2015 (10) TMI 2382 - HC - Income Tax

Re-opening of assessment - interest free loan to the partners who were also partners of Gujarat Tea Limited - Held that - From the material on record and even show cause notice / queries / questionnaires and the reply of the asssessee, it appears that as such there was no inquiry and / or application of mind by the AO with respect to interest free loan to the partners and / or any query with respect to the interest on the amount advance to the partners, more particularly, with respect to reasons recorded while reopening of the assessment. Whatever the question that was with respect to interest paid to Jivraj Tea Limited and the petitioner assessee was requested to show cause as to why the interest paid to Jivraj Tea Limited disallowed and even assessee also replied to the same. AO at the time of framing original assessment did not address himself with respect to interest free loan paid to the partners and with respect to the case on the disallowance to the interest at the rate of 12% p.a. on the amount advance to the partners. Under the circumstances, it cannot be said that reopening of the assessment for AY 2009-10 is mere change of opinion of the AO. It is required to be noted that reopening of the assessment is within the period of four years. Having reasons to believe that assessee had used interest bearing funds for non business purpose by giving interest free loans to its partners and therefore, interest expenses corresponding to the interest chargeable on the amount so diverted to the partners of the assessee firm for non business purposes has escaped assessment in the hands of the assessee firm within the meaning of Section 147 of the Act and having so satisfied when the impugned notice under Section 148 of the Act has been issued, it cannot be said that the AO has committed any error and / or illegality and / or assumption of jurisdiction by the AO to reopen the assessment for AY 2009-10,is invalid and / or not justified. - Decided against assessee.

Summary

Issues Involved:

1. Legality of the notice under Section 148 of the Income Tax Act, 1961 for reopening the assessment for AY 2009-10.
2. Whether the reopening of the assessment for AY 2009-10 constitutes a change of opinion by the Assessing Officer (AO).

Issue-wise Detailed Analysis:

1. Legality of the Notice under Section 148 of the Income Tax Act, 1961:

The petitioner challenged the notice issued under Section 148 of the Income Tax Act, 1961, arguing that the reopening of the assessment for AY 2009-10 is illegal and contrary to Section 147 of the Act. The petitioner contended that the AO had already scrutinized and finalized the assessment for AY 2009-10, and the reopening was arbitrary and without jurisdiction. The petitioner further argued that the reasons recorded for reopening the assessment were not permissible as they represented a mere change of opinion by the AO.

In opposition, the revenue argued that the notice under Section 148 and the reopening of the assessment were just, proper, and in consonance with Section 147 of the Act. The revenue maintained that the AO had recorded reasons to believe that income chargeable to tax had escaped assessment for AY 2009-10 and had obtained requisite approval from the appropriate authority. The revenue contended that there was no application of mind by the AO regarding the amount advanced to the partners and the non-charging of interest during the original assessment, thus justifying the reopening.

The court examined the reasons recorded by the AO for reopening the assessment, which included the observation that the petitioner had advanced sums to its partners without charging interest while paying interest on borrowed funds. The AO believed that interest-bearing funds were used for non-business purposes, leading to the conclusion that income chargeable to tax had escaped assessment.

2. Whether the Reopening of the Assessment Constitutes a Change of Opinion by the AO:

The petitioner argued that the reopening of the assessment was based on a change of opinion by the AO, which is not permissible. The petitioner highlighted that during the original assessment proceedings, the AO had conducted a detailed inquiry and had accepted the petitioner's explanations regarding the interest-free loans to partners and interest payments to Jivraj Tea Limited.

The revenue countered this argument by stating that there was no application of mind by the AO regarding the specific issue of interest-free loans to partners during the original assessment. The revenue emphasized that the AO had not formed any opinion on this matter, and the reopening was based on new information that came to light, indicating that income had escaped assessment.

The court noted that the reopening of the assessment was within the statutory period of four years and observed that the AO had not addressed the issue of interest-free loans to partners during the original assessment. The court concluded that the reopening was not based on a mere change of opinion but on the AO's reasons to believe that income had escaped assessment.

Conclusion:

The court dismissed the petition, holding that the reopening of the assessment for AY 2009-10 was justified and not based on a mere change of opinion. The court found that the AO had valid reasons to believe that income chargeable to tax had escaped assessment, and the notice under Section 148 of the Income Tax Act, 1961, was legally issued. The court discharged the notice and vacated any ad-interim relief granted earlier.