2021 (1) TMI 788 - HC - Income Tax

Reopening of assessment u/s 147 - re-opening the assessment beyond the period of four years under Section 147 - Undisclosed interest on capital' or 'remuneration' from the partnership firm - HELD THAT - It is the settled position of law that the condition precedent for the purpose of resorting to re-opening of the assessment is that the Assessing Officer should be satisfied based on some cogent or tangible material, that the case is one of escapement of income chargeable to tax. In the absence of escapement of any income chargeable to tax, it is not open for the department to re-open the case of the assessee. Mr.Hemani is right in his submission that mere incorporation of interest on partners capital and remuneration does not necessarily mean or should be construed as mandatory. There has to be some material on record to indicate that the writ-applicant had actually received any 'interest on capital' or 'remuneration' from the partnership firm. Where no such income has been earned by the writ-applicant, the question of taxing the same does not arise at all. Applying the very same dictum of law as laid in the case of Alidhara Taxspin Engineers 2017 (5) TMI 1684 - GUJARAT HIGH COURT we have no hesitation in arriving at the conclusion that the re-opening of the assessment is not justified. - Decided in favour of assessee.

Summary

Issues:
1. Validity of the notice issued under Section 148 of the Income Tax Act, 1961 for re-opening the assessment for the Assessment Year 2011-12.
2. Whether the income chargeable to tax had escaped assessment within the meaning of Section 147 of the Act 1961.
3. Justification of re-opening the assessment proceedings beyond the period of four years.
4. Compliance with the condition precedent for re-opening the assessment.
5. Determination of interest on capital and remuneration from the partnership firm.
6. Interpretation of the partnership agreement regarding interest and remuneration to partners.
7. Application of the decision in the case of PCIT vs. Alidhara Taxspin Engineers to the present case.

Analysis:
1. The writ-application challenges the notice issued under Section 148 of the Income Tax Act, 1961 for re-opening the assessment for the Assessment Year 2011-12. The notice was based on the alleged escapement of income chargeable to tax. The writ-applicant sought relief to quash the notice and stay further proceedings pending disposal of the petition.

2. The department claimed that the partnership firm did not provide interest and remuneration to its partners as per the partnership deed during the Assessment Year 2011-12. Allegations were made regarding excess deduction claimed under Section 10AA of the Act, which was considered taxable in the partners' hands. The department contended that the writ-applicant failed to disclose income received from the partnership firm.

3. The primary issue was the justification of re-opening the assessment proceedings beyond the four-year period under Section 147 of the Act 1961. The department alleged that material facts were not fully disclosed, leading to the escapement of income. Objections were filed against the re-opening, which were disposed of by the Revenue.

4. The Court considered the condition precedent for re-opening the assessment, emphasizing the requirement of tangible material indicating escapement of income chargeable to tax. Mere incorporation of interest on capital and remuneration was not sufficient without actual receipt of such income by the writ-applicant.

5. The interpretation of the partnership agreement regarding interest and remuneration to partners was crucial. The Court referred to a previous case where it was held that the partners' wish not to pay/charge interest and remuneration, as reflected in the partnership deed, could lead to deletion of disallowance claimed under relevant sections of the Income Tax Act.

6. Applying the precedent set in a previous case, the Court concluded that the re-opening of the assessment was not justified. The decision in the case of PCIT vs. Alidhara Taxspin Engineers was relied upon to dismiss the appeal and quash the impugned notice, terminating all consequential proceedings.

7. Ultimately, the Court allowed the writ-application, quashed the notice, and held that the re-opening of the assessment was not justified based on the available evidence and legal principles applied in similar cases.