2022 (2) TMI 1096 - HC - Income Tax

Reopening of assessment u/s 147 - reopening beyond period of four years - change of opinion - slump sale - deduction of interest paid on loan or borrowing from Public / State / Industrial financial institution as claimed by petitioner should not have been allowed because after slump sale, assets and liabilities belonged to the transferee and it was the transferee who paid the interest to these financial institutions in a subsequent Financial Year - HELD THAT - The reasons expressly state that the Assessing Officer, who passed the original assessment order, had allowed this deduction and, therefore, reopening in our view, is only due to change of opinion, which, as held time and again by various courts, is not permissible. Moreover, in the notes to the Form 3CD submitted by petitioner alongwith its return of income expressly provided as pursuant to the slump sale in the previous year 13-14, the liability on account of interest payable and property tax payable was transferred to E-land Fashion India Private Limited. In case of E-land Apparel Limited, the said interest and property tax liability was disallowed u/s 43B of the Income Tax Act 1961 and was remaining unpaid as at the end of the previous year 13-14. As held by this court in 3i Infotech Ltd. vs. Assistant Commissioner of Income Tax 2010 (6) TMI 372 - BOMBAY HIGH COURT petitioner had brought to the attention of the Assessing Officer this facet while submitting the tax audit report as a part of its return of income. This is not a case where petitioner can be regarded as having merely produced its books of account or other evidence during the course of the assessment proceedings on the basis of which material evidence could have been deduced by the Assessing Officer with the exercise of due diligence. Petitioner, u/s 139 of the Act had a mandatory obligation to furnish with its return of income the report of audit. Petitioner fulfilled its obligation. In the case at hand, the reopening is proposed after the expiry of 4 years after the end of relevant assessment year and assessment has been completed under Section 143(3) of the Act. Therefore, the proviso to Section 147 would apply and the onus is on respondents to show that there was a failure on the part of petitioner to fully and truly disclose all material facts necessary for assessment. This has not been discharged by respondents. In the affidavit in reply, as submitted by Mr. Suresh Kumar, what has been merely submitted is that there was incorrectness of the claim on the part of petitioner while filing its return of income, which has been discovered subsequent to the original assessment and, therefore, there is no change of opinion. We are afraid, we cannot agree with the view expressed by respondents.- Decided in favour of assessee.

Summary

Issues:
1. Transfer of business through slump sale agreement.
2. Claim for deduction of interest paid by the transferee.
3. Reopening of assessment under Section 147 of the Income Tax Act.
4. Change of opinion by the Assessing Officer.
5. Compliance with mandatory obligations for furnishing audit report.
6. Application of Explanation 1 to Section 147 for failure to disclose material facts.
7. Time-barred notice under Section 148.
8. Incorrectness of claim in the return of income.

1. Transfer of Business through Slump Sale Agreement:
The petitioner transferred its fabric manufacturing business to a subsidiary through a slump sale agreement, including all assets and liabilities. The liabilities, including loans from banks, were taken over by the transferee, discharging the petitioner of its obligations.

2. Claim for Deduction of Interest Paid by the Transferee:
In the subsequent financial year, the transferee paid outstanding interest originally payable by the petitioner to banks. The petitioner claimed a deduction for this payment, even though made by the transferee, in its return of income for the relevant assessment year.

3. Reopening of Assessment under Section 147:
The assessing officer issued a notice under Section 148, stating that the interest deduction claimed by the petitioner should not have been allowed as the liabilities belonged to the transferee post-slump sale. The officer believed that income had escaped assessment under Section 147.

4. Change of Opinion by the Assessing Officer:
The court held that the reopening was due to a change of opinion as the deduction was allowed in the original assessment. Reopening based on a change of opinion is impermissible under established legal principles.

5. Compliance with Mandatory Obligations for Furnishing Audit Report:
The petitioner fulfilled its mandatory obligation to furnish the audit report with its return of income, disclosing the transfer of liabilities and interest payments by the transferee.

6. Application of Explanation 1 to Section 147 for Failure to Disclose Material Facts:
The court referenced precedents to establish that the petitioner had disclosed all material facts necessary for assessment, as evidenced by the statutory disclosures made in the tax audit report submitted with the return of income.

7. Time-Barred Notice under Section 148:
As the reopening was proposed after four years from the end of the relevant assessment year and the assessment was completed under Section 143(3), the burden was on the respondents to show a failure to disclose material facts, which they failed to discharge.

8. Incorrectness of Claim in the Return of Income:
The respondents argued incorrectness of the petitioner's claim in the return of income post-assessment, but the court disagreed, finding it to be a change of opinion and allowed the petition, quashing the impugned notices and orders.

In conclusion, the court ruled in favor of the petitioner, highlighting the impermissibility of reopening based on a change of opinion and the petitioner's compliance with mandatory obligations for disclosure. The court quashed the notices and orders issued by the assessing officer.