(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
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