2013 (5) TMI 361 - HC - Income Tax

Reopening of assessment Reasons as per revenue on verification of records (i) assessment advances are made from the borrowed funds and there is no instance to prove that the advances were made for the business purpose therefore same would be disallowable u/s 36(1)(iii) of the Act (ii) Disallowance of interest related to the funds utilized towards non-taxable income u/s 14A of the Act (iii)Disallowance of additional depreciation as the same was not explained by the assessee (iv) Assesse filed TDS acknowledgments reconciliation of the expenditure and amount subjected to TDS would give rise to a possible disallowance under Section 40(a)(ia) of the Act. Held that - During the assessment proceedings the assessee had brought to the pointed notice of the AO that the assessee had paid interest to IDBI. Along with such answer in the correspondence copy of the ledger account of the interest paid was already enclosed. Disallowance of expenditure relatable to tax free income in terms of section 14A of the Act it is undoubtedly true that rule 8D of the Income Tax Rules 1962 was not in operation at that time. The determination therefore could not have been based on such formula. This is however not to suggest that there could be no disallowance at all under section 14A of the Act if it was found that expenditure was incurred for earning tax free income. With respect to the question of TDS the AO himself has recorded that the tax was deducted and return was duly filed. Surely for such a fishing inquiry reopening of assessment could not be permissible that too assessment beyond the period of four years from the end of the relevant assessment year when it is not even the case of the Department that the assessee had not disclosed truly and fully all material facts. As the AO based his reasons on verification of the material already on record during the original assessment. In the reasons recorded or the notice issued for reopening it is not even alleged that there was failure on the part of the assessee to disclose truly and fully all material facts. On this ground petition cannot be allowed.

Issues Involved:
1. Challenge to notice issued under section 148 of the Income Tax Act, 1961 for Assessment Year 2006-07.
2. Reasons for re-opening assessment including disallowance of interest, disallowance under section 14A, disallowance of additional depreciation, and possible disallowance under section 40(a)(ia).
3. Objections raised by petitioner against the notice for reopening.
4. Judicial analysis of reasons recorded for issuing the notice.
5. Assessment of whether there was a failure to disclose material facts leading to escapement of income chargeable to tax.
6. Examination of the relevance of the information provided during the assessment proceedings.
7. Determination of disallowance under section 14A without the operation of Rule 8D at the time.
8. Consideration of possible disallowance under section 40(a)(ia) and the need for reconciliation of expenditure and tax deducted at source.

Detailed Analysis:
1. The petitioner challenged the notice issued under section 148 of the Income Tax Act, 1961 for the Assessment Year 2006-07, based on the reasons recorded by the Assessing Officer. The reasons included concerns about interest-free advances, investment in tax-free income generating assets, additional depreciation claimed, and TDS-related expenditures.

2. The petitioner objected to the notice for reopening, but the objections were rejected by the respondent. The High Court analyzed the four reasons recorded by the Assessing Officer for issuing the notice, focusing on the utilization of borrowed funds, disallowance under section 14A, additional depreciation claim, and TDS-related provisions.

3. The court noted that the Assessing Officer based the reasons on verification of records from the original assessment and did not allege any failure on the petitioner's part to disclose material facts fully and truly. This lack of failure to disclose material facts was a critical factor in the court's decision to allow the petition challenging the notice for reopening.

4. The court highlighted that the petitioner had provided full details of borrowing and interest paid during the assessment proceedings, indicating that all relevant information was already part of the record. This further supported the court's decision to quash the impugned notice.

5. Regarding the disallowance under section 14A, the court acknowledged that Rule 8D was not in operation at the time, emphasizing that any disallowance should be based on the disclosure of material facts. In this case, the court found no evidence of non-disclosure leading to income escapement.

6. The court also addressed the TDS-related concerns, noting that the Assessing Officer acknowledged the tax deductions and required reconciliation of expenditures. However, the court emphasized that such inquiries did not warrant reopening the assessment, especially beyond the statutory period, without evidence of non-disclosure of material facts.

7. Ultimately, the court quashed the notice for reopening the assessment, highlighting the importance of disclosing all material facts and the lack of such failure in this case. The petition was allowed and disposed of accordingly, in favor of the petitioner.

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