2006 (10) TMI 209 - AT - Income Tax

Summary

Issues Involved:
1. Reopening of assessment under section 147 of the Income-tax Act.
2. Taxability of interest income credited by the firm to the partners' accounts.
3. Charging of interest under sections 234A and 234B of the Income-tax Act.

Detailed Analysis:

1. Reopening of Assessment under Section 147:
The assessee objected to the reopening of assessment under section 147, arguing that there was full and true disclosure in the original return, and no fresh material warranted the reopening. The Assessing Officer (AO) justified the reopening, stating that the income was not correctly disclosed, leading to escapement of assessment. The Tribunal held that since the original assessment was completed under section 143(1)(a), where the AO has no power to vary the declared income, the proviso to section 147 does not apply. The AO merely needs to have reason to believe that income has escaped assessment, which was adequately demonstrated. Therefore, the reopening of assessment was upheld.

2. Taxability of Interest Income Credited by the Firm:
The main issue was whether the interest credited by the firm to the partners' accounts should be taxed in the hands of the partners, even if they follow the cash system of accounting. The AO argued that since the firm follows the mercantile system and credits interest to the partners' accounts, the interest should be taxed as received by the partners. The CIT(A) disagreed, allowing the partners to follow the cash system and tax the interest upon withdrawal. The Tribunal reversed the CIT(A)'s decision, stating that the credited interest was unconditionally available to the partners and should be deemed received, thus taxable, even under the cash system. The Tribunal cited the Supreme Court's decision in McDowell & Co. Ltd. v. CTO, emphasizing that tax avoidance through a colorable device is not permissible.

3. Charging of Interest under Sections 234A and 234B:
The assessee challenged the charging of interest under sections 234A and 234B. The Tribunal held that charging of interest is compensatory and mandatory, consequent to the assessment. Since the assessee did not deny the liability to file the return or pay advance tax, the interest under sections 234A and 234B was upheld as consequential.

Conclusion:
The Tribunal allowed the appeals by the revenue, holding that the interest credited to the partners' accounts by the firm is taxable as received by the partners. The reopening of assessment under section 147 was justified, and the charging of interest under sections 234A and 234B was upheld as consequential. The cross objections by the assessee were dismissed.