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TMI Blog2022 (6) TMI 21X X X X Extracts X X X X X X X X Extracts X X X X ..... of the regular assessment proceedings after calling for the requisite details had found no infirmity in the claim of the assessee company that prior to commencement of its commercial operations, the interest earned on the funds that were received by it as share capital and temporarily parked as short term fixed deposits with the banks, being in the nature of a capital receipt was to be reduced from the pre-operative expenses. As stated by the Ld. AR, and rightly so, in the absence of any fresh tangible material coming to the notice of the A.O after the original assessment proceedings had culminated vide his order passed u/s. 143(3), dated 23.12.2011, the reopening of its case on an issue which had been deliberated upon by him in the course of the regular assessment proceedings would be nothing short of taking recourse to re-assessment proceedings on the basis of a mere change of opinion , which as observed by us hereinabove is not permissible under law. Thus such a substitution of a view of a successor A.O cannot form a justifiable basis for reopening the case of an assessee. We find that the Hon'ble Supreme Court in its landmark judgment in the case of CIT Vs. Kelvina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hri G.N Singh, DR ORDER PER RAVISH SOOD, JM: The captioned appeals filed by the assessee are directed against the common order passed by the CIT(Appeals)-1, Raipur dated 08.07.2016, which in turn arises from the respective orders passed by the A.O under Sec. 143(3)/147 of the Income-tax Act, 1961 (in short the Act ) for assessment years 2009-10, 2010- 11 2012-13. As common issues are involved in the captioned appeals, therefore, the same are being taken up and disposed off by way of a consolidated order. We shall first take up the appeal filed by the assessee company in ITA No.348/RPR/2016 for assessment year 2009-10 wherein the impugned order has been assailed on the following grounds of appeal before us: (1) That in the facts and circumstances of the case and in law, the learned CIT(A) erred in holding that reopening of the assessment proceedings is valid. (2) In the facts and circumstances of the case and in law, the Ld. CIT(A) erred in confirming the addition made by the AO of Rs.59,23,240/- holding interest on temporary funds parked with banks as revenue receipts chargeable to tax under the head income from other sources. The Ld. CIT(A) was not jus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al operations were duly accounted for in its books of accounts as per the mandate of law as a capital receipt and reduced from the pre-operative expenses ,i.e, the cost of project, therefore, no adverse inference qua the said treatment of interest income was called for in its hands. However, the Assessing Officer was not persuaded to subscribe to the aforesaid claim of the assessee. Observing, that the aforesaid issue in question, i.e., as to whether the interest income claimed as a capital receipt by the assessee was in the nature of a revenue receipt or not, had not been examined by the Assessing Officer in the course of the original assessment framed by him vide his order passed u/s.143(3), dated 22.12.2011, the Assessing Officer rejected the claim of the assessee that the re-assessment proceedings had been taken recourse to on the basis of a mere change of opinion . On the contrary, it was observed by the AO that his predecessor while framing assessment in the case of the assessee company in a subsequent year i.e assessment year 2011-12, had after detailed scrutiny held the interest income derived by the assessee company on the bank deposits in question as its income from othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntented that since in the AY 2009-10 similar claim of the assessee was allowed by AO, therefore, in the current year also the claim should be allowed. Dealing with the first contention, the fact that interest has been earned out of deposits made from surplus share capital the income would not become capital receipt and non taxable. If it is held so then in case of several assessee s part of share capital is often parked is bank as short term deposit till it is required for the purpose of project, in all such cases the income should be treated as capital receipts but it is not so. Interest from such deposits is duly taxed as income. The project of joint venture company was mining of coal and other related activities. However, this fact will have no bearing on the nature of interest income. Facts of the case are akin to the facts in M/s. Tuticorin Alkali( supra.) were also taxability of interest earned before commencement of business which was received on short term deposits with bank out of capital in the form of loan from financial instructions. In that case, the Hon ble Supreme Court ruled in the favour of Revenue.Disregarding with the view taken by Bombay High Court, the Apex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the revenue receipt and will have to be taxed accordingly. Any set off or deduction of any expenditure can only be made in accordance with the provision of the Act. In coming to this conclusion the Apex Court agreed with the decision of House of Lords in case of BSC Footwear Ltd. Vs. Ridgway as under: 20. In the case of B.S.C Footwear Ltd. Ridgway ( Inspector of Taxes) (1972) 83 ITR 269 ( HL), Russel, L.J while rejecting an argument based on well-settled accountancy practice, pointed out that the Income Tax Laws does not march step by step in the divergent footprints of the accountancy profession. 21. The view of Russel, L.J was upheld by the House of Lords on appeal. It was observed by the Lord Reid: Whatever merits there may be in the company's accountancy methods for the purposes of its internal affairs I am not persuaded that Cross J. and the Court of Appeal were wrong in finding them unacceptable for tax purposes. In the case before us, the company had surplus funds in its hands. In order to earn income out of the surplus funds, it invested the amount for the purpose of earning interest. The interest thus earned is clearly of revenue nature and will have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such interest is taxable as income from other sources and not as business income. The Division Bench of Bombay High Court in Shree Krishna Polyster Ltd (supra) have also considered the legal position and held that the interest on short term deposits with bank by investing surplus fund acquired in public issue invested in short term bank deposits did not spring or emanate from the business activity of the assessee, hence it cannot be considered as business income and is liable as income from other sources. The Bombay High Court considered all the judgments including the judgment in Tuticorin Alkali Chemicals Fertilizers (supra), Division Bench's judgment of this Court in M.P. State Industries Corpn. (supra) and held that such income is an income from other sources and cannot be treated as an income from business and held that the said interest is liable to be taxed. 9. As the Division Bench of this Court have considered this question in M.P. State Industries Corpn. (supra) and have decided the question, we do not find any reason to differ with the aforesaid. So we find that this appeal does not involve aforesaid substantial questions of law for our consideration and accord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rative expenses. On going through all these decisions, I find that the decision in the case of M/s. Tuticorin Alkali has wider ambit and connotation and has emanated from the basic principles of income theory and shrined in the taxation of income this country. The operating paras in the decision are as under: As can be seen above, the Hon'ble Supreme Court have passed their decision on the basis theory of income as per Income Tax Act as per which any receipts in the hands of the assessee is income unless it is exempt specifically under the certain section of the Act. Nature of income is not dependent on the purpose for which the assessee s fund was to be deployed. Therefore, interest on fixed deposits has to be taxed under one or other head. Since assessee s business had not commenced the interest could not be treated as business income. Therefore, it had to be taxed under the residual i.e. income from other sources. Respectfully, following the same, I hereby hold that the income in question is taxable under the head other sources . Accordingly, the addition made by the AO is hereby sustained and the grounds taken by the appellant are dismissed. 6. The assessee be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erative expenses to be capitalized, therefore, no adverse inferences qua such treatment of the interest income was called for in its case. 8. As the Ld. AR has assailed the validity of jurisdiction that was assumed by the A.O for dislodging the concluded assessment of the assessee company that was earlier framed vide order passed u/s.143(3), dated 20.12.2011, therefore, we shall first deal with the same. 9. On a perusal of the records, we find that it is a matter of an admitted fact that original assessment in the case of the assessee company was framed by the AO vide his order passed u/s. 143(3), dated 23.12.2011, wherein its returned income was accepted as such, Page 20-21 of the APB. It is the claim of the Ld. AR, that in the course of original assessment proceedings the A.O had, inter alia, called for the details of interest income and, in compliance thereof the same were duly filed by the assessee before him, which after necessary deliberations was accepted by him. In order to support his aforesaid contention the Ld. AR had drawn our attention to a copy of the notice u/s.142(1), dated 10.10.2011 a/w query lettter, wherein the A.O vide a query placed at Sr. No.20 had spec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness was in the nature of a capital receipt which was required to be set-off against the pre operative expenses and could not have been brought to tax in its hands as income from other sources. 11. Per contra, the Ld. Departmental Representative (for short DR ) relied on the orders of the lower authorities. It was averred by the Ld. DR that as the assessee had failed to offer the interest earned on its fixed deposits held with the three banks under the residuary head of income, i.e, as its income from other sources and had wrongly claimed it as a capital receipt, therefore, the Assessing Officer had rightly reopened its case u/s.147 of the Act. Controverting the claim of the assessee that the interest earned on the funds which were parked with the banks as short-term deposits was rightly accounted for by the assessee as a capital receipt, it was submitted by the Ld. DR, that as observed by the Assessing Officer, and rightly so, the same being an independent income was without choice liable to be brought to tax as the income of the assesee from other sources. It was submitted by the Ld. DR that as the assessee had failed to offer the interest earned on the short-term deposits a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther sources and had wrongly treated the same as a capital receipt which was reduced from the pre-operative expenses incurred during the stage of construction, the A.O for the purpose of bringing the aforesaid amount of interest income to tax had reopened its case u/s.147 of the Act. Order of reassessment was, thereafter, passed by the A.O u/s. 143(3)/147, dated 20.03.2015 wherein after treating the interest income of Rs.59.23 lacs (supra) as the assessee s income from other sources its income was assessed at Rs.59.23 lacs. On appeal, CIT(Appeals) not finding favour with the contentions advanced by the assessee, i.e, both as regards validity of the jurisdiction that was assumed by the A.O for reopening the concluded assessment as well as those that were advanced by him qua the merits of the addition made by the A.O, dismissed the appeal. 13. After giving a thoughtful consideration to the contentions advanced by Ld. Authorized Representatives of both the parties, we find substantial force in the claim of the Ld. AR that the reopening of the concluded assessment of the assessee company was prompted on the basis of a mere change of opinion on the same set of facts as were there b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey are given a go by and only one condition has remained, viz., that where the AO has reason to believe that income has escaped assessment, confers jurisdiction to reopen the assessment. Therefore, post 1st April, 1989, power to reopen is much wider. However, one needs to ITA No.1212/Mum/2019 A.Y. 2012-13 M/s Medley Pharmaceuticals Ltd. Vs. DCIT-10(2)(2) give a schematic interpretation to the words reason to believe failing which, we are afraid, s. 147 would give arbitrary powers to the AO to reopen assessments on the basis of mere change of opinion , which cannot be per se reason to reopen. We must also keep in mind the conceptual difference between power to review and power to reassess. The AO has no power to review; he has the power to reassess. But reassessment has to be based on fulfilment of certain pre-condition and if the concept of change of opinion is removed, as contended on behalf of the Department, then, in the garb of reopening the assessment, review would take place. One must treat the concept of change of opinion as an in-built test to check abuse of power by the AO. Hence, after 1st April, 1989, AO has power to reopen, provided there is tangible material t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respondent No. 1 proposes to reopen the assessment because according to him deduction under s. 80M was wrongly allowed, and, therefore, he was of the opinion that the income has ITA No.1212/Mum/2019 A.Y. 2012-13 M/s Medley Pharmaceuticals Ltd. Vs. DCIT-10(2)(2) escaped assessment. Though, in the notice respondent No. 1 has used the phrase reason to believe , admittedly between the date of the order of assessment sought to be reopened and the date of forming of opinion by respondent No. 1, nothing new has happened and there is no change of law, no new material has come on record, no information has been received. It is merely a fresh application of mind by the same officer to the same set of facts. Thus, it is a case of mere change of opinion, which, in our opinion, does not provide jurisdiction to respondent No. 1 to initiate proceedings under s. 148 of the Act. It can now be taken as a settled law, because of a series of judgments of various High Courts and the Supreme Court, which have been referred to in the judgment of the Full Bench of the Delhi High Court in the case of Kelvinator of India Ltd. (supra) referred to above, that under s. 147 assessment cannot be reopened on a m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expression reason to believe‟ needs to be given a schematic interpretation in order to ensure against an arbitrary exercise of power by the AO. The judgment of the Supreme Court emphasises that the power to reopen an assessment is not akin to a power to review the order of assessment and a mere change of opinion would not justify a recourse to the power under s. 147. Unless the AO has tangible material to reopen an assessment, the power cannot be held to be validly exercised. The Supreme Court has held thus : ...Therefore, post-1st April, 1989, power to reopen is much wider. However, one needs to give a schematic interpretation to the words reason to believe‟ failing which we are afraid s. 147 would give arbitrary powers to the AO to reopen assessments on the basis of mere change of opinion‟, which cannot be per se reason to reopen. We must also keep in mind the conceptual difference between power to review and power to reassess. The AO has no power to review; he has the power to reassess. But reassessment has to be based on fulfilment of certain precondition and if the concept of change of opinion‟ is removed, as contended on behalf of the Departme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y herein observe, that as per the mandate of law, even where a concluded assessment is sought to be reopened by the A.O within a period of 4 years from the end of the relevant assessment year, it is must that the A.O has fresh material or information with him, that had led to the formation of belief on his part that the income of the assessee chargeable to tax has escaped assessment. Our aforesaid view is fortified by the judgments of the Hon'ble High Court of Bombay in the case of NYK Lime (India) Ltd. Vs. DCIT (No.2) [2012] 346 ITR 361 (Bom) and Purity Tech Textile Pvt. Ltd. Vs. ACIT Anr. [2010] 325 ITR 459 (Bom). 15. We, thus, in the backdrop of our aforesaid observations not being able to persuade ourselves to subscribe to the order passed by the CIT(Appeals), who had upheld the jurisdiction assumed by the A.O u/s. 147 of the Act, set-aside his order and quash the assessment framed by the A.O u/s. 143(3)/147 of the Act dated 20.03.2015 for want of jurisdiction. 16. As we have quashed the assessment for want of valid assumption of jurisdiction by the AO u/s. 147 of the Act, therefore, we refrain from adverting to the other contentions advanced by the Ld. AR, i.e, bot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... short term fixed deposits with the banks. Observing, that the aforesaid interest income on short term deposits was though liable to for being taxed under the under the residuary head of income, i.e, income from other sources, but the assessee had shown the same as a capital receipt and reduced it from the pre-operative expenses which was thereafter to be capitalized, the A.O called upon the assessee to put forth an explanation justifying the treatment of interest income as a capital receipt. As the reply filed by the assessee did not find favour with the A.O, therefore, he vide his order passed u/s.143(3)/147, dated 20.03.2015 made an addition of the aforesaid interest income under the residuary head of income, i.e, income of assesse from other sources and determined its income at Rs.2,08,37,710/-. 23. Aggrieved the assessee carried the matter in appeal before the CIT(Appeals) but without any success. 24. The assessee being aggrieved with the order of the CIT(Appeals) has carried the matter before us. 25. Controversy involved in the present appeal lies in a narrow compass, i.e., as to whether the interest income earned by the assesee company on the funds that were received ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d.(supra), as under: It is clear upon a perusal of the facts as found by the authorities below that the funds in the form of share capital were infused for a specific purpose of acquiring land and the development of infrastructure. Therefore, the interest earned on funds primarily brought for infusion in the business could not have been classified as income from other sources. Since the income was earned in a period prior to commencement of business it was in the nature of capital receipt and hence was required to be set off against pre-operative expenses. In the case of Tuticorin Alkali Chemicals (1997) 227 ITR 172, it was found by the authorities that the funds available with the assessee in that case were surplus and, therefore, the Supreme Court held that the interest earned on surplus funds would have to be treated as income from other sources‟. On the other hand in Bokaro Steel Ltd (1999) 236 ITR 315 (SC) where the assessee had earned interest on advance paid to contractors during pre-commencement period was found to be inextricably linked‟ to the setting up of the plant of the assessee and hence was held to be a capital receipt which was permitted to be s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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