2016 (8) TMI 368 - HC - Income Tax

Reopening of assessment - claim of deduction under Section 10B - whether the assessee firm had not paid any interest to its partner on their capital? - Held that - To summarize, the partnership deed was available on record, from which itself the Assessing Officer has recorded that there were provisions for payment of interest on capital and remuneration to the partners. The fact that no such payments were made during the year under consideration was also part of the record so disclosed by the assessee. The partners capital account was also part of the assessment proceedings. There was no failure on the part of assessee to disclose truly and fully all material facts. Even if the assessee s claim of deduction under Section 10B of the Act was artificially inflated, it was well within the powers of the Assessing Officer to deny such claim while framing the assessment. The reopening of the assessment beyond the 4 years would not be permissible.- Decided in favour of assessee Penalty under Section 271D - failure to comply with the provisions of Section 269SS of the Act i.e. acceptance of loan or deposit otherwise than by account payee cheque or bank draft - Held that - Second ground recorded by the Assessing Officer in the reasons, it has two elements. First is acceptance of loan without disclosing the mode of acceptance and second, the repayment of the said loan. Regarding acceptance of loan, the Assessing Officer refers to penalty under Section 271D of the Act which would be imposable for violation of provisions of Section 269SS of the Act. In this context, the Assessing Officer does not record that any income chargeable to tax had escaped assessment, the prime requirement for reopening the assessment but refers to possible penalty being imposed on the assessee. Regarding repayment of such loan though we recall that reference to the details of the cheque under which the repayment so made have been recorded, he desires to scrutinize the same further. It is held by series of judgments of this Court and other Courts that for mere scrutiny, reopening of the assessment would not be permissible. The reopening of assessment could be made if the Assessing Officer had formed a belief that income chargeable to tax had escaped assessment. In order to do so, the Assessing Officer must have some tangible material having live link with the escapement of the income on the basis of which he can form a bonafide belief of escapement of income chargeable to tax. Reopening cannot be resorted to for fishing or rowing inquiry on mere suspicion that income chargeable to tax may have escaped assessment. - Decided in favour of assessee

Summary

Issues Involved:
1. Validity of the reopening of assessment beyond four years.
2. Alleged failure to disclose material facts regarding the payment of interest and remuneration to partners.
3. Acceptance and repayment of a loan without proper documentation.

Issue-wise Detailed Analysis:

1. Validity of the Reopening of Assessment Beyond Four Years:
The petitioner challenged the reopening of the assessment for the Assessment Year 2006-07, which was initiated by a notice dated 8.8.2011. The reopening was beyond the four-year period stipulated under Section 147 of the Income-Tax Act, 1961. The court emphasized that for reopening beyond four years, it must be demonstrated that the income chargeable to tax had escaped assessment due to the failure of the assessee to disclose fully and truly all material facts. The court found that the reasons recorded by the Assessing Officer were based on facts already available on record, and there was no failure on the part of the assessee to disclose material facts. Therefore, the reopening was deemed invalid.

2. Alleged Failure to Disclose Material Facts Regarding the Payment of Interest and Remuneration to Partners:
The Assessing Officer cited the non-payment of interest and remuneration to partners as grounds for reopening. The partnership deed, which provided for such payments, was part of the records. The audit report and annexures also clearly stated that no interest or remuneration was paid. The court noted that these facts were fully disclosed during the original assessment proceedings. The Assessing Officer had the opportunity to examine these details and disallow any inflated deductions under Section 10B of the Act during the original assessment. Hence, there was no failure on the part of the assessee to disclose material facts.

3. Acceptance and Repayment of a Loan Without Proper Documentation:
The Assessing Officer raised concerns about a loan of ?18.42 lakhs accepted from M/s. Ratilal Patel-HUF, where the mode of acceptance was not mentioned, and the repayment details were unclear. The court observed that the Assessing Officer's reference to possible penalties under Section 271D for violation of Section 269SS did not indicate that income chargeable to tax had escaped assessment. The court reiterated that reopening for mere scrutiny or further inquiry is not permissible unless there is tangible material indicating escapement of income. The Assessing Officer's desire to scrutinize the repayment details further did not constitute valid grounds for reopening.

Conclusion:
The court quashed the notice dated 8.8.2011 for reopening the assessment, as both grounds cited by the Assessing Officer failed to meet the legal requirements for reopening beyond four years. The petition was allowed and disposed of.