2006 (10) TMI 211 - AT - Income Tax

Summary

Issues Involved:
1. Reopening of assessment under Section 147 of the IT Act.
2. Taxability of interest income credited to partners' accounts.
3. Method of accounting employed by partners vs. the firm.
4. Charging of interest under Sections 234A and 234B of the IT Act.

Detailed Analysis:

Reopening of Assessment under Section 147 of the IT Act:
The assessee challenged the reopening of the assessment under Section 147, arguing that there was full and true disclosure in the original return, and no fresh material justified the reassessment. The Revenue contended that the AO had valid reasons to believe that income had escaped assessment, particularly since the original assessment was completed under Section 143(1)(a) without forming any opinion. The Tribunal upheld the AO's action, stating that the AO merely needed to have reason to believe that income had escaped assessment, which was adequately demonstrated by the facts available to him.

Taxability of Interest Income Credited to Partners' Accounts:
The core issue was whether the interest income credited to the partners' accounts by the firm, which follows a mercantile system of accounting, should be taxed in the hands of the partners who follow a cash system of accounting. The AO argued that the interest credited should be considered as received by the partners, thus taxable, citing the judgment in McDowell & Co. Ltd. vs. CTO. The CIT(A) disagreed, allowing the partners to follow their chosen method of accounting. However, the Tribunal reversed this decision, holding that the credited interest was unconditionally available to the partners and should be deemed received, thus taxable under the cash system of accounting as well.

Method of Accounting Employed by Partners vs. the Firm:
The Tribunal examined whether the partners could follow a different method of accounting from the firm. The partners argued that they could follow the cash system even if the firm followed the mercantile system. The Tribunal acknowledged that while the choice of accounting method is at the discretion of the assessee, the credited interest in the partners' accounts should be considered as received due to its unconditional availability. This decision was supported by the principle that the firm and partners are not separate juristic entities under the Indian Partnership Act, 1932.

Charging of Interest under Sections 234A and 234B of the IT Act:
The assessee also contested the charging of interest under Sections 234A and 234B. The Tribunal held that charging interest is compensatory and mandatory, consequential to the assessment. Since the assessee did not deny the liability to file returns or pay advance tax, the interest charges under Sections 234A and 234B were upheld as consequential and mandatory.

Conclusion:
The Tribunal concluded by allowing the appeals from the Revenue and dismissing the cross-objections from the assessee. The interest income credited to the partners' accounts was deemed received and taxable, the reopening of assessment under Section 147 was justified, and the charging of interest under Sections 234A and 234B was upheld as consequential.