to the effect that in terms of section 114(e) of the Indian Evidence Act and judicial and official acts have been regularly performed. In the case of Kelvinator of India Ltd. 2010 (1) TMI 11 - SUPREME COURT OF INDIA had held in similar circumstance that if it be held that an order which has been passed purportedly without application of mind would itself confer jurisdiction upon the AO to reopen the proceedings without anything further, the same would amount to giving premium to an authority exercising quasi-judicial function to take benefit of its own wrong. The necessary ingredients of section 147 in the form of tangible material post completion of assessment proceedings are conspicuously absent. Hence the reopening of assessment does not survive. The assessee was not able to realize interest income offered by it on amount advanced to Six Sigma Gases Pvt. Ltd. in the earlier two assessment years. During the year under consideration, the assessee had duly taken note of the poor financial condition of Six Sigma Gases Pvt. Ltd. and had taken a conscious call of not recognizing the interest income on accrual basis and had even further taken a call for not charging any interest on the said loan for which a separate Board Resolution had also been passed. The poor financial condition of Six Sigma Gases Pvt Ltd had not been disputed by the revenue. The poor financial condition of Six Sigma Gases Pvt Ltd had not been disputed by the revenue. It would not serve any purpose by the assessee having unnecessarily fastened with a tax liability on notional interest income which would never be realized and in future eventually result in claim of bad debt. We hereby quash the reassessment proceedings framed by the ld. AO both on law as well as on facts. - Decided in favour of assessee.

Summary

Issues:
Challenging the validity of re-opening proceedings u/s 147 of the Income Tax Act and consequentially bringing to tax interest income on loan advanced.

Analysis:
The appeal arose from the order of the Commissioner of Income Tax(Appeals) against the order passed by the Deputy Commissioner of Income Tax under sections 147/143(3) of the Income Tax Act for the Assessment Year 2008-09. The only ground raised was challenging the re-opening proceedings and taxing interest income on a loan advanced to a company. The reasons for re-opening included the failure to account for interest income on the loan, resulting in underassessment of income. The assessee argued that the decision was based on poor financial health of the company and had already been considered in the original assessment. The assessee also highlighted a resolution not to charge interest. The AO reopened the assessment despite objections and upheld the tax liability, which was affirmed by the CIT(A).

The Tribunal noted that the reassessment was made within the prescribed time limit but found no new material post the original assessment to justify the reopening. It was deemed a clear case of change of opinion without tangible fresh evidence. The Tribunal cited legal precedents emphasizing that reassessment cannot be based solely on a change of opinion. The Tribunal also considered the merit of the case, noting the assessee's decision not to charge interest due to the poor financial condition of the company. The Tribunal concluded that taxing notional interest income that would never be realized was unjust, and quashed the reassessment proceedings on both legal and factual grounds.

In conclusion, the Tribunal allowed the appeal, ruling in favor of the assessee and quashing the reassessment proceedings. The decision was based on the lack of new material justifying the reopening and the merit of not taxing unrealizable interest income.