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TMI Blog2013 (3) TMI 200X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be covered by the section to be eligible for deduction as the payment could have been made to a director who is a shareholder as disbursement of profit or dividend. These reasons are not postulated on there being any suppression on the part of the assessee or a failure on the part of the assessee to state fully and truly all material facts necessary for the assessment. Thus the reopening orders of the assessments for 2005-06 and 2006-07 have to be quashed and set aside. AY 2007-08 AND 2008-09 - revenue submitted it to be within a period of four years - Held that:- This is a case where the nature of the payment, the basis of the computation and the rationale for computing the remuneration to the two directors with reference to a fixed remuneration in part and a proportion of the net profits in balance was brought in focus before the A.O. And as before this Court it is not in dispute at the hearing that the two directors have been assessed under section 143(3) on the amounts paid by the assessee to them as salary income and their assessments have been completed accordingly. Thus the reopening of the assessments for the two AY must be held to be based on a pure change of opinion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2005, declaring a total income of ₹ 9.82 crores. The assessee carries on business as a share and stock broker and carries out trading and investment in shares and securities. During the period relevant to A.Y.2005-06, the assessee paid remuneration of ₹ 9.83 crores to each of its two directors which included remuneration by way of commission/performance bonus of ₹ 9.50 crores to each of the said directors. These amounts were reflected in Schedule-10 of the Balance Sheet as on 31 March 2005 and the Profit and Loss Account for the year ending on that date. These amounts were also reflected in Annexure-IV forming part of the Tax Audit Report in Form-3CD. During the course of the assessment proceedings, the A.O. called upon the Petitioner to justify the remuneration in terms of Section 40A(2)(b). By a letter dated 12 March 2007, the assessee responded to the request of the A.O. for a disclosure of the nature of business and the shareholding pattern. The agreements between the assessee and its two directors respectively dated 15 April 2003 were disclosed before the A.O. By a letter dated 31 August 2007, the assessee informed the A.O. that remuneration of ₹ 9.83 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g made to the shareholders are not covered under this section to be eligible for deduction as the same could have been made to the director who is a shareholder as disbursement of profit or dividend. Since, the assessee has violated the provisions of section of 36(1)(ii) in making such claim of commission payment as expenditure, I have reasons to believe that income chargeable to tax has escaped the assessment. The Petitioner objected to the reopening of the assessment by a letter dated 22 October 2010 stating, inter alia, that there was no failure on the part of the Petitioner to disclose fully and truly all material facts necessary for the assessment and hence the requirement for reopening of the assessment for the year in question was not fulfilled. The Petitioner urged that during the course of the assessment there was a full disclosure of the material facts and the A.O. was informed that a commission/performance bonus was paid to the directors and it was after the A.O. was satisfied about the genuineness and the reasonableness of the payments and of the allowability of the deduction that the assessment was completed, without making any addition, under section 143(3). These ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be a failure on the part of the assessee to fully and truly disclose material facts for the assessment for the jurisdiction of A.O. to be invoked. 8. In the present case, the notices purporting to reopen the assessments for both A.Y.2005-06 and 2006-07 do not even allege that there was any such failure on the part of the assessee. On the contrary, the record would indicate that the assessee had initially by a letter dated 12 March 2007 and subsequently by a letter dated 31 August 2007 placed on the record before the A.O. the nature of payments, the agreements with the two directors in pursuance of which they were paid a fixed monthly remuneration and a commission/performance bonus representing 35% of the net profit before taxation and a justification for the payment. The A.O. was apprised by the Assessee of all the material facts necessary for the assessment and there was no suppression. No such submission has in addition, been urged by the Revenue. 9. The A.O. has sought to reopen the assessments on the ground that under Section 36(1)(ii) only such commission payments are allowed as expenditure as any sum paid to an employee as bonus or commission for services rendered, whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 and 2006-07. 11. The contention of the assessee here is that though the reopening of the assessments for A.Y.2007-08 and 2008-09 is within a period of four years, the A.O. has purported to do so on the basis of a mere change in opinion which is impermissible having regard to the judgment of the Supreme Court in Commissioner of Income Tax Vs. Kelvinator of India Limited (supra). Moreover, it has been urged that tax was deducted at source by the assessee while making the payments to two directors; the directors in turn filed their own returns and assessments have been completed under section 143(3) taxing the amount in their hands as salary income. It is thus urged that the reopening was on the basis of mere change in opinion which is impermissible. 12. On the other hand, it has been urged on behalf of the Revenue that a verification by the A.O. of the reasonableness of the payments under section 40A(2)(b) is distinct from the question as to whether the amount paid to the directors falls within the purview of Section 36(1) (ii). According to the Revenue, during the course of the assessment proceedings, there was no formation of opinion by the A.O. at all since the order of as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computation and the rationale for computing the remuneration to the two directors with reference to a fixed remuneration in part and a proportion of the net profits in balance was brought in focus before the A.O. Hence, all the primary facts for the purpose of a deduction under Section 36(1)(ii) were placed before the A.O. That the order of assessment under Section 143(3) accepted the claim on this issue is what matters. Before this Court it is not in dispute at the hearing that the two directors have been assessed under section 143(3) on the amounts paid by the assessee to them as salary income. The Revenue has admittedly treated the amounts paid to the directors in question as salary income in their hands and their assessments have been completed accordingly. In this view of the matter, the reopening of the assessments for the A.Y.2007-08 must be held to be based on a pure change of opinion and not on tangible material. 14. The following principle which has been enunciated in the judgment of the Supreme Court in Commissioner of Income Tax Vs. Kelvinator of India Ltd. (2010)320-ITR-561 (SC) must govern : 4. On going through the changes, quoted above, made to Section 147 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itution by the `opinion' of the AO. It was pointed out that the meaning of the expression, `reason to believe' had been explained in a number of Court rulings in the past and was well settled and its omission from S.147 would give arbitrary powers to the AO to reopen past assessments on mere change of opinion. To allay these fears, the Amending Act, 1989, has again amended S.147 to reintroduce the expression `has reason to believe' in place of the words `for reasons to be recorded by him in writing, is of the opinion'. Other provisions of the new S.147, however, remain the same. 15. Following the principle which has been enunciated in the Supreme Court decision, we have come to the conclusion that the reopening of the assessment for A.Y.2007-08 was on a mere change of opinion and was impermissible in law. No separate submissions have been urged by either side for A.Y.2008-09, the Court being informed by counsel for the assessee and for the Revenue that the reopening is on similar grounds. 16. For these reasons, we have come to the conclusion that the reopening of the assessments under section 148 for A.Ys.2005-06, 2006-07, 2007-08 and 2008-09 is contrary to l ..... X X X X Extracts X X X X X X X X Extracts X X X X
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