MANIBHAI AND BROTHERS (PCC) SARKHEJ V. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 1(1)(1)

SCA/17545/2021

AI Insights

The case involves Manibhai and Brothers (PCC) Sarkhej, the petitioner, challenging a notice issued by the Assistant Commissioner of Income Tax, Circle 1(1)(1), the respondent, under Section 148 of the Income Tax Act, 1961, for reopening the assessment for the Assessment Year 2013-14. The notice was based on the grounds that the petitioner had claimed deductions on interest paid on capital borrowed from partners and on security charges, which the Assessing Officer deemed not allowable under the Act. The petitioner argued that the reopening was beyond the permissible period and constituted a mere change of opinion, not supported by any new tangible material. The court found that the reopening was not justified as the petitioner had fully disclosed all material facts during the original assessment.

• Counselvise Citation: [2022] 140 COUNSELVISE.COM (IT) 747400 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 19-07-2022
• Assessment Year: misc
• Other Referred Cases: Commissioner Of Income Tax, Delhi vs M/S. Kelvinator Of India Ltd reported in 320 ITR 560 (SC)
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: M R BHATT; KARAN SANGHANI
• Assessee Lawyers: TUSHAR HEMANI; VAIBHAVI PARIKH
• Keywords: Assessment Year 2013-14; Capital borrowed; Income tax reassessment; Interest deduction; Security Charges
• Section: 147; 148; 143(3); 40(a)(ia); 24(b)

Judgement Text

"C/SCA/17545/2021 JUDGMENT DATED: 19/07/2022 IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/SPECIAL CIVIL APPLICATION NO. 17545 of 2021 FOR APPROVAL AND SIGNATURE: HONOURABLE MR. JUSTICE N.V.ANJARIA and HONOURABLE MR. JUSTICE BHARGAV D. KARIA ================================================================ 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India or any order made thereunder ? ================================================================ MANIBHAI AND BROTHERS (PCC) SARKHEJ Versus THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 1(1)(1) ================================================================ Appearance: MR TUSHAR HEMANI, LD.SR.ADV WITH MS VAIBHAVI K PARIKH(3238) for the Petitioner(s) No. 1 MR M.R.BHATT, LD.SR.ADV WITH MR KARAN SANGHANI FOR M R BHATT & CO.(5953) for the Respondent(s) No. 1 =============================================================== CORAM:HONOURABLE MR. JUSTICE N.V.ANJARIA and HONOURABLE MR. JUSTICE BHARGAV D. KARIA Date : 19/07/2022 ORAL JUDGMENT (PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA) 1. Heard learned Senior Advocate Mr. Tushar Page 1 of 13 C/SCA/17545/2021 JUDGMENT DATED: 19/07/2022 Hemani with learned advocate Ms.Vaibhavi K. Parikh for the petitioner and learned Senior Advocate Mr.M.R.Bhatt with learned advocate Mr.Karan Sanghani for M.R.Bhatt & Co. for the respondent. 2. Rule, returnable forthwith. Learned advocate Mr.Karan Sanghani for M.R.Bhatt & Co. waives service of notice of rule on behalf of the respondent. 2.1 Having regard to the controversy involved in this petition, which is in a very narrow compass, with the consent of the learned advocates for the respective parties, the same is taken up for hearing today. 3.1. The petitioner has challenged the notice dated 21.03.2021 issued under Section 148 of the Income Tax Act, 1961 (for short ‘the Act’) for reopening of the Assessment Year 2013-14. Page 2 of 13 C/SCA/17545/2021 JUDGMENT DATED: 19/07/2022 3.2. The reasons for reopening of the assessment were provided to the petitioner on 19th May, 2021. As per the reasons recorded, the petitioner has claimed deduction of Rs.1,40,33,638/- towards interest paid on capital borrowed from the partners of the petitioner-firm and in view of the provisions of section 24(b) of the Act, interest is allowable in case of capital borrowed but contribution of capital by partners cannot be termed as amount borrowed by the firm for purchase of property and hence such interest is not allowable. It is further stated in the reasons recorded that as per the balance-sheet, profit and loss account and ledger, the petitioner made payment of security charges of Rs.7,89,840/- which was also required to be disallowed under provisions of Section 40(a)(ia) of the Act. 3.3. The petitioner filed objections on Page 3 of 13 C/SCA/17545/2021 JUDGMENT DATED: 19/07/2022 19.07.2021 before the Assessing Officer contending that on perusal of the reasons recorded, it appears that the Assessing Officer without forming an independent belief and opinion incorrectly invoked the provisions of Section 147 of the Act. The petitioner further explained in detail with regard to both the proposed issues for reopening. 3.4. The Assessing Officer by order dated 03.11.2021 disposed off objections filed against notice under Section 148 of the Act by rejecting the same. 4.1. Learned Senior Advocate Mr. Tushar Hemani submitted that the regular assessment for the Assessment Year 2013-14 was concluded by assessment order dated 31.08.2015 passed under Section 143(3) of the Act after proper scrutiny, therefore, the impugned notice which is issued beyond the period of four years, is liable to be Page 4 of 13 C/SCA/17545/2021 JUDGMENT DATED: 19/07/2022 set aside as there is nothing to indicate that there was any suppression on the part of the petitioner with regard to the issues which have been raised in relation to the interest expense claimed under Section 24(b) of the Act as the petitioner has paid interest to the partners on the capital borrowed by it. 4.2. It was further submitted that the assessment order dated 31.08.2015 was passed after issuance of notice under Sections 143(2) and 142(1) of the Act and the petitioner has filed detailed reply on 11th August, 2015 submitting all the details including the partners’ capital account etc., as required by the Assessing Officer and therefore there is no failure on the part of the petitioner to disclose fully and truly all material facts. 5.1. On the other hand, learned Senior Advocate Mr.M.R.Bhatt assisted by learned Page 5 of 13 C/SCA/17545/2021 JUDGMENT DATED: 19/07/2022 advocate Mr.Karan Sanghani for M.R.Bhatt & Co. for the respondent submitted that the petition is filed at a premature stage as the notice under Section 148 read with Section 147 of the Act for Assessment Year 2013-14 has been issued after recording satisfaction by the assessing officer that he has reason to believe that income has escaped assessment for the both the issues of payment of interest on partners’ capital and payment of security charges by the assessee and if the petitioner is aggrieved by the reassessment order, alternative efficacious remedy is available by way of Appeal to the CIT (Appeals) and thereafter to the Appellate Tribunal as per the provisions of the Act. 5.2. It was submitted that the reasons recorded by the Assessing Officer are based upon due application of mind and forming an independent opinion. Page 6 of 13 C/SCA/17545/2021 JUDGMENT DATED: 19/07/2022 5.3. It was further submitted that the Assessing Officer has reason to believe that income chargeable to tax has escaped assessment as the petitioner has not fully and truly disclosed the material facts necessary for assessment for the year under consideration. It was submitted that the requisite full and true discloser of all material facts necessary for the assessment have not been made as noted in the reasons recorded for the reopening and the evidences as mentioned and the reasons recorded for reopening were embedded in such a manner that material evidence could not be discovered by the Assessing Officer at the time of the original assessment and could have been discovered with due diligence and accordingly, the provisions of Sub-section (1) of Section 147 of the Act is attracted. 6. Considering the rival submissions made by the both the sides and the detailed reply filed in Page 7 of 13 C/SCA/17545/2021 JUDGMENT DATED: 19/07/2022 response to the notice under section 142(1) of the Act during the course of scrutiny assessment under Section 143(3) of the Act along with partners’ capital account and other details and on perusal of the reasons recorded by the Assessing Officer for reopening, it appears that the facts enumerated therein have been found on the examination of the case records only. There is nothing on record to show any live link with any tangible material available with the Assessing Officer to form an independent opinion to form a reasonable belief that income chargeable to tax has escaped assessment in respect of both the issues for the year under consideration. 7. The assessee has submitted all the material facts including the statement showing comparison of expenses of last three financial years, copy of balance-sheet, profit and loss account, partners’ capital account, fix assets block, copy Page 8 of 13 C/SCA/17545/2021 JUDGMENT DATED: 19/07/2022 of ledger account of electricity expenses etc. as requested by the Assessing Officer in the notice under Sections 143(2) and 142(1) of the Act. 8. In view of the facts of the case, therefore, it cannot be said that the petitioner has not disclosed fully and truly all material facts and therefore as per proviso to the Section 147 of the Act, no reopening can be made beyond four years in case, when there is no failure on the part of the assessee to fully and truly disclose all material facts and it is a mere change of opinion by the assessing officer which is not permissible to reopen the assessment as per settled legal position as held by the Hon’ble supreme Court in case of Commissioner Of Income Tax, Delhi vs M/S. Kelvinator Of India Ltd reported in 320 ITR 560 (SC) as under: “On going through the changes, quoted above, made to Section 147 of the Act, we find that, prior to Direct Tax Laws Page 9 of 13 C/SCA/17545/2021 JUDGMENT DATED: 19/07/2022 (Amendment) Act, 1987, re-opening could be done under above two conditions and fulfillment of the said conditions alone conferred jurisdiction on the Assessing Officer to make a back assessment, but in section 147 of the Act [with effect from 1st April, 1989], they are given a go-by and only one condition has remained, viz., that where the Assessing Officer has reason to believe that income has escaped assessment, confers jurisdiction to re-open the assessment. Therefore, post-1st April, 1989, power to re-open is much wider. However, one needs to give a schematic interpretation to the words \"reason to believe\" failing which, we are afraid, Section 147 would give arbitrary powers to the Assessing Officer to re-open assessments on the basis of \"mere change of opinion\", which cannot be per se reason to re-open. We must also keep in mind the conceptual difference between power to review and power to reassess. The Assessing Officer has no power to review; he has the power to re-assess. But reassessment has to be based on fulfillment 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 re-opening 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 Assessing Officer. Hence, after 1st April, 1989, Assessing Officer has power Page 10 of 13 C/SCA/17545/2021 JUDGMENT DATED: 19/07/2022 to re-open, provided there is \"tangible material\" to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief. Our view gets support from the changes made to Section 147 of the Act, as quoted hereinabove. Under the Direct Tax Laws (Amendment) Act, 1987, Parliament not only deleted the words \"reason to believe\" but also inserted the word \"opinion\" in Section 147 of the Act. However, on receipt of representations from the Companies against omission of the words \"reason to believe\", Parliament re-introduced the said expression and deleted the word \"opinion\" on the ground that it would vest arbitrary powers in the Assessing Officer. We quote here in below the relevant portion of Circular No.549 dated 31st October, 1989, which reads as follows: \"7.2 Amendment made by the Amending Act, 1989, to reintroduce the expression `reason to believe' in Section 147. --A number of representations were received against the omission of the words `reason to believe' from Section 147 and their substitution by the `opinion' of the Assessing Officer. It was pointed out that the meaning of the expression, `reason to believe' had been explained in a Page 11 of 13 C/SCA/17545/2021 JUDGMENT DATED: 19/07/2022 number of court rulings in the past and was well settled and its omission from section 147 would give arbitrary powers to the Assessing Officer to reopen past assessments on mere change of opinion. To allay these fears, the Amending Act, 1989, has again amended section 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 section 147, however, remain the same.\" For the afore-stated reasons, we see no merit in these civil appeals filed by the Department, hence, dismissed with no order as to costs.” 9. Therefore, when a regular assessment order under section 143(3) of the Act is passed, a presumption can be raised that assessing officer passed such an order on application of mind after considering the material on record. Therefore, Assessing officer cannot invoke jurisdiction to reassess under section 147 of the Act upon a mere change of opinion. Page 12 of 13 C/SCA/17545/2021 JUDGMENT DATED: 19/07/2022 10. In view of the foregoing reasons, the petition succeeds and is accordingly allowed. The impugned notice dated 21.03.2021 issued under Section 148 of the Act is hereby quashed and set aside. Rule is made absolute to the aforesaid extent. No orders as to cost. (N.V.ANJARIA, J) (BHARGAV D. KARIA, J) PALAK Page 13 of 13 "