Devenbhai Mafatlal Patel v. The Assistant Commissioner Of Income Tax Circle 1(3

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/SPECIAL CIVIL APPLICATION NO. 20607 of 2018 FOR APPROVAL AND SIGNATURE: HONOURABLE MR. JUSTICE J.B.PARDIWALA Sd/- ================================================================ DEVENBHAI MAFATLAL PATEL Versus THE ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE 1(3) ================================================================ Appearance: MR TUSHAR HEMANI, SR.ADVOCATE with MS VAIBHAVI PARIKH(3238) for the Petitioner(s) No. 1 MRS KALPANA K RAVAL(1046) for the Respondent(s) No. 1 ================================================================ CORAM: HONOURABLE MR. JUSTICE J.B.PARDIWALAandHONOURABLE MR. JUSTICE ILESH J. VORA Date : 07/01/2021 ORAL JUDGMENT (PER : HONOURABLE MR. JUSTICE J.B.PARDIWALA) 1.By this writ-application under Article 226 of theConstitution of India, the writ-applicant has prayed for thefollowing reliefs : “(a)quash and set aside the impugned notice at Annexure-A to this petition;Annexure-A to this petition; (b)pending the admission, hearing and final disposal of this petition, to stay the implementation and operation of the notice at Annexure-A to this petition and stay the further proceedings for the Assessment Year 2011-12;this petition, to stay the implementation and operation of the notice at Annexure-A to this petition and stay the further proceedings for the Assessment Year 2011-12; (c)any other and further relief deemed just and proper begranted in the interest of justice;granted in the interest of justice; (d)to provide for the cost of this petition.” 2.The subject matter of this writ-application is the impugnednotice issued under Section 148 of the Income Tax Act, 1961 (forshort, 'the Act 1961') for re-opening of the assessment for theAssessment Year 2011-12 on the ground that the incomechargeable to tax had escaped assessment within the meaning ofSection 147 of the Act 1961. The notice dated 31[st] March 2018issued under Section 148 of the Act 1961 is at page-16(Annexure-A) to this writ-application. The reasons recorded andconveyed to the writ-applicant are at page-66 (Annexure-G) tothis writ-application. 3.It appears that the writ-applicant filed his return of incomeon 30[th] September 2011 for the Assessment Year 2011-12declaring the total income at Rs.84,20,950=00 and agricultureincome for the rate purpose of Rs.7,38,235=00 Thereafter, a revised return of income was filed on 24[th] September 2012showing the income of Rs.2,18,400=00 from a house property,Rs.5,36,22,727=00 from the business and profession for whichdeduction under chapter VIA of Section 80IB ofRs.5,36,62,553=00 was claimed, long term capital gain ofRs.84,23,837=00 was claimed exempt under Section 54B of theAct 1961. The writ-applicant also showed income from the othersources of Rs.1,38,120=00 and agriculture income ofRs.7,38,230=00 for the rate purpose. The case of thewrit-applicant was selected for scrutiny under the CASS. Theassessment proceedings came to be completed on 25[th] February2014 by passing order under Section 143(3) of the Act 1961. Anaddition of Rs.6,55,538=00 on account of STCG was made. 4.The record reveals that the writ-applicant is a partner in apartnership firm running in the name of M/s.Vijya LaxmiExports. It appears that the Revenue Audit Party raised an auditobjection in the case of M/s.Vijya Laxmi Exports. As per theaudit objection, the partnership deed of M/s.Vijya Laxmi Exportscontains a clause to provide interest and remuneration to itspartners as per the provision of Section 40(b) of the Act 1961. 5.It is the case of the department that the firm did not makeany provision for the said interest and remuneration to beprovided to the partners in accordance with the provisions of thepartnership deed during the Assessment Year 2011-12. 4.The record reveals that the writ-applicant is a partner in apartnership firm running in the name of M/s.Vijya LaxmiExports. It appears that the Revenue Audit Party raised an auditobjection in the case of M/s.Vijya Laxmi Exports. As per theaudit objection, the partnership deed of M/s.Vijya Laxmi Exportscontains a clause to provide interest and remuneration to itspartners as per the provision of Section 40(b) of the Act 1961. 5.It is the case of the department that the firm did not makeany provision for the said interest and remuneration to beprovided to the partners in accordance with the provisions of thepartnership deed during the Assessment Year 2011-12. 6.It has come to the notice of the department that M/s.VijyaLaxmi Exports paid Rs.12,74,351=00 as interest on the partnerscapital and Rs.44,97,148=00 as remuneration to its partners, but at the same time, claimed excess deduction ofRs.57,71,499=00 under Section 10AA of the Act 1961 which wasliable to be taxed in the hands of the partners. According to thedepartment, the income of Rs.57,71,499=00 was required to betaxed in the hands of the partners. According to the Revenue,the writ-applicant, being one of the partners of the firmM/s.Vijya Laxmi Exports, has a share capital of 30 per cent. 7.Having regard to what has been stated above, it is the caseof the Revenue that the writ-applicant had received interest oncapital of rs.3,82,305=00 and Rs.13,49,145=00 respectively asremuneration from the partnership firm and the said amounthad not been offered or disclosed for the purpose of taxation. 8.In such circumstances referred to above, the departmenthas thought fit to re-open the assessment proceedings beyondthe period of four years on the ground that the amount ofRs.17,31,450=00 had escaped assessment within the meaning ofSection 147 of the Act 1961 for failure on the part of thewrit-applicant to disclose all the material facts fully and truly. 9.Upon receipt of the reasons for the re-opening of theassessment proceedings, objections were filed dated 20[th] July2018 and the same came to be disposed of by the Revenue videorder dated 20[th] September 2018. 10.Being dissatisfied with the decision to re-open theassessment, the writ-applicant is here before this Court with thepresent writ-application. 11.This Court, while issuing the notice, passed the followingorder dated 26[th] December 2018 : “1.Mr.Tushar Hemani, learned advocate for the petitionerhas invited invited the attention of the Court to the orderdated 20.12.2018 passed by this Court in the case of VijyaLaxmi Exports in Special Civil Application No.20132 of 2018to submit that in the case of the partnership firm also, theAssessing Officer sought to reopen the assessment on theground that the firm had claimed excess deduction ofRs.57,71,499/- under Section 10AA of the Income Tax Act,1961 which was liable to be taxed in the hands of thepartners. It was pointed out that in that case the court hasissued notice and has restrained the respondents frompassing the final order. 2.Referring to the reasons recorded, it was submittedthat in the case of the partners, the Assessing Officer seeksto reopen the assessment on the ground that M/s.VijyaLaxmi Exports has paid Rs.12,74,351/- as interest onpartners capital and Rs.44,97,148/- as remuneration to itspartners but has claimed excess deduction ofRs.57,71,499/- under section 10AA of the Act. Referencewas made to the computation of total income of Vijya LaxmiExports to point out that interest and remuneration therein isshown as nil, which is also reflected in clause (g) in columnNo.17 in the statement of particular required to be furnishedunder Section 44AB of the Act. It was submitted thattherefore, the Assessing Officer seeks to reopen theassessment on the basis of conjectures and surmises and 2.Referring to the reasons recorded, it was submittedthat in the case of the partners, the Assessing Officer seeksto reopen the assessment on the ground that M/s.VijyaLaxmi Exports has paid Rs.12,74,351/- as interest onpartners capital and Rs.44,97,148/- as remuneration to itspartners but has claimed excess deduction ofRs.57,71,499/- under section 10AA of the Act. Referencewas made to the computation of total income of Vijya LaxmiExports to point out that interest and remuneration therein isshown as nil, which is also reflected in clause (g) in columnNo.17 in the statement of particular required to be furnishedunder Section 44AB of the Act. It was submitted thattherefore, the Assessing Officer seeks to reopen theassessment on the basis of conjectures and surmises and that on the reasons recorded, the Assessing Officer couldnot have formed the belief that income chargeable to tax hasescaped assessment. It was further pointed out that in thiscase the impugned notice has been issued on 31[st] March,2018 in relation to Assessment Year 2011-12 which isclearly beyond a period of four years from the end of therelevant assessment year without there being any failure onthe part of the petitioner to disclose fully and truly allmaterial facts necessary for his assessment, therefore, theassumption of jurisdiction on the part of the AssessingOfficer under section 147 of the Act, is invalid. 3.Having regard to the submission advanced by thelearned counsel for the petitioner, issue Notice returnable on5th February, 2019. By way of ad-interim relief, therespondent is permitted to proceed further pursuant to theimpugned notice; he, however, shall not pass the final orderwithout the prior permission of this Court. Direct service ispermitted today.” 12.Mr.Tushar Hemani, the learned senior counsel assisted byMs.Vaibhavi Parikh and Mr.Parimal Parmar, the learned counselappearing for the writ-applicant, submitted that the Revenue isnot justified in re-open the assessment proceedings on thegrounds as assigned in the reasons. He would submit that fromthe computation of total income, tax audit report and annualaccounts of the partnership firm, no interest or remunerationhad been paid by the firm to its partners. The case of thewrit-applicant for the year under consideration was taken up forscrutiny assessment under Section 143(3) of the Act 1961. The Assessing Officer, at the relevant point of time, framed theassessment under Section 143(3) of the Act 1961 vide orderdated 25[th] February 2014 without making any addition inrespect of the interest on capital and remuneration to thepartners. 13.It is further pointed out by Mr.Hemani that the partnershipfirm, namely Vijya Laxmi Exports, was also selected for scrutinyassessment for the Assessment Year 2011-12 and the AssessingOfficer had disallowed the entire claim of deduction ofRs.86,19,599=00 under Section 10AA while framing theassessment under Section 143(3) of the Act 1961 vide orderdated 26[th] February 2014. The assessment order was carried inappeal before the CIT(A) who, vide order dated 2[nd] May 2014,deleted the disallowance of Rs.86,19,599=00 made by theAssessing Officer under Section 10AA of the Act 1961. 14.He would submit that the re-opening is beyond the periodof four years from the end of the relevant assessment years.There is no failure on the part of his client in fully and trulydisclosing all the material facts. The action of re-opening beyondthe period of four years is not justified in any manner. 15.In such circumstances referred to above, Mr.Hemani, thelearned senior counsel prays that there being merit in hiswrit-application, the same may be allowed and the impugnednotice be quashed and set-aside. 16.On the other hand, this writ-application has beenvehemently opposed by Ms.Raval, the learned senior standing 14.He would submit that the re-opening is beyond the periodof four years from the end of the relevant assessment years.There is no failure on the part of his client in fully and trulydisclosing all the material facts. The action of re-opening beyondthe period of four years is not justified in any manner. 15.In such circumstances referred to above, Mr.Hemani, thelearned senior counsel prays that there being merit in hiswrit-application, the same may be allowed and the impugnednotice be quashed and set-aside. 16.On the other hand, this writ-application has beenvehemently opposed by Ms.Raval, the learned senior standing counsel appearing for the Revenue. Ms.Raval would submit thathaving regard to the reasons assigned for re-opening of theassessment, this Court may not interfere. According to Ms.Raval,tangible material has come to the notice of the department, andon the basis of which, the department could be said to bejustified in issuing the notice for the purpose of re-opening ofthe assessment. 17.In such circumstances referred to above, Ms.Raval praysthat there being no merit in this writ-application, the same maybe rejected. 18.Having heard the learned counsel appearing for the partiesand having gone through the materials on record, the onlyquestion that falls for our consideration is, whether the Revenueis justified in re-opening the assessment beyond the period offour years under Section 147 of the Act 1961. 19.We take notice of the fact that the decision to re-open theassessment is substantially on the ground that thewrit-applicant failed to offer 'interest on capital' and'remuneration' as income alleged to have been received from thepartnership firm, namely M/s.Vijya Laxmi Exports. 20.It is the settled position of law that the condition precedentfor the purpose of resorting to re-opening of the assessment isthat the Assessing Officer should be satisfied based on somecogent or tangible material, that the case is one of escapement ofincome chargeable to tax. In the absence of escapement of anyincome chargeable to tax, it is not open for the department to re-open the case of the assessee. 21.Mr.Hemani is right in his submission that mereincorporation of interest on partners capital and remunerationdoes not necessarily mean or should be construed as mandatory.There has to be some material on record to indicate that thewrit-applicant had actually received any 'interest on capital' or'remuneration' from the partnership firm. Where no such incomehas been earned by the writ-applicant, the question of taxing thesame does not arise at all. 22.At this stage, we may look into the decision of this HighCourt in the case of PCIT vs. Alidhara Taxspin Engineers (TaxAppeal No.265 of 2017, decided on 2[nd] May 2017), wherein thisCourt considered two questions of law as proposed by theRevenue in the said appeal. The two questions of law whichcame to be considered by this Court are as under : “Whether on the facts and circumstances of the case and inlaw, the Hon’ble ITAT was justified in not appreciating thefact that by not providing interest and remuneration to thepartners, the firm has claimed higher profits leading tohigher claim of deduction u/s 80IB of the Act and thus,devoiding the revenue from due amount of tax? (B)“Whether on the facts and circumstances of the caseand in law, the Hon’ble ITAT was justified in notappreciating that the Section 80IB(10) enables AO tore-compute the profit of undertaking claiming deduction u/s80IB i.e. the partnership firm as in the present case and not the case of partner’s admissibility towards interest/remuneration as held in the case of Smt. Mala Tandon?” 23.While dismissing the appeal of the Revenue and answeringthe aforesaid two questions in favour of the assessee, this Courtheld as under : (B)“Whether on the facts and circumstances of the caseand in law, the Hon’ble ITAT was justified in notappreciating that the Section 80IB(10) enables AO tore-compute the profit of undertaking claiming deduction u/s80IB i.e. the partnership firm as in the present case and not the case of partner’s admissibility towards interest/remuneration as held in the case of Smt. Mala Tandon?” 23.While dismissing the appeal of the Revenue and answeringthe aforesaid two questions in favour of the assessee, this Courtheld as under : “On interpretation of the partnership agreement andconsidering the wish of the partners reflected in thepartnership deed, not to pay/charge interest on the partnerscapital and the remuneration, the learned tribunal hasrightly deleted the dis-allowance made by the AssessingOfficer with respect to the deduction claimed under Section80IB of the Income Tax Act. As rightly observed by thelearned tribunal, mere incorporation of interest on thepartners’ capital and remuneration does not signify that thesame are mandatory in nature. We concur with the viewtaken by the learned tribunal. We see no reason to interferewith the impugned judgment and order passed by thelearned tribunal. No substantial questions of law arise in thepresent Tax Appeal. The present Tax Appeal deserves to bedismissed and is accordingly dismissed.” 24.Applying the very same dictum of law as laid in the case ofAlidhara Taxspin Engineers (supra), we have no hesitation inarriving at the conclusion that the re-opening of the assessmentis not justified. 25.In the result, this writ-application succeeds and is herebyallowed. The impugned notice is hereby quashed and set-aside. All the consequential proceedings pursuant thereto standterminated. (J. B. PARDIWALA, J.) /MOINUDDIN (ILESH J. VORA, J.)