Ms. Harsha Devani, J.@mdashBy this petition under Art. 226 of the Constitution of India, the petitioner has challenged the notice dated 5th Feb., 2010 issued by the respondent under s. 148 of the IT Act, 1961 (the Act) reopening the petitioners assessment for asst. yr. 2005-06.
2. The petitioner, a partnership firm, submitted a return of income for asst. yr. 2005-06 on 29th Oct., 2005. The return was accompanied by the computation of income and audit report wherein the petitioner had specifically claimed a deduction of Rs. 5,50,000 by way of remuneration to partners and interest to partners of Rs. 2,74,905. During the course of scrutiny assessment under s. 143, the AO sent a questionnaire along with notice under s. 142(1) dated 4th Sept., 2006. The petitioner complied with the requisition by a letter dated 18th Sept., 2006. The AO, thereafter, framed assessment under s. 143(3) of the Act on 10th Oct., 2007 computing the business income at Rs. 22,59,221 and specifically gave deduction of interest of Rs. 2,74,905 and salary to partners of Rs. 5,50,000 and thus computed the total income at Rs. 14,34,316 which came to be rounded off at Rs. 14,34,320.
3. Thereafter, the petitioner received the impugned notice dated 5th Feb., 2010 for asst. yr. 2005-06 stating that income had escaped assessment and asking the petitioner to file the return of income. Reasons for reopening also came to be furnished to the petitioner whereupon, the petitioner filed objections to the proposed reassessment by a letter dated 6th April, 2010. The respondent rejected the said objections by an order dated 12th Oct., 2010. After passing the objections disposal order, even before the petitioner received the same, the respondent issued notices dated 14th Oct., 2010 under s. 133(6) of the Act to various parties who had deposits with the petitioner and also reminded them of the provisions of s. 272A(2)(c) in case of non-compliance of s. 133(6) notices. Being aggrieved, the petitioner has filed the present petition challenging the notice issued under s. 148 of the Act as well as the order rejecting the objections, dated 12th Oct, 2010.
4. Mr. J.P. Shah, learned advocate for the petitioner submitted that this is out and out a case of change of opinion and, therefore, the notice is bad in view of the decision of the Supreme Court in the case of
4.1 Next, it was submitted that the AO had himself allowed Rs. 5,50,000 in computation, which is indicative of both application of mind and opinion, and exactly for the same reason, that now according to the AO less is allowable because interest though shown and taxed as business income is wrongly taxed as such, is nothing but a change of opinion. Placing reliance upon the decision of the Bombay High Court in the case of
4.2 In conclusion, it was urged by the learned advocate for the petitioner that in any case, the view taken by the AO is a plausible view in the light of the above referred decisions, assuming that it is capable of two views. It was submitted that whether interest income is a business income is a debatable issue which is capable of two opinions and as such, the reopening of assessment is merely a change of opinion and therefore, the assumption of jurisdiction on the part of the AO under s. 147 of the Act is bad in law.
5. The petition was vehemently opposed by Mr. K.M. Parikh, learned standing counsel appearing on behalf of the respondent. It was submitted that the AO has recorded detailed reasons and has given a reasoned order while disposing of the objections raised by the petitioner. Inviting attention to the original assessment order framed under s. 143(3) of the Act, it was submitted that there is no discussion as regards FDR bank interest in the assessment order and that the same has not been computed separately by the petitioner-assessee while computing its income. It was submitted that there is no mention of Rs. 2,43,927 either in the return or in the computation by the AO and neither the petitioner nor the AO has dealt with the same separately. It was argued that interest income cannot be considered as business income. That the assessee had computed the book profit by adding FDR interest income though the same was not computable under the head of Income from business or profession. That the assessee had clubbed income of two different sources together and the AO while framing assessment under s. 143(3) of the Act had not applied his mind to this aspect. It was, accordingly submitted that the reasons for reopening being germane, there is no warrant for any intervention by this court.
6. In rejoinder, Mr. J.P. Shah, learned advocate for the petitioner drew the attention of the court to the computation of income to point out that the same clearly indicates that the partners salary has been worked out on the basis of net profit as per P&L a/c. Referring to the P&L a/c for the year ended on 31st March, 2005, it was pointed out that the same clearly indicates bank interest income of Rs. 2,43,927. It was submitted that in the circumstances, the submission of the learned counsel for the respondent that the FDR interest is not mentioned by the petitioner, is contrary to the record of the case. Referring to the communication dated 18th Sept., 2006 of the petitioner filed in response to the letter dated 4th Sept., 2006 of the AO, it was pointed out that it is clearly stated therein that the interest accrued on Rs. 57 lakhs is provided as interest accrued on bank deposit of Rs. 2,43,927 during the year. It was submitted that in the circumstances, the petitioner had disclosed all material facts before the AO and the AO after approving the same and applying his mind to the issue involved, had framed the assessment under s. 143(3) of the Act. The reopening of assessment is, therefore, based upon a mere change of opinion and as such, is not valid in law.
7. In the light of the rival contentions raised by the learned advocates for the respective parties, it may be germane to refer to the reasons recorded for reopening of the assessment under s. 147 of the Act, which read thus:
Reasons for reopening of the assessment u/s 147 of the IT Act, 1961
The assessee had filed return of income for the asst. yr. 2005-06 on 29-10-2005 declaring income of Rs. 7,26,980. The assessee is engaged in construction business. The assessment proceedings were completed under s. 143(3) of the IT Act, 1961 on 10/10/2007 determining total income at Rs. 14,34,320.
2. As per s. 40(b)(v)(2) for the purpose of book profit, only income chargeable under the head business or profession is to be computed. Therefore, if there is income chargeable to tax under the head other than business or profession i.e. income from other sources, capital gains and income from house property, credited to P&L account, will be deducted from the net profit for computation of book profit.
3. It is observed that Rs. 2.43,927 being FDR bank interest received by the firm and credited to P&L account requires to be excluded to compute book profit under s.. 40(b) of the Act. The AO has allowed deduction of Rs. 5,50,000 as against Rs. 4,54,430 resulting excess allowance on this count by Rs. 97,570. This has resulted in short levy of tax plus interest of Rs. 46,773.
4. On going through the P&L a/c filed along with the return of income, it is seen that said account is credited by
|
Gross profit |
Rs. 22,88,315 |
|
Interest income |
Rs. 2,43,927 |
|
income tax refund |
Rs. 1,02,470 |
Net profit worked out at Rs. 5,64,001. As per provisions of s. 40(b) of the Act, the book profit is to be computed in respect of income chargeable under the head "Profit and Gains from business or profession". In view of this provision, the income received from interest is to be excluded for working out the book profit under s. 40(b) of the Act.
5. In view of the above provisions, income chargeable to tax amounting to Rs. 97,570 has escaped assessment. Therefore, I have reason to believe that the income chargeable to tax to the extent of Rs. 97,570 has escaped the assessment within the meaning of s. 147 of the IT Act, 1961 for the asst. yr. 2005-06 and it is a fit case for issuance of notice under s. 148 of the Act. Notice under s. 148 is accordingly issued.
A perusal of the reasons recorded shows that the main ground for reopening the assessment is that FDR bank interest of Rs. 2,43,927 received by the firm and credited to the P&L a/c was required to be excluded while computing book profit under s. 40(b) of the Act. If the said amount were excluded, the allowance towards partners salary would come to Rs. 4,54,430 as against Rs. 5,50,000 allowed by the AO, resulting in short levy of tax plus interest of Rs. 46,773. The other ground is that the income of Rs. 2,43,927 received from interest is to be excluded while working out the book profit under s. 40(b) of the Act and that if the income of the petitioner is computed after excluding the interest income from the book profit under s. 40(b) of the Act, the total income chargeable to tax which has escaped assessment would come to Rs. 97,570.
8. A perusal of the assessment order as originally framed under s. 143 of the Act indicates that while computing the profit as per the P&L a/c, the AO has added interest to partners and remuneration to partners and thereafter, allowed deduction thereof, which clearly exhibits due application of mind on the part of the AO. The AO has also disallowed Rs. 7,01,119 under s. 40(a)(ia) of the Act which resulted in considerable increase in the total income. The AO while recording the reasons has lost sight of this fact, namely that the total income has increased from Rs. 7,26,980 as declared in the return to Rs. 14,34,320 in view of the aforesaid disallowance and therefore, the remuneration to partners of Rs. 5,50,000 as claimed by the petitioner would still be allowable even if the FDR bank interest is not taken into consideration while computing book profit. Hence, income chargeable to tax to the tune of Rs. 46,773 cannot be said to have escaped assessment. The first ground of reopening is therefore, misconceived.
9. Insofar as the exclusion of interest income while computing book profit is concerned, it is apparent that during the course of assessment proceedings, the entire facts regarding FDR bank interest were furnished to the then AO who appears to have been of the opinion that the entire investment and income pertains to business only and accordingly net income was worked out and salary paid to partners under s. 40(b) of the Act came to be computed. Considering the material placed before the AO, it would appear that the AO must have applied his mind in taking into consideration the interest income while computing book profit under s. 40(b) of the Act. Moreover, in the light of the decision of the Bombay High Court in the case of CIT v. Paramount Premises (P) Ltd. (supra), the view taken by the AO is a plausible view. Once the view taken by the AO is a plausible view, reopening of assessment on the ground that another view which is more beneficial to the Revenue is possible, is nothing but a mere change of opinion. In the circumstances in the light of the decision of the Supreme Court in the case of CIT v. Kelvinator of India Ltd. (supra) wherein it has been held that one needs to give a schematic interpretation to the words "reason to believe" failing which, 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; the reopening of assessment is bad in law.
10. For the foregoing reasons, the petition succeeds and is accordingly allowed. The impugned notice dated 5th Feb., 2010 issued by the respondent under s. 148 of the Act (Exh. E to the petition) is hereby quashed and set aside". Rule is made absolute accordingly with no order as to costs.
