2023 (9) TMI 1321 - HC - Income Tax

Reopening of assessment u/s 147 - petitioners are partners in a partnership firm engaged in the business of developing housing projects - whether petitioners have offered interest on capital and remuneration , in case of the partnership firm My Home Developers , where the assessment of the firm was sought to be reopened on similar grounds? - HELD THAT - On the issue of reopening on the count in these three petitions on the ground that the petitioners have offered interest on capital and remuneration , in case of the partnership firm My Home Developers , where the assessment of the firm was sought to be reopened on similar grounds, the Division Bench of this Court in the petitions at the behest of the firm, on appreciation of the clauses in the partnership deed held as, the clauses contained partnership deeds are only enabling provision not mandatory in nature so as to lead to an inference that, the assessee had to pay interest on capital and remuneration to its partners. It provided for interest on partner's capital and remuneration, the same is subject to their mutual agreement. Even after 01.04.2009, interest on capital as well as the remuneration were not to be paid to the partners. We do not find any material on record to indicate that, the writ applicant has actually received any interest on capital and remuneration from the partnership firm. Record further indicates that, for the assessment year 2010-11, deduction under Section 80 IB(10) was claimed without paying any interest on capital and remuneration to partners and such claim was not disturbed by the assessing officer. In this view of the matter, the conclusion arrived at by the assessing officer that, the assessee has claimed deduction without providing interest on capital and remuneration to partners as per the clause 6 and 7 of the deed, has escaped assessment on account of failure on the part of the assessee in filing of the return of income disclosing fully and truly all material facts are contrary to law and without jurisdiction. Petitioner sold immoveable property but no capital gain was offered in the return of income - As property sold was owned by Lavjibhai Ambaliya HUF . The Balance-sheet of HUF of the preceding year submitted showed the property on the asset side. No description or situation of the property purchased was given. Sale consideration of Rs. 32,28.800/- was received by cheque. LTCG of Rs. 23,99,559/- duly reflected as is evident from the relevant Statement of Long Term Capital Gain. The reassessment was also therefore based on suspicion. As pointed out factors that indicate that income has escaped assessment consists of facts which if established will have a cause and effect relationship, whereas factors which indicate a suspicion about income escaping assessment which would warrant a further inquiry. This is not what is contemplated under section 148 of the Act. The jurisdiction cannot be used to carry out a roving inquiry. Even when the order disposing of the objections is read, certain observations made on gain made on sale of property and change in amount of interest were not reflected in the reasons for reopening of assessment which also makes the exercise vulnerable. Petition allowed.

Summary

Issues Involved:
1. Validity of reopening the assessment under Section 148 of the Income Tax Act.
2. Whether the petitioner received "interest on capital" and "remuneration" from the partnership firm.
3. Validity of the partnership deeds and their amendments.
4. Alleged escapement of income due to the sale of immovable property and unexplained investment in immovable properties.

Summary:

1. Validity of Reopening the Assessment:
The court examined whether the conditions precedent for reopening the assessment under Section 148 of the Income Tax Act were met. The petitioner argued that there was no "escapement of any income chargeable to tax" as no "interest on capital" or "remuneration" was received from the partnership firm. The court found that the reopening was based on suspicion rather than tangible material, emphasizing that jurisdiction under Section 148 cannot be used for a roving inquiry.

2. Receipt of "Interest on Capital" and "Remuneration":
The petitioner contended that no "interest on capital" or "remuneration" was received, and therefore, there was no escapement of income. The court referenced a previous decision in PCIT vs. Alidhara Taxspin Engineers, which held that mere incorporation of such clauses in the partnership deed does not make them mandatory. The court found that the clauses were enabling provisions, not mandatory, and no actual interest or remuneration was paid.

3. Validity of Partnership Deeds:
The court scrutinized the partnership deeds and their amendments. The respondent argued that the deeds were executed to mislead facts, but the court found that the amended deed explicitly stated that no interest or remuneration was payable. The court concluded that the partnership deed dated 01.04.2009 was valid and correctly reflected the agreement among partners.

4. Alleged Escapement of Income:
For the sale of immovable property and unexplained investment, the court found that the property sold was owned by "Lavjibhai Ambaliya HUF" and the sale consideration was duly reflected in the HUF's balance sheet and return of income. The court emphasized that the reassessment was based on suspicion without any tangible material, thus making the exercise of reopening the assessment invalid.

Conclusion:
The court allowed all the petitions, quashing the impugned notices under Section 148. The court reiterated that reopening of assessments requires tangible material and cannot be based on mere suspicion or for conducting a roving inquiry.