(PER :
HONOURABLE MR.JUSTICE AKIL KURESHI)
1. Heard learned counsel for the parties for final disposal of the petition.
Petitioner has challenged notice dated 27.3.2012 (annexed at Annexure-A to the petition) issued by the respondent Assessing Officer under section 148 of the Income Tax Act, 1961 ( the Act for short).
Petition arises in following factual background:-
3.1 The petitioner is a company registered under the Companies Act. For the Assessment Year 2006-07, the petitioner had filed its return of income on 26.12.2006 declaring total income of Rs.61.98 crores (rounded off). Such return was taken in scrutiny. The Assessing Officer passed an order under section 143(3) of the Act on 26.12.2008. It is this scrutiny assessment that the respondent seeks to reopen for which impugned notice has been issued.
At the request of the petitioner, the Assessing Officer supplied the reasons recorded by him for issuing such a notice. Such reasons read as under:-
3. Reasons for re-opening assessment under section 147 of the I.T. Act, 1961 in your case for A.Y.2006-07 as recorded:-
(i) On verification of the details available on record it is noticed that the assessee has borrowed funds from IDBI amounting to Rs.8.crores and paid interest of Rs.12,80,617/- on it to the bank. While verifying application of funds, it is seen that the assessee has made interest free advances to the tune of Rs.4,4,31,833/-. Last year advances were shown at Rs.62,35,986/-. Therefore, it is clear that new advances during the year were made from borrowed funds. Further, there is no instance to prove that the advances were made for the business purpose. The assessee borrowed funds and utilized the same for non-interest bearing advances and claimed interest on borrowed funds. The interest disallowable under section 36(1)(iii) of the Act worked out of the extent of Rs.7,17,136/- which requires to be disallowed accordingly.
(ii) On verification of Balance Sheet as on 31.03.2006, it is noticed that the assessee has invested Rs.6,07,63,392/- in shares and Rs.1 crore in mutual fund during the previous year under consideration. Income from such investment is not taxable under the IT Act, 1961. Provisions of Section 14A lays down that expenditure relatable to income not being part of total income needs to be determine under Rule 8D of IT Rules, 1962 ( method provided in the said rule). Disallowance of interest related to the funds utilized towards non-taxable income u/s 14A of the Act to the extent of Rs.2,46,083/-. This requires the disallowance u/s. 14A of the Act to the extent of Rs.2,46,083/-.
(iii) On verification of depreciation claimed by the assessee and allowed during the assessment, it is noticed that the assessee has claimed an additional depreciation of Rs.33,15,561/- @ 7.5% on Rs.4,42,07,480/- cost of plant and machinery) which has been installed in FY 2004-05 relevant to AY 2005-06. The assessee has not explained further on this issue. The deprecation in AY 2006-07 is allowable on WDV of the machinery installed in FY 2004-05, even though depreciation in that year had not been claimed. Therefore, Rs.33,14,561/- requires to be disallowed and added back into total income of the assessee.
(iv) On verification of the details, it is noticed that the assessee has incurred huge expenditure which has subject to TDS under Chapter-XXIII B of the Act, including Provisions of Sec.195 applicable to the payment made to non-residents. Though the TDS return acknowledgment are obtained and placed on records, the reconciliation of such expenditure and amount subjected to TDS requires to be made for possible disallowance u/s. 40(a)(ia) of the Act.
5. The petitioner thereupon raised its objections to the notice for reopening under communication dated 3.1.2013. Such objections, were, however, rejected by the respondent by an order dated 11.3.2013. Hence, the petition.
6. Having heard learned counsel for the parties, we notice that the Assessing Officer has recorded four different reasons for issuing notice for reopening, which in the nutshell are as under:-
(1) The assessee had borrowed funds from IDBI amounting to Rs.8 crores and paid interest at Rs.12,80,617/- on it. On verification of the application of such funds, it was seen that the assessee had made interest free advances to the tune of Rs.4,44,31,833/-. On this premise, Assessing Officer believed that since the assessee had utilized the borrowed funds for making interest free advances, interest expenditure on borrowed funds would not be deductible under section 36(1)(iii) of the Act.
It was found that the assessee had made investment in shares and mutual funds which generated tax free income. The expenditure relatable to earning such income had to be disallowed as per the provisions of section 14A of the Act and such disallowance had to be determined under rule 8D of the Income Tax Rules, 1962.
It was noticed that the assessee had claimed additional depreciation of Rs.33,15,561/- at the rate of 7.5% on a sum of Rs.4,42,07,480/- expended towards cost of plant and machinery, which was installed in the Financial Year 2004-05. The Assessing Officer believed that the claim of depreciation of the assessee on such machinery for the Assessment Year 2006-07 had to be worked out on the written down value of such machinery though the depreciation may not have been claimed in the earlier year.
It was further noticed that the assessee had made provision to which section 195 of the Act was applicable. The assessee though filed TDS acknowledgments, reconciliation of the expenditure and amount subjected to TDS, would give rise to a possible disallowance under Section 40(a)(ia) of the Act.
7. The impugned notice has been issued beyond the period of 4 years from the end of the relevant Assessment Year. Question of income chargeable to tax escaping assessment for the failure of the assessee to disclose truly and fully all material facts, would therefore, assume significance.
8. In all four reasons recorded by us hereinabove, the Assessing Officer starts with an expression that on verification of record . Thus, the Assessing Officer has based his reasons on verification of the material already on record during the original assessment. In the reasons recorded, or the notice issued for reopening it is not even alleged that there was failure on the part of the assessee to disclose truly and fully all material facts. On this short ground, we are inclined to allow the petition.
9. Additionally, we notice that during the assessment proceedings, the assessee had brought to the pointed notice of the Assessing Officer that the assessee had paid interest of amount of Rs.12,80,617/- to IDBI. Along with such answer in the correspondence, copy of the ledger account of the interest paid was already enclosed. Thus full details of the borrowing, interest paid, etc. were part of the assessment proceedings.
10. With respect to disallowance of expenditure relatable to tax free income in terms of section 14A of the Act, it is undoubtedly true that rule 8D of the Income Tax Rules, 1962 was not in operation at that time. The determination, therefore, could not have been based on such formula. This is, however, not to suggest that there could be no disallowance at all under section 14A of the Act if it was found that expenditure was incurred for earning tax free income. However, in this case also the crucial question is, did the assessee withhold true and full facts during the course of assessment leading to escapement of income chargeable to tax? Answer has to be in the negative.
11. With respect to the question of TDS, the Assessing Officer himself has recorded that the tax was deducted and return was duly filed. He only required to reconcile the expenditure and the tax deducted at source which may lead to a possible disallowance under section 40(a)(ia) of the Act. Surely, for such a fishing inquiry reopening of assessment could not be permissible that too assessment beyond the period of four years from the end of the relevant assessment year when it is not even the case of the Department that the assessee had not disclosed truly and fully all material facts.
12. For all the reasons recorded above, impugned notice at Annexure-A is quashed. Petition is allowed and disposed of accordingly.
(AKIL KURESHI, J.) (MS SONIA GOKANI, J.) SUDHIR Page 7 of 7