2013 (3) TMI 200 - HC - Income Tax

Re opening of assessment - violation of provisions of section of 36(1)(ii) in making claim of commission payment to Directors as expenditure - AY 2005-06 and 2006-07 - Held that - The notices purporting to reopen the assessments for all the years do not even allege that there was any such failure on the part of the assessee to disclose the claim. On the contrary, the record would indicate that the assessee had initially by a letter dated 12 March 2007 and subsequently by a letter dated 31 August 2007 placed on the record before the A.O. the nature of payments, the agreements with the two directors in pursuance of which they were paid a fixed monthly remuneration and a commission/ performance bonus representing 35% of the net profit before taxation and a justification for the payment. The A.O. was apprised by the Assessee of all the material facts necessary for the assessment and there was no suppression. No such submission has in addition, been urged by the Revenue. The A.O. has stated that a payment made to a shareholder would not be covered by the section to be eligible for deduction as the payment could have been made to a director who is a shareholder as disbursement of profit or dividend. These reasons are not postulated on there being any suppression on the part of the assessee or a failure on the part of the assessee to state fully and truly all material facts necessary for the assessment. Thus the reopening orders of the assessments for 2005-06 and 2006-07 have to be quashed and set aside. AY 2007-08 AND 2008-09 - revenue submitted it to be within a period of four years - Held that - This is a case where the nature of the payment, the basis of the computation and the rationale for computing the remuneration to the two directors with reference to a fixed remuneration in part and a proportion of the net profits in balance was brought in focus before the A.O. And as before this Court it is not in dispute at the hearing that the two directors have been assessed under section 143(3) on the amounts paid by the assessee to them as salary income and their assessments have been completed accordingly. Thus the reopening of the assessments for the two AY must be held to be based on a pure change of opinion and not on tangible material - appeal in favour of assessee.

Summary

Issues Involved:
1. Validity of reopening assessments for Assessment Years (A.Ys.) 2005-06 and 2006-07 under Section 148 of the Income Tax Act, 1961.
2. Validity of reopening assessments for A.Ys. 2007-08 and 2008-09 under Section 148 of the Income Tax Act, 1961.

Detailed Analysis:

Assessment Years 2005-06 and 2006-07:

1. Context and Background:
The assessee challenged the notices for reopening assessments for A.Ys. 2005-06 and 2006-07, which were issued beyond four years from the end of the relevant assessment year. The original assessments were completed under Section 143(3) of the Income Tax Act, 1961. The reopening could only be valid if there was a failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment.

2. Disclosure and Assessment:
For A.Y. 2005-06, the assessee had disclosed all relevant details, including remuneration paid to directors, in the balance sheet, profit and loss account, and tax audit report. The Assessing Officer (A.O.) had called for and received justifications for the remuneration under Section 40A(2)(b). An order of assessment was passed on 24 December 2007.

3. Reasons for Reopening:
A notice for reopening was issued on 30 March 2012, citing that the commission paid to directors, who were also shareholders, violated Section 36(1)(ii) of the Act. The A.O. believed that the payment could have been made as profits or dividends, not as commission, thus leading to income escaping assessment.

4. Assessee's Objections:
The assessee argued that there was no failure to disclose material facts and that the A.O. was fully informed about the payments during the original assessment. The objections were dismissed by an order dated 3 December 2012.

5. Court's Analysis:
The court found that the notices did not allege any failure by the assessee to disclose material facts. The A.O. had all necessary information about the payments and agreements with directors. The reopening was based on a different interpretation of Section 36(1)(ii) without any new tangible material. Thus, the reopening did not meet the requirements of the proviso to Section 147.

6. Conclusion:
The court quashed the notices for reopening assessments for A.Ys. 2005-06 and 2006-07, as the conditions under the proviso to Section 147 were not satisfied.

Assessment Years 2007-08 and 2008-09:

1. Context and Background:
For A.Y. 2007-08, the assessee had filed a return declaring total income and disclosed remuneration paid to directors, including commission. The A.O. had issued a questionnaire and received detailed responses justifying the payments. An order of assessment was passed under Section 143(3).

2. Reasons for Reopening:
The reopening was justified on the same grounds as for A.Ys. 2005-06 and 2006-07, citing a violation of Section 36(1)(ii).

3. Assessee's Objections:
The assessee contended that the reopening was based on a mere change of opinion, which is impermissible under the Supreme Court decision in Commissioner of Income Tax Vs. Kelvinator of India Limited. The payments were already taxed as salary in the hands of the directors, and the reopening lacked new tangible material.

4. Revenue's Argument:
The Revenue argued that the A.O.'s verification of reasonableness under Section 40A(2)(b) was distinct from the applicability of Section 36(1)(ii), suggesting that the original assessment did not form an opinion on the latter.

5. Court's Analysis:
The court emphasized that the A.O. must have tangible material to justify reopening and cannot do so based on a mere change of opinion. The assessee had provided all primary facts, including agreements and justifications for payments, during the original assessment. The A.O. had accepted the claim, and the directors were taxed on the amounts as salary income.

6. Conclusion:
The court concluded that the reopening for A.Y. 2007-08 was based on a change of opinion without new tangible material. No separate submissions were made for A.Y. 2008-09, and the reopening was on similar grounds. Hence, the court quashed the notices for reopening assessments for A.Ys. 2007-08 and 2008-09.

Final Judgment:
The court allowed the petitions, quashing and setting aside the notices issued under Section 148 of the Income Tax Act, 1961, for A.Ys. 2005-06, 2006-07, 2007-08, and 2008-09. There was no order as to costs.