(Per : HONOURABLE MS JUSTICE SONIA GOKANI) The petitioner herein has challenged notice of reopening the issue under Section 148 of the Income Tax Act (to be referred to as "the Act" hereinafter) in the following factual background.
The petitioner filed its return of income for the assessment year 2006-2007 disclosing the total income at Rs.7,71,847/-. Details of break-up of administrative expenses and debited to profit and loss account were annexed. It also reflected interest expense of Rs.1685832/-. The Assessing Officer issued notice under Section 143(2) asking for certain information. Thereafter, the notice under Section 142(1) was also issued. This questionnaire contained various points. Relevant questions are being reproduced here :
"(1) A brief note on the nature of activities undertaken in the previous year and the status of the activities undertaken in the earlier years.
(6) Whether any interest on Term Loan was capitalized during the year. If yes, furnish the following details:
(a) Amount of term loan
(b) Amount of interest capitalized
(c) The assets with which it is capitalized
(d) Furnish details of payment of interest.
(7) In respect of loans raised during the year, whether squared up or not, furnish confirmation of each party along with name, address, PAN and a copy of ledger account as appearing in your books of accounts.
(8) Furnish name, address & copy of accounts of all parties from whom purchases exceeding Rs.50,000/- have been made during the period under consideration.
(9) Furnish the following details in respect of creditors/debtors in whose name sum exceeding Rs.50,000/- is outstanding Sr.
No.
Name and address of the person Nature of transactions Total amount involved Amount outstanding at the year end Whether person covered u/s. 40A(2)(b) (12) Furnish details of the secured loans obtained during the year alongwith the details of the securities/assets mortgaged furnished for obtaining such loans."
It is further averred in the petition that due compliance of the said notice dated 19.5.2008 was already made and same was answered in the manner shown here-in-after :
2.1 Nature of Activities/Sources of income Your assessee is an Authorized dealer on commission bases for Nylon/polyester Yarn of JCT Ltd., Century Enka Ltd and Garden Silk Ltd. In the earlier year also,you assessee has under taken the same activity.
2.7 The details regarding unsecured loan raised viz., name, address, PAN and amount involved is already summarized in Annexure A forming part of Form 3CD of audit report dated 29/7/2006. However, we have enclosed here with the copies of ledger accounts and acknowledgment of Income Tax Return filed for the year under consideration of all the depositors, duly signed and confirmed by them, in Annexure-A for your kind perusal.
2.8 Your assessee has made purchase only once in the whole year I.e. in May 2005, for 3,006.02 kgs of yarn for Rs.6,61,3337 from JCT Ltd.(PAN :AAACJ 6733 E) of 1304, Adatiya Awas, Bombay Market, Surat. There are no other transactions of purchase during the year."
Further details were furnished during the course of hearing and there is correspondence entered into by both the sides furnishing all the requisite details which were called for. It is the say of the petitioner that pursuant to these queries, it was explained with regard to some of the persons as to why there was a higher rate of interest paid in respect of some of these persons as well. It emerges further that assessment order was passed in respect of the present petitioner by the Assessing Officer after this detailed scrutiny on 29.8.2008.
As averred in the petition by the appellant, by issuance of impugned notice under Section 148 of the Act dated 17.8.2011, the very issue is sought to be reopened and impugned notice is challenged in the present petition.
As can be noted from record, on a request, the reasons of issuance of the notice have been furnished which states as under :
"The assessee derives income from trading of nylon/polyster yarn on commission basis. It is noticed from the records that the assessee has claimed deduction u/s36(1)(iii) in respect of unsecured loan. During the year the assessee has purchased goods worth Rs.661337/- whereas borrowed unsecured loan of Rs.1,15,99,299/- on which interest of Rs.16,85,832/- was paid and deduction claimed u/s 36(1)(iii) of the I.T. Act. The assessee is earning commission income and since the assessee has purchased goods worth only Rs.6,61,337/- the genuineness of funds borrowed for business purpose needs to be ascertained. Hence, the interest paid was not in accordance with the provisions of section 36 of the Income-tax Act. The assessee is purchasing and selling goods but the purchase and sale are not accounted for in the books of account and therefore utilisation of borrowed funds cannot be verified. In view of the above I have reason to believe that income chargeable to tax has escaped assessment for the A.Y. 2006-07."
Objections to this have been furnished on 7.11.2011. While disposing of these objections on 11.11.2011, it has been mentioned by the Deputy Commissioner that income chargeable to tax in the instant case has escaped assessment and the reopening of the assessment is well within the time as per the rules framed under the Income Tax Act and therefore, on this count, the request for dropping the proceedings under Section 148 has been rejected.
Learned senior counsel Shri J.P. Shah has vehemently submitted before us that reopening of assessment is beyond the period of four years from the relevant assessment year where in the reasons supplied, there is no such reason mentioned of assessee having failed to disclose truly and fully all material facts and only ground given is for the purpose of verification of funds borrowed for business that the said notice has been issued. He also further submitted that there is no other additional material on the basis on which this notice can be sustained even within 4 years as notice clearly mentions that from the record Assessing Officer formed belief that deduction claimed under Section 36(1)(iii) of the Act in respect of unsecured loan requires to be verified with regard to the genuineness of the funds borrowed for the business purpose. This notice needs quashment therefore, as the very basis is not tenable. He has taken us through the entire exercise having gone into by the Assessing Officer at the time of original assessment in examining the issue in question. He further explained the modus in which the present assessee functions by pointing out that assessee is a dealer of three manufacturers of yarn. Being the dealer he would procure orders for the Principal who would sell the goods directly to the customer. As per the terms between the dealer and the Principal, payment thereof needs to be made immediately and the same is being done by the dealer (appellant herein) and consequently he becomes entitled to quantity/rate discount from the Principal. On raising of the bills by the Principal, dealer debits the account of the customer who received the yarn directly from the Principal and after sometime the customers would make payment to the dealer. Thus, for services rendered by the dealer, he earns discount from the Principal and interest from the customers.
Thus according to the learned counsel, dealer uses his own fund or he has to take help of borrowed funds which is being utilised for the purpose of the business operating in the fashion explained. Therefore, borrowed amount is utlised for the purpose of business and the interest paid thereon is an allowable expenditure under section 36(1)(iii) of the Act. This deployment of the funds and borrowing made by him has been in detail scrutinized by the Assessing Officer and therefore, this notice cannot be sustained without even a whisper that there was failure on the part of appellant to reveal fully and truly material facts.
Per contra learned counsel Shri Manav Mehta appearing for the Revenue has sought to rely upon the reasonings given while rejecting the objections raised by appellant against the notice and recording of reasons on dated 11.11.2011 to base his submissions. Counsel pointed out that sum of Rs.1.15 crores (rounded off) is borrowed unsecured loan on which interest of Rs.16,85,832/- was paid and appellant claimed deduction under Section 36(1)(iii) of the Act. It is highly unlikely as disproportionately the assessee had shown purchase of goods only worth Rs.6,61,337/-. Therefore for verifying the genuineness of the funds that this notice has been issued which does not require any interference by this Court.
On having heard both the sides at length and with their assistance having examined the documents and materials on record, for the reasons to follow here-in-after, we are of the opinion that impugned notice of reopening cannot be sustained.
It needs to be noted at the outset that issuance of notice under section 148 of the Act is in respect of assessment year 2006-2007. Admittedly, the notice has been issued beyond the period of four years from the end of relevant assessment year. There are very well laid down parameters regarding exercise of powers under the Act, where said notices of reopening the assessment can be issued by the Assessing Officer. One such requirement is that the notice could have been issued if the assessee did not file return under section 139 or other reason is when income escaped assessment since assessee would not have disclosed truly and fully all material particulars at the time of original assessment, necessary for the purpose of the assessment. As can be seen from the reasons recorded itself, there is neither any such contention raised nor such ingredient being reflected. Beyond four years the escapement of income must be occasioned by a failure on the part of assessee to disclose material facts, fully and truly and Assessing Officer in such event if has reason to believe that income chargeable to tax has escaped assessment for year under consideration, that confers jurisdiction on him to reopen assessment.
As is noted earlier, this notice is being issued essentially for verifying the genuineness of the funds and that too from the record itself, the Assessing Officer was of the opinion that deduction of expenditure under Section 36(1)(iii) of the Act could not have been allowed. It is since very well laid down and settled law that only for the purpose of verifying the details in a matter beyond the period of four years, it would not be permissible for the Assessing Officer to issue the notice on change of mind unless, of-course, there is nondisclosure on part of the assessee which is not even a case here.
As has been noted earlier at the time of original assessment, this very issue has been examined by raising specific queries and as appears from the record the query which concerns the very issue of unsecured loans as well as interest paid thereon had been examined. Not only the questions raised have been in detail and at length explained by the assessee, but in subsequently issued notice and hearing as well those aspects have been answered and scrutinized and thus there is no dispute that assessment was completed after scrutiny under sub-section (3) of Section 143 of the Act where considering material on record and explanation offered when final conclusion is arrived at by the Assessing Officer that assessee was entitled to deduction, Assessing Officer cannot have reason to believe contrary to that, based on the same material that income escaped assessment. At the time of original assessment, it was explained by the assessee that the very nature of transaction with all the Principals requires borrowing of funds. In the objections filed to the notice in question, agreements entered into with all the 3 Principals are explained at length and the reason for borrowing as also the need of security deposit also gets explained fully. At the time of original assessment, comparative statement of income and expenditure are submitted along with other requisite materials to satisfy the Assessing Officer and after closely scrutinizing the issue from various angels, assessment was completed.
In such circumstances no powers can be exercised as sought to be done in this case by arbitrary exercise of the same as power to reopen is not akin to review nor is it permissible on mere change of opinion nor for the purpose of looking into the aspects which are long before concluded on due scrutiny.
Law in this regard is also very well settled and requires mention at this stage. In case of Hotel Oasis (Surat) Pvt. Ltd. reported in 57 DTR 378, assessment was found to have been reopened to make inquires and notice was quashed.
In CIT v. Batra Bhatta Company(321 ITR P.526) Delhi High Court did not permit the notice of reopening to be sustained on the ground of having been issued for fishing inquiry.
Therefore, in light of discussion above, there would not arise any question of permitting reopening of assessment for the purpose of making any roving inquiry when the issue of genuineness of the funds borrowed had been examined at a greater details at the time of original assessment. As could also be noted from the record, the entire modus of operation of the assessee who was acting as a dealer for three manufacturers of yarn has been explained satisfactorily and unambiguously and therefore, considering the line of activities of the assessee and as the issues which had emanated from the nature of transactions have been deeply and appropriately scrutinized, it is not open for the Revenue to reopen the assessment beyond the period of four years by issuance of notice in question without semblance of allegations of non disclosure on his part.
Resultantly, this petition succeeds. Impugned notice dated 17.8.2011 and all consequential orders followed therefrom are hereby quashed. Parties to bear their respective costs.
Petition is disposed of in terms thereof.
(Akil Kureshi,J.) (Ms.
Sonia Gokani,J.) (raghu) Top