M/s. Victor Engineering Works, Ahmedabad V. The Income tax Officer,A'bad Ward-3(1), Ahmedabad

ITA 209/AHD/2011

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 50535 (ITAT-AHMEDABAD)
• Duration Of Justice: 6 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-08-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Next Hearing Date: 24-08-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 27-01-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VINOD TANWANI
• Assessee Lawyers: S N DIVATIA
• Keywords: Depreciation; Proportionate interest; Difference of opinion; Tax effect; Reason to believe; Change of opinion; Reassessment proceedings
• Section: 147; 148; 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL SMC BENCH AHMEDABAD (BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER) ITA NO.20/AHD/2011 A. Y.: 2005-06 INCOME TAX OFFICER, WARD 3 (1), 5 TH FLOOR, INSURANCE BUILDING, ASHRAM ROAD, AHMEDABAD VS M/S. VICTOR ENGINEERING WORKS, C/1/357, GIDC, ODHAV, AHMEDABAD PA NO. AABFV 5092 J (APPELLANT) (RESPONDENT) ITA NO.209/AHD/2011 A.Y.: 2005-06 M/S. VICTOR ENGINEERING WORKS, C/1/357, GIDC, ODHAV, AHMEDABAD VS INCOME TAX OFFICER, WARD 3 (1), 5 TH FLOOR, INSURANCE BUILDING, ASHRAM ROAD, AHMEDABAD PA NO. AABFV 5092 J (APPELLANT) (RESPONDENT) DEPARTMENT BY SHRI VINOD TANWANI, DR ASSESSEE BY SHRI S. N. DIVATIA, AR DATE OF HEARING: 25-08-2011 DATE OF PRONOUNCEMENT: 25-08-2011 O R D E R PER BHAVNESH SAINI, JM: BOTH THE CROSS APPEALS ARE DIRECTED AGAINST ORDER OF THE CIT(A), GANDHINAGAR, AHMEDABAD DATED 12-11-2010 FOR ASSESSMENT YEAR 2005-06. 2. BRIEFLY, THE FACTS OF THE CASE AS NOTED IN THE I MPUGNED REASSESSMENT ORDER ARE THAT RETURN OF INCOME WAS FI LED ON ITA NO. 20 AND 209/AHD/2011 M/S. VICTOR ENGINEERING WORKS 2 29-10-2005 DECLARING TOTAL INCOME AT RS.61,521/-. A SSESSMENT U/S 143(3) OF THE IT ACT WAS COMPLETED ON 24-12-2007 DE TERMINING TOTAL INCOME AT RS.1,30,030/-. LATER ON, ON VERIFICATION OF THE RETURN OF INCOME AND THE ACCOMPANIED AUDITED ACCOUNTS, IT WA S OBSERVED THAT INCOME CHARGEABLE TO TAX HAS ESCAPED ASSESSMENT IN THIS YEAR IN AS MUCH AS INTEREST ON BORROWED FUNDS WAS WRONGLY CLAI MED AS THE BORROWED AMOUNT WAS NOT UTILIZED FOR THE PURPOSE OF BUSINESS, BUT WAS WITHDRAWN BY THE PARTNERS FOR NON-BUSINESS PURP OSES. NOTICE U/S 148 OF THE IT ACT WAS ISSUED AND REASSESSMENT WAS C OMPLETED BY MAKING DISALLOWANCE OF THE INTEREST U/S 36 (1) (VII ) OF THE IT ACT IN A SUM OF RS.3,15,083/-. THE ASSESSEE CHALLENGED THE R EOPENING OF THE ASSESSMENT BEFORE THE LEARNED CIT(A) AS WELL AS ADD ITION ON MERIT. THE LEARNED CIT(A) HELD THAT REOPENING OF THE ASSES SMENT IS VALIDLY INITIATED AND THERE WAS NO CHANGE OF OPINION INVOLV ED. AS REGARDS THE ADDITION ON MERIT IS CONCERNED, THE LEARNED CIT(A) NOTED THAT FUNDS WERE BORROWED AND INTEREST WAS PAID AND THE SUBSTAN TIAL FUNDS HAVE BEEN DIVERTED TO PARTNERS FOR NON-BUSINESS PURPOSES . IT WAS HOWEVER, SEEN THAT THE AO HAD DISALLOWED THE ENTIRE INTEREST . THEREFORE, PROPORTIONATE INTEREST WAS DISALLOWED ON THE WITHDR AWALS MADE BY THE PARTNERS WHICH WAS WORKED OUT TO RS.1,39,524/- AND THE APPEAL OF THE ASSESSEE WAS PARTLY ALLOWED. 3. THE REVENUE IS IN APPEAL CHALLENGING THE DELETIO N OF DISALLOWANCE OF INTEREST OF RS.1,75,541/-. THE ASSE SSEE IS IN APPEAL CHALLENGING THE REOPENING OF THE ASSESSMENT U/S 147 OF THE IT ACT AS WELL AS CHALLENGING THE UPHOLDING OF THE DISALLOWAN CE OF INTEREST OF RS.1,39,542/-. ITA NO. 20 AND 209/AHD/2011 M/S. VICTOR ENGINEERING WORKS 3 4. THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW AND R EFERRED TO PB-24 TO 26 WHICH ARE THE REASONS FOR REOPENING OF THE AS SESSMENT AND ALSO REFERRED TO ORIGINAL ASSESSMENT ORDER COPY OF WHICH IS FILED AT PAGE 27 OF THE PAPER BOOK AND ARGUED THAT WHILE MAK ING THE ORIGINAL ASSESSMENT ORDER, THE AO HAD FULLY EXAMINED THE CLA IM OF INTEREST EXPENSES AND MADE DISALLOWANCE OUT OF IT. NOW, THE REOPENING OF THE ASSESSMENT, SO AS TO DISALLOW INTEREST TO THE EXTEN T WITHDRAWALS MADE BY THE PARTNERS IS NOTHING BUT CHANGE OF OPINION ON THE PART OF THE AO. HE HAS SUBMITTED THAT ALL THE PARTICULARS WERE DISCLOSED AT THE TIME OF ORIGINAL ASSESSMENT AND THE CASE IS FULLY E XAMINED BY THE AO BY VERIFYING THE BOOKS OF ACCOUNTS AND DETAILS SUBM ITTED BEFORE THE AO AT THE TIME OF ORIGINAL ASSESSMENT PROCEEDINGS. NO NEXUS HAS BEEN PROVED BETWEEN THE BORROWED FUNDS AND THE AMOU NT OF WITHDRAWAL BY THE PARTNERS OF THE ASSESSEE FIRM. TH EREFORE, REOPENING IS MADE ON MERE SUSPICION. THE REOPENING OF THE ASS ESSMENT ON MERE CHANGE OF OPINION IS NOT JUSTIFIED AND HE HAS RELIED UPON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F CIT VS KELVINATOR OF INDIA LTD., 320 ITR 561 IN WHICH IT W AS HELD THAT AFTER THE AMENDMENT THE ASSESSING OFFICER HAS TO HAVE REASONS TO BELIEVE THAT THE INCOME HAS ESCAPED ASSESSMENT, BUT THIS DOES NOT IMPLY THAT THE ASSESSING OFFICER CAN REOPEN AN ASSESSMENT ON MERE CHANGE OF OPINION. THE CONCEPT OF CHANGE OF OPINION MUST BE TREATED AS AN INBUILT TEST TO CHECK THE ABU SE OF POWER. ITA NO. 20 AND 209/AHD/2011 M/S. VICTOR ENGINEERING WORKS 4 5. THE LEARNED DR RELIED UPON THE ORDERS OF THE AUT HORITIES BELOW BUT SUBMITTED THAT THE ISSUE OF INTEREST WAS EXAMIN ED BY THE AO AT THE ORIGINAL ASSESSMENT STAGE. 6. I HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE FACTS NOTED ABOVE ARE NOT DISPUTED. THE HONBLE FULL BENCH OF THE DEL HI HIGH COURT IN THE CASE OF KELVINATOR OF INDIA LTD., 256 ITR 1 BY FOLLOWING CIRCULAR NO.549 OF CBDT HELD THAT ON MERE CHANGE OF OPINION OF AO CANNOT BE A GROUND FOR RE-ASSESSMENT AND THAT AMENDMENT OF SECTION 147 OF THE IT ACT WITH EFFECT FROM 01-04-1989 HAS NOT A LTERED THE POSITION. THE HONBLE GUJARAT HIGH COURT IN THE CASE OF GARDE N SILK MILLS PVT. LTD., 237 ITR 668 HELD THAT HOWEVER WIDE THE SCOPE OF TAKING ACTION U/S 148 OF IT ACT, IT DOES NOT CONFIRM JURIS DICTION ON CHANGE OF THE INTERPRETATION OF A PARTICULAR PROVIS ION EARLIER ADOPTED BY THE ASSESSING AUTHORITY. FOR COMING TO A CONCLUSION THAT THERE HAS BEEN EXCESSIVE LOSS OR DEPRECIATION ALLOWANCE OR THAT THERE HAS BEEN UNDER ASSESSMENT OR ASSESSMENT AT A LOWER RATE OR FOR APPLYING OTHER PROVISIONS OF EXPLANATIO N 2 TO SECTION 147, IT MUST BE ON MATERIAL AND IT SHOULD HAVE NEXU S FOR HOLDING SUCH OPINION CONTRARY TO WHAT HAS BEEN EXPRESSED EA RLIER. EVEN AFTER THE AMENDMENT OF SECTION 147, MERE CHANGE OF OPINION DOES NOT CONFIRM JURISDICTION ON THE ITO TO INITIAT E PROCEEDING FOR REASSESSMENT MERELY BY RESORTING TO EXPLANATION 1 TO SECTION 147. THE HONBLE CALCUTTA HIGH COURT IN THE CASE OF BERG ER PAINTS INDIA LTD. 245 ITR 648 HELD WHEN ANY PARTICULAR ISSUE HAS BEEN CONSIDERED BY THE ITO AND CIT(A) AND WHEN THERE IS NO FAILURE TO DISCLOSE THE FACTS, THE REASSESSMENT PROCEEDINGS AR E NOT VALID. ITA NO. 20 AND 209/AHD/2011 M/S. VICTOR ENGINEERING WORKS 5 THE HONBLE SUPREME COURT IN THE CASE OF CIT VS FOR ANER FRANCE, 264 ITR 566 HELD REASSESSMENT NOT ON BASIS OF MERE CHANGE OF OPINION LAW SAME BEFORE AND AFTER AMENDMENT BY DIRECT TAX LAWS. THE HONBLE SUPREME COURT IN THE CASE OF INDIAN OIL CORPORATION, 159 ITR 956 HELD THAT NO CASE U/S 148 IS MADE OUT WHEN THE FACTS WERE KNOWN ALL ALONG WITH TO THE REV ENUE WHILE MAKING THE ORIGINAL ASSESSMENT. THE HONBLE SUPREME COURT IN THE CASE OF ASSOCIATED STONE INDUSTRY LTD., 224 ITR 560 HELD THAT THE ASSESSEE SHALL HAVE TO DISCLOSE ONLY THE PRIMA RY FACTS. THE HONBLE SUPREME COURT IN THE CASE OF CIT VS KELVINA TOR OF INDIA LTD., 320 ITR 561 HELD THAT AFTER THE AMENDMENT THE ASSESSING OFFICER HAS TO HAVE REASONS TO BELIEVE THAT THE INCOME HAS ESCAPED ASSESSMENT, BUT THIS DOES NOT IMPLY THAT THE ASSESS ING OFFICER CAN REOPEN AN ASSESSMENT ON MERE CHANGE OF OPINION. THE CONCEPT OF CHANGE OF OPINION MUST BE TREATED AS AN INBUILT TEST TO CHECK THE ABUSE OF POWER. CONSIDERING THE ABOVE LEGAL PROPOSITIONS DECIDED IN THE ABOVE CASES, IT IS CLEA R THAT THE AO IS NOT JUSTIFIED IN REOPENING THE ASSESSMENT ON MERE CHANG E OF OPINION. 7. IN VIEW OF THE ABOVE FACTS, IT IS CLEAR THAT THE FACTS REGARDING INTEREST WERE BEFORE THE AO AT THE TIME OF MAKING T HE ORIGINAL ASSESSMENT ORDER U/S 143(3) OF THE IT ACT. THE AO R ECORDED IN THE ORIGINAL ASSESSMENT ORDER (PB-27) THAT THE ASSESSEE ATTENDED AND FILED REQUIRED DETAILS BEFORE THE AO. IT IS FURTHER NOTED THAT FROM THE DATA MADE AVAILABLE AND THE MATERIAL PLACED ON RECO RD, THE CASE HAS BEEN THOROUGHLY EXAMINED. THE BOOKS OF ACCOUNTS WER E TEST CHECKED AND THE CASE WAS DISCUSSED WITH THE ASSESSEES COUN SEL. THE AO, ITA NO. 20 AND 209/AHD/2011 M/S. VICTOR ENGINEERING WORKS 6 THEREFORE, CONSIDERED THE ISSUE OF INTEREST EXPENSE S OF RS.3,15,083/- AT THE ORIGINAL ASSESSMENT STAGE WHICH IS THE SUBJE CT MATTER IN THE REOPENING OF THE ASSESSMENT UNDER APPEAL NOW. THE F INDINGS OF THE AO ON THIS ISSUE IN THE ORIGINAL ASSESSMENT ORDER A RE REPRODUCED AS UNDER (PB-28): THE ASSESSEE HAS CLAIMED INTEREST EXPENSES OF RS.3,15,083/-. ON THE OTHER HAND THE ASSESSEE HAS G IVEN LOAN/ADVANCE OF RS.72,380/- TO CERTAIN PARTIES ON W HICH NO INTEREST HAS BEEN CHARGED. THE MATTER WAS DISCUS SED WITH THE A. R. OF THE ASSESSEE, AND HE HAS NOT TAKE N ANY OBJECTION FOR THE SAID DISALLOWANCE AND ACCORDINGLY INTEREST OF RS.6,514/- @ 9% IS DISALLOWED FROM THE INTEREST CLAIMED AND ADDED IN THE TOTAL INCOME OF T HE ASSESSEE. 7.1 THE AO IN THE REASSESSMENT ORDER THEREAFTER NOT ED THAT LATER ON, ON VERIFICATION OF RETURN OF INCOME AND ACCOMPA NYING AUDITED ACCOUNTS IT WAS OBSERVED THAT THERE IS ESCAPEMENT O F INCOME ON ACCOUNT OF INTEREST CLAIMED IN A SUM OF RS.3,15,083 /-. THE AO ACCORDINGLY RECORDED THE REASONS FOR REOPENING OF T HE ASSESSMENT COPY OF WHICH IS FILED AT PAGE 26 OF THE PAPER BOOK WHICH READS AS UNDER: ANNEXURE SL. NO.11. IN THIS CASE, ORDER U/S. 143(3) OF THE ACT FOR A. Y . 2005-06 WAS PASSED ON 24.12.2007. THEREAFTER, IT HA S BEEN OBSERVED THAT INCOME HAS ESCAPED ASSESSMENT AS UNDER: 2. THE ASSESSEE HAD BORROWED UNSECURED LOAN TO THE TUNE OF RS.30,99,018/- DURING THE YEAR AND PAID INT EREST OF ITA NO. 20 AND 209/AHD/2011 M/S. VICTOR ENGINEERING WORKS 7 RS.3,15,083 THEREON. IT IS ALSO SEEN THAT THE PARTN ERS HAD WITHDRAWN FROM THE CAPITAL ACCOUNT, A SUM OF RS.33,31,475/- WITH THE RESULT THE NET BALANCE OF C APITAL AT THE END OF THE YEAR WAS (-) RS.17,26,775/-. SINCE T HE ENTIRE BORROWED FUND WAS CARRIED AWAY BY PARTNERS F OR NON-BUSINESS PURPOSES, THE INTEREST P[AID ON SUCH BORROWED LOAN IS NOT ADMISSIBLE U/S. 36(III) OF THE ACT AND REQUIRED TO BE DISALLOWED. FAILURE TO DO SO RESULTE D IN UNDERASSESSMENT OF TAXABLE INCOME OF RS.3,15,083/-. 3. I HAVE, THEREFORE, REASON TO BELIEVE THAT INCOME CHARGEABLE TO TAX OF RS.3,15,083/- HAS ESCAPED ASSESSMENT FOR THIS YEAR. IT IS THEREFORE, REQUESTE D THAT NECESSARY APPROVAL TO ISSUE NOTICE U/S. 148 MAY KIN DLY BE GIVEN. THE LIMITATION IN THIS CASE EXPIRES ON 31.03 .2012. 7.2 CONSIDERING THE ABOVE FACTS, IT IS CLEAR THAT T HE AO EXAMINED THE DETAILS OF THE CLAIM OF DEDUCTION FOR INTEREST AT THE ORIGINAL ASSESSMENT STAGE. IT WOULD SUGGEST THAT THE AO AFTE R CONSIDERING THE DETAILS PLACED ON RECORD AND BY APPLYING HIS MIND C OMPLETED THE ASSESSMENT AT THE ORIGINAL ASSESSMENT STAGE AND ACC EPTED THE CLAIM OF THE ASSESSEE. NO NEW MATERIAL CAME TO THE KNOWLE DGE OF THE AO BECAUSE REASONS WERE RECORDED MAINLY ON THE BASIS O F RETURN OF INCOME AND THE AUDITED ACCOUNTS BEFORE HIM WHICH WE RE ALREADY CONSIDERED IN THE ORIGINAL ASSESSMENT PROCEEDINGS. REOPENING OF THE ASSESSMENT ON THE BASIS OF THE MATERIAL AVAILABLE O N RECORD IS THUS CLEARLY A CHANGE OF OPINION BASED ON THE SAME SET O F FACTS AND MATERIALS. SINCE THE SAME FACTS WERE BEFORE THE AO FOR GRANT OF DEDUCTION OF INTEREST AT THE STAGE OF THE ORIGINAL ASSESSMENT AND NOTHING NEW CAME TO THE KNOWLEDGE OF THE AO, THEREF ORE, THE AUTHORITIES BELOW WERE NOT JUSTIFIED IN HOLDING THA T THE REOPENING OF THE ASSESSMENT IS VALID IN LAW. ON MERE CHANGE OF O PINION, THE ITA NO. 20 AND 209/AHD/2011 M/S. VICTOR ENGINEERING WORKS 8 REOPENING OF THE ASSESSMENT WOULD NOT BE VALID IN L AW. THE ABOVE POSITION IS FURTHER REITERATED BY THE HONBLE SUPRE ME COURT IN THE CASE OF KELVINATOR OF INDIA LTD. (SUPRA). ACCORDING LY, I DO NOT FIND ANY JUSTIFICATION IN REOPENING OF THE ASSESSMENT IN THE MATTER. I ACCORDINGLY, SET ASIDE THE ORDERS OF THE AUTHORITIE S BELOW AND QUASH THE REASSESSMENT PROCEEDINGS. IT WOULD RESULT INTO DELETION OF THE ENTIRE ADDITION AND AS SUCH THE ISSUE ON MERIT NEED S NO FURTHER ADJUDICATION BEING HAVING ACADEMIC INTEREST ONLY. I T MAY ALSO BE FURTHER NOTED THAT IN THE DEPARTMENTAL APPEAL, THE TAX EFFECT IS BELOW RS. 2 LACS AND AS SUCH THE DEPARTMENTAL APPEAL IS F ILED CONTRARY TO THE CIRCULAR OF CBDT. THEREFORE, DEPARTMENTAL APPEA L WOULD NOT BE MAINTAINABLE AND WOULD BE LIABLE TO BE DISMISSED. I N VIEW OF THE ABOVE, I SET ASIDE THE ORDERS OF THE AUTHORITIES BE LOW AND ALLOW THE APPEAL OF THE ASSESSEE. 8. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALL OWED AND THE DEPARTMENTAL APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT. SD/- (BHAVNESH SAINI) JUDICIAL MEMBER LAKSHMIKANT/- COPY OF THE ORDER FORWARDED TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE CIT(A)- CONCERNED 5. THE DR, ITAT, CONCERNED 6. GUARD FILE BY ORDER DY. REGISTRAR, ITAT, AHM EDABAD