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TMI Blog2011 (10) TMI 601X X X X Extracts X X X X X X X X Extracts X X X X ..... ecord. The other methods provide the external aid for the above object. The idea under both the methods to arrive at just conclusion, which is admissible in law. On due consideration of this logic, we are of the view that had these details were available then that would be an ideal situation and there may not be any controversy but can the department put the assessee under tax liability on the ground that why it used the funds borrowed by the partners for the construction purposes or whether the partners as well as the assessee must have used this amount for some other activities. The revenue is unable to collect any evidence demonstrating the other activities. As far as other aspects are concerned, there is no dispute between the department and the assessee. The interest expenses incurred by the assessee on the borrowed funds if used for the purpose of construction then deduction of such expenses will be admissible to the assessee under sec. 24(b) of the Income-tax Act, 1961. The only dispute between the parties relates to the quantification of amounts used for the purpose of construction. On an analysis of the balance sheet, we are of the view that the assessee is able to demonst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77; 79,89,490 after disallowing property tax of ₹ 61,00,190. He also disallowed interest on borrowed capital at ₹ 24,96,015. Dissatisfied with this adjustment, assessee carried the matter in appeal before the learned CIT(Appeals). Learned CIT(Appeals) decided the appeal on 14.8.2003 and Assessing Officer gave the effect to Learned CIT(Appeals)'s order on 27.2.2004. He recomputed the income of the assessee at ₹ 12,63,018. The assessee again moved an application under sec. 154. It claimed that advance rent of March 2001 amounting to ₹ 1,75,500 has been assessed in assessment year 2001-02 and, therefore, it cannot be considered again in 2002-03. In assessment year 2001-02, an assessment order was passed under sec. 143(3) of the Act. Learned Assessing Officer ultimately determined the income of assessee at ₹ 10,87,520. 4. Assessing Officer had issued notice under section 148 on 28.3.2007 after recording the reasons for reopening of the case. This notice was served in all the assessment years. Assessee filed a letter on 30.4.2007, in all the four assessment years, stating therein, that the return originally filed be treated as return filed under sec. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the purpose of construction as there was no addition to the commercial complex during the year, except repayment of outstanding loan of ₹ 1.66 Cr. payable to Canara Bank. The assessee has claimed deduction u/s 24 on account of interest for current year at ₹ 53.61,464/- which has been allowed. Since Vyshya Bank Ltd. duly certified that the loan of ₹ 4 Cr. is being sanctioned for the purpose of construction of commercial complex/repayment of existing loan with Canara Bank and the Interest payable on that loan for the period is ₹ 53,61,484/- whereas the assessee has used only 1.66 Cr. out of loan of ₹ 4 Cr., on which deduction u/s 24 is claimed but the deduction u/s 24 should be restricted to the amount of interest attributable to repayment of loan of Canara Bank only. Thus deduction u/s 24 in respect on interest on a sum of ₹ 2.34 Cr. which was not utilized for the construction/repayment of loan is not allowable. Besides this the income has also escaped assessment in respect of income earned on the balance borrowed funds utilized for the activities not disclosed by the assessee firm as the assessee has not shown any income except income from hou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted on 01.10.2003 with the following remaining partners: 1. Bal Kishan Gupta 2. Krishna Gupta 3. Ankit Gupta 4. Ashish Gupta The transfer of the capital assets on dissolution of the firm falls within the ambit of section 45(4) of the I.T. Act and the assessee firm has not shown any capital gains on the transfer of assets of the dissolved firm. The capital gains arising after ascertaining the fair market value of the assets on the date of such transfer has escaped assessment. Further, deduction u/s. 24 on account of interest for current year at ₹ 29,79,150 has been allowed in excess since Vyshya Bank on 12.5.2001sanctioned loan of ₹ 4 crores for the purpose of construction/repayment of existing loan with Canara Bank and the interest payable on that loan for the period is ₹ 53,61,484 whereas the assessee has used only 1.66 cr. Out of loan ₹ 4 Cr, on which deduction u/s. 24 is claimed but the deduction u/s 24 should be restricted to the amount of interest which attributable to repayment of loan of Canara Bank only. Thus, deduction u/s. 24 in respect of interest on a sum of ₹ 2.34 Cr. Which was not utilized for the construction/repayment of loan is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SD) [2007] 289 ITR 37/[2008] 170 Taxman 131. He further submitted that in assessment years 2002-03 and 2003-04, a notice under sec. 148 of the Act was issued on the basis of incorrect facts. He pointed out that the Assessing Officer in the reasons has referred that assessee took a loan of ₹ 4 crores from Vysya Bank which was alleged to have been used for repayment of loan from Canara Bank. But only a sum of ₹ 1.66 crores was used for making repayment of loan, meaning thereby the amounts to this extent was used for the purpose of construction and interest under sec. 24 of the Income-tax Act, 1961 could be allowed only on this amount. The learned counsel for the assessee submitted that outstanding actual loan of Canara Bank was ₹ 1,89,08,019. Thus, Assessing Officer failed to take cognizance of true facts before harboring a belief to reopen the assessment. He relied upon the decision of Hon'ble Delhi High Court in the case of CIT v. Raine Singh 337 ITR 417 (Sic). He further relied upon the decision of United Electrical Co. (P.) Ltd.(supra) for this proposition. In his next fold of submission, he pointed out that from perusal of the reasons, it reveals that A.O. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the firm was again reconstituted on 30th September 2003 and, therefore, the transfer of the capital assets on dissolution of the firm falls within the ambit of sec. 45(4) of the Act. He pointed out that the assessee has already submitted copies of the partnership deed exhibiting the retirement of two partners. Only two partners were retired on 30th September, 2003. The copy exhibiting the retirement was duly submitted to the Assessing Officer before scrutinizing return and thus there is no new information came to the notice of the Assessing Officer. The details with regard to the claim of deduction in respect of interest expenses on borrowed capital used for the purpose of the construction under sec. 24 of the Act was duly made in the return and it was verified by the Assessing Officer under sec. 143(3) of the Act. All these facts would indicate that no fresh material came to the possession of the Assessing Officer which can empower him to reopen the assessment. According to the Full Bench decision of the Hon'ble Delhi High Court in the case of Kelvinator of India Ltd. (supra), if a scrutiny assessment was made under sec. 143(3) then it will be presumed that such an order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st have come to the possession of learned CIT who inspected the record. He prepared a report and transmitted it to the Assessing Officer for examination. It is the Assessing Officer who on analysis of the report, formed an opinion that income has escaped assessment. Learned CIT has not given any direction to the Assessing Officer for issuance of notice under sec. 148 of the Act. Assessing Officer has nowhere mentioned this aspect in the reasons recorded for reopening of the assessment. He has only made reference to the report of inspection carried out at the end of learned CIT. There is no formation of opinion in these two assessment years, therefore, it cannot be said that Assessing Officer was not having any information. The reopening has been made after collecting information which has a direct nexus with formation of belief demonstrating the escapement of income, thus, the decision relied upon by the learned counsel for the assessee for buttressing his proposition that reopening should not be resorted on mere suspicion, notice under sec. 148 should not be issued without collection of fresh information and reassessment notice under sec. 148 should not be issued on the directions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t only in India but in other places also, the ITO worked out the proportionate overhead expenses of the assessee for its business in India. Subsequently, in the course of assessment proceedings for assessment years 1962-63, the ITO appears to have noticed that a mistake had been committed in the computation of the overhead expenditure. He issued a notice under sec. 148 of the Act. Hon'ble Supreme Court has upheld the reopening of the assessment on the ground that the case of the assessee falls within clause (b) of sec. 147 of the Act. Learned DR submitted that even if from the existing information, it is discernible that Assessing Officer has committed an error than that can be removed by exercising the powers under sec. 148 of the Act. He pointed out that benefit of the proviso appended to section 147 is not available to the assessee in the present appeals, because notice has been issued within four years from the end of the relevant assessment years. Thus, even if the assessment was made under sec. 143(3), the benefit of the proviso would not be available to the assessee. In such situation, if the Assessing Officer has information indicating escapement of income then, he can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ponse to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year: Provided further that the Assessing Officer may assess or reassess such income, other than the income Involving matters which are the subject matters of any appeal, reference or revision, which is chargeable to tax and has escaped assessment. Explanation 1.- Production before the Assessing Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of the foregoing proviso. Explanation 2.- For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely :- (a) where no return of income has been furnished by the assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax ; (b) where a return of income has been furnished by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , therefore, the proviso appended to section 147 has no application on the dispute in hands. Thus, we do not wish to make any elaborate discussion on this issue. The first proposition canvassed by the assessee before us is that after expiry of limitation for issue of notice under se. 143(2), Assessing Officer cannot issue notice under sec. 148, unless a fresh information came to his possession. The emphasis of the learned counsel for the assessee was that details in respect of interest expenses was already on the record, therefore, no fresh information came to the possession of the Assessing Officer which can enable him to issue notice under sec. 148 particularly in assessment years 2002-03 and 2003-04. We have extracted the reasons recorded by the Assessing Officer in the foregoing paragraphs. On perusal of these reasons, it reveal that learned CIT on an inspection of the record in his jurisdiction found certain excess relief claimed by the assessee in respect of interest expenses. He transmitted the inspection report to the Assessing Officer, who formed an opinion that income has escaped assessment. There is no scrutiny assessment in the assessment years 2002-03 and 2003-04. Thus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tiate proceeding under sec. 147 and failure to take steps under sec. 143(3) will not render the Assessing Officer powerless to initiate reassessment proceedings even when the intimation under sec. 143(1) had been issued." 13. We could appreciate the contention of the assessee that had there been any change of opinion but in these two years, there is no opinion expressed by the Assessing Officer on this issue. The assessee had referred number of decisions of Hon'ble Delhi High Court noticed earlier, but put emphases on the case of Shipra Srivastava (supra). In this case, there was only an intimation under sec. 143(1) of the Act. The learned Assessing Officer had issued notice under sec. 148. Hon'ble High Court has observed that Assessing Officer has not applied his mind on the information for arriving at a conclusion that reasons are available demonstrating the escapement of income. In that case, the assessee is a doctor in Escort Heart Institute and Research Centre. According to the Assessing Officer, she has been provided a rent free unfurnished accommodation and she has not disclosed the perquisite value of the residential accommodation at 10% of salary, Hon'ble ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transmitted the information which has been analysized by the Assessing Officer and he had formed his independent opinion. The next proposition raised by the assessee is that Assessing Officer has formed his opinion on the basis of incorrect facts. We have seen the balance sheet as well as the reasons recorded by the Assessing Officer. In the understanding of the Assessing Officer, only a sum of ₹ 1.66 crores was used out of the loan taken from Vysya Bank for repayment of Canara Bank's loan, whereas according to the assessee, the loan of Canara Bank outstanding on that day was ₹ 1,89,08,019. In our opinion, it is not such an inaccuracy of facts which can goad the Assessing Officer at a wrong conclusion. Basic issue was whether loan of ₹ 4 crores taken from Vysya Bank was utilized for construction of the building giving rental income or repayment of the loan earlier used for the construction of the building. If there is a small variation of ₹ 22 lacs, it can be looked into after hearing the assessee. But this variation did not influence the Assessing Officer for arriving at a wrong conclusion in forming the belief. 14. As far as the case laws relied upon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re before the Assessing Officer, when he passed the scrutiny assessment, though no discussion on these issues is discernible but in view of the Full Bench decision of the Hon'ble Delhi High Court in the case of Kelvinator of India Ltd. (supra), it is to be construed that these must have been looked into. Learned CIT(Appeals) has upheld the reopening of assessment basically for two reasons. In her understanding, the number of documents i.e. partnership deed etc. were not only voluminous but spread over a number of years and meaningful reference could only be drawn after, some one delve deep into them . Assessing Officer in the scrutiny assessment failed to consider the issue. The observations of the Learned CIT(Appeals) on page 5 read as under: "In the case at hand, the number of documents (partnership deeds, reconstitution deeds, retirement deeds, bank loan sanction papers etc.) were not only voluminous, but spread over a number of years, (from 1995 to 2003), and meaningful inferences could be drawn only after delving deep into them. Thus, it cannot be said that all the documents relied upon for reopening the assessment were readily made available to the Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me would amount to giving a premium to an authority exercising quasi-judicial function to take benefit of its own wrong. For the reasons aforementioned, we are of the opinion that the answer to the question raised before this Bench must be rendered in the affirmative, i.e., in favour of the assessee and against the Revenue. No order as to costs". 18. Both the reasoning assigned by the Learned First Appellate Authority run contrary to the law laid down by the Full Bench of the Hon'ble jurisdictional High Court. The Hon'ble Court has emphasized that Assessing Officer cannot be given premium for his own wrongs. Therefore, we are of the view that no new information came to the possession of the Assessing Officer after passing of scrutiny assessment in these two assessment years. He has reopened the assessment on the basis of those very information upon which he could have passed a more detailed order under sec. 143(3) in the first round. Thus, reopening of assessment is merely based on change of opinion. The decision of Hon'ble Delhi High Court in the case of Kelvinator of India Ltd. (supra) has been further upheld by the Hon'ble Supreme Court also. Thus, in view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 20,62,512 towards addition to the building and ₹ 17,25,713 for construction activity of the building. Her conclusion in paragraph No.7.5.3 reads as under: "7.5.3 The sum and substance of the findings made above is that the deduction u/s.24(b) in respect of interest payable to Vyasya Bank, will be allowable on the loan amount of ₹ 2,26,82,244 (Rs. 1,89,08,019 utilized to repay the outstanding old loan of Canara Bank + ₹ 20,62,512 utilized for making the addition on the commercial property +Rs. 17,11,713, utilized for construction activity by way of repayment of outstanding creditors). The Assessing Officer is accordingly directed to rework the interest payable to Vyasya Bank during the relevant year on ₹ 2,26,82,244. As a result, out of the appellant's claim of current year interest of ₹ 53,61,484, the interest to be actually allowed as deduction u/s. 24(b) will be the interest of ₹ 11,99,972 payable to Canara Bank and the interest worked out on loan of ₹ 2,26,82,244 payable to Vyasya Bank". 21. The learned counsel for the assessee while impugning the order of the Learned CIT(Appeals) submitted that Learned First Appellate Au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e investment as on 31.3.2002 was ₹ 1,12,19,330. He pointed out that the only asset with the partner is the capital investment in the assessee's firm and the corresponding liability is the loan amount representing this asset which clearly indicates that the funds borrowed by the partners were invested in the assessee's firm and which was used for the purpose of repayment of loan. On the strength of these details, he pointed out that Learned First Appellate Authority has erred in not appreciating the facts in totality, rather dissecting the facts in a half way under the belief that direct evidence is not available. In this way, he prayed that funds used by the assessee from interest bearing funds of the partners and unsecured loans are to be considered as used for the purpose of the construction and interest expenses deserves to be allowed. 22. Learned DR on the other hand relied upon the order of the Learned CIT(Appeals). He pointed out that when construction was completed by the borrowed fund taken from Canara Bank then it is for the assessee to show that the current loan taken from Vysya Bank was used for the purpose of the construction of the building which gives r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there is no dispute between the department and the assessee. The interest expenses incurred by the assessee on the borrowed funds if used for the purpose of construction then deduction of such expenses will be admissible to the assessee under sec. 24(b) of the Income-tax Act, 1961. The only dispute between the parties relates to the quantification of amounts used for the purpose of construction. On an analysis of the balance sheet, we are of the view that the assessee is able to demonstrate, utilization of funds for the purpose of the construction. Learned revenue authorities without specifying any reason refused to take cognizance of the balance sheet of the partners. In view of the above discussion, we allow this ground of appeal raised by the assessee in all the assessment years and direct the Assessing Officer to grant deduction of interest expenses with regard to current interest charges also. The facts in other years are also common. Thus, in view of the above discussion, the grounds of appeal raised by the assessee in all the years are allowed and the solitary ground raised by the revenue in assessment year 2005-06 is rejected. 24. In assessment year 2004-05, the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sentatives, we have gone through the record carefully. Learned DR relied upon the order of the Learned CIT(Appeals). He also brought to our notice the definition of transfer contained in sec. 2(47) of the Act as well as sec. 45(4) of the Act. Both these clauses read as under: "2(47) 'transfer', in relation to a capital asset, includes, - (i) the sale, exchange or relinquishment of the asset' or (ii) the extinguishments of any rights therein; or … … (iv) any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of any immovable property. Explanation- For the purposes of sub-clauses (v) and (vi), 'immovable property' shall have the same meaning as in clause (d) of sec. 269UA. 45(4) The profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals (not being a company or a co-operative so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat there are number of decisions rendered by the ITAT on this issue which are in favour of the assessee. He mainly drew our attention towards the decision of the ITAT, Mumbai in the case of ITO v. Smt. Paru D. Dave[2008] 110 ITD 410. 29. On due consideration of the facts and circumstances, we find that Hon'ble Mumbai High Court in the case of A.N. Naik Associates (supra) has considered this aspect in details. Hon'ble High Court is of the opinion that by Finance Act, 1987, the Hon'ble Parliament brought on the statute book a new sub-section (4) in sec. 45 of the Act, the effect is that the profits or gains arising from the transfer of a capital assets by a firm to a partner on dissolution or otherwise would be chargeable as the firm's income in the previous year in which the transfer took place and for the purpose of computation of capital gain, the fair market value of the assets on the date of transfer would be deemed to be the full value of the consideration received or accrued as a result of the transfer. According to the Hon'ble High Court, if one has to see the object of the Act and the mischief, it seeks to avoid, then it would be clear that the intentio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt-term capital gain arises on surrender of rights in the revalued partnership assets. Partnership firm constituted of its partners is governed by the provisions of Partnership Act. The partnership firm is not a legal entity and property of the partnership vests in its partners inasmuch as all the partners have an interest in the partnership property. The provisions of the Partnership Act clearly provide that a property which is brought in by the partners on the formation of partnership or acquired in the course of business of partnership, becomes the property of the firm. The partners of a partnership firm are entitled to a share in the profits of the business to the extent of their share ratio. During the subsistence of partnership no partner has any assigned right or share in the partnership property. During the continuance of the partnership the partners have only a right in the profits of the partnership and no partner can deal with any portion of the partnership property as his own during the continuance of the partnership firm." 10. Their Lordships of Hon'ble Supreme Court in S.V. Chandra Pandian v. S.V. Sivalinga Nadar[1995] 212 ITR 592 held that as under : " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was taken by the Hon'ble Supreme Court in CIT v. R. Lingamallu Raghukumar[2001] 247 ITR 801. In case any asset/property is allocated to a partner in proportion to his share in the profits of the firm, there is no partition or transfer taking place nor there is any relinquishment of interest of other partners in the allocated property, in the sense of transfer or extinguishment of interest as envisaged under section 17 of the Registration Act. Thus, when dissolution of partnership firm takes place and residue is distributed amongst the partners after settlement of amounts, there is no transfer or relinquishment of interest as envisaged under section 17 of the Registration Act. This view was held by the Hon'ble Supreme Court in S.V. Chandra Pandian's case (supra). The Income-tax Act has brought in by way of an amendment to section 45 of the Income-tax Act that on dissolution of partnership firm provisions of section 45(4) of the Act shall be applicable which treats the dissolution of a partnership as deemed transfer of assets from the partnership firm to its partners. 13. In a partnership amongst partners, each and every partner of the firm has an interest in each and e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R 216/171 Taxman 254 in favour of the revenue but we find in that case the firm was dissolved and assets were taken by one of the partners in his proprietaryship concern. The latest decision of Hon'ble Kerala High Court is again in favour of the assessee. Similarly, there are decisions at the end of the ITAT which are in favour of assessee. The decision of Hon'ble Madhaya Pradesh High Court is also in favour of the assessee. On the other hand, the decision of Hon'ble Karnataka High Court and Hon'ble Mumbai High Court are in favour of the revenue. Faced with this situation, we deem it appropriate to follow the decisions which are in favour of the assessee. Hon'ble Kerala High Court in its latest decision rendered on 28.10.2010 in the case of M.V. Narayanan (supra) has held that on retirement of partner, if the firm, continues with the business then there is no distribution of assets and section 45(4) of the Act would not be applicable. Though the parties have not advanced any agreement but at the time of decision, it struck to our mind, that true sense nothing was gained by the firm. If some thing has been transferred and any gain is there, then that would be to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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