2022 (12) TMI 1281 - HC - Income Tax

Reopening of assessment u/s 147 - transactions in question were in the nature of partners capital withdrawal - HELD THAT - In response to the summons under section 131(1A) the petitioner explained that there was a development agreement entered into between M/s. Sarthak Enterprise and M/s. Savy Unispace Pvt. Ltd. M/s. Sarthak Enterprise received certain amountg as advances from M/s. Savy Unispace Pvt. Ltd. which was partially withdrawn by the petitioner who was partner in the firm M/s. Sarthak Enterprise. The petitioner produced copy of the account from M/s. Sarthak Enterprise alongwith copies of acknowledgment of the returns filed by the firm, copies of accounts of M/s. Savy Unispace Pvt. Ltd was also produced and the bank account of M/s. Savy Unispace Pvt. Ltd was also shown duly reflecting the source of M/s. Sarthak Enterprise for made to the petitioner. The above facts show that the amount was received by the petitioner as partners capital. The amount received had a valid source. The petitioner utilised the amount for repayment of loan obtained from Munjal B. Shah. Therefore, the account reflected that there was an element of income in the transaction. The question of escapment of income chargeable to tax did not arise. The assessing officer misdirected himself in invoking powers to reopen the assessment Undisputedly powers to reopen the assessment were exercised beyond four years from the end of the relevant assessment year. Therefore the First Proviso to section 147 of the Act would require the assessing officer to establish that the assessee had failed to fully and truly disclose all material facts. As in the communication whereby the reasons recorded were supplied, no satisfaction was recorded by the assessing officer that the income chargeable to tax has escaped assessment. Not only the said requirement was not satisfied, but as seen above, there was no actual escapment of income as well. The formation of opinion by the assessing officer for the purpose of exercise of powers to reopen the assessment could be said to have been vitiated to be rendered bad in law. For all the aforesaid reasons, the petitioner is entitled to succeed.

Summary

Issues:
Challenge against notice under section 148 of the Income Tax Act, 1961 for reopening assessment for the assessment year 2013-2014 and rejection of objections against reopening.

Analysis:

Issue 1: Reopening of Assessment
The Special Civil Application challenged a notice issued under section 148 of the Income Tax Act, 1961, seeking to reopen the assessment for the year 2013-2014. The notice was based on the Assessing Officer's belief that the income of the petitioner had escaped assessment. The petitioner requested reasons for reopening, which were provided after issuing a notice under section 142(1) of the Act. The petitioner objected to the reopening, stating that the transactions in question were partners' capital withdrawals, supported by relevant documents. The assessing officer's reasons for reopening were based on financial transactions that remained unexplained in the petitioner's hands.

Issue 2: Legal Arguments
The petitioner argued that the reopening was based on borrowed satisfaction and that there was no escapement of income. The petitioner contended that the conditions for reopening under section 147 were not met, as there was no failure to disclose material facts. The respondent, however, relied on the affidavit-in-reply, stating that substantial income had been omitted to be taxed, supported by the decisions in relevant case laws.

Issue 3: Escapement of Income
The court emphasized that for validly exercising powers to reopen assessment, there must be escapement of income in the assessee's hands for the relevant year. The record showed that the petitioner had explained the transactions and provided necessary details even before the notice under section 148 was issued. It was established that the amount received was partners' capital and had a valid source, used for loan repayment, negating any escapement of taxable income.

Issue 4: Legal Precedents
The court referred to a previous judgment where the jurisdiction to reopen assessment beyond four years without failure to disclose material facts was deemed unlawful. In this case, the assessing officer failed to establish non-disclosure of material facts, rendering the exercise of powers to reopen assessment invalid.

Conclusion:
The court ruled in favor of the petitioner, setting aside the notice under section 148 issued for the assessment year 2013-2014 and the order rejecting objections to reopening. The court found that there was no escapement of income chargeable to tax, and the assessing officer's decision to reopen assessment was deemed unlawful. The petitioner's petition was allowed, and the rule was made absolute.