Manibhai And Brothers (Pcc) Sarkhej v. Honourable Mr. Justice Bhargav D. Karia

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/SPECIAL CIVIL APPLICATION NO. 17545 of 2021 FOR APPROVAL AND SIGNATURE: HONOURABLE MR. JUSTICE N.V.ANJARIA andHONOURABLE MR. JUSTICE BHARGAV D. KARIA ================================================================ 1 Whether Reporters of Local Papers may be allowed tosee the judgment ?see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of thejudgment ?judgment ? 4 Whether this case involves a substantial question oflaw as to the interpretation of the Constitution of Indiaor any order made thereunder ?law as to the interpretation of the Constitution of Indiaor any order made thereunder ? ================================================================MANIBHAI AND BROTHERS (PCC) SARKHEJ Versus THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 1(1)(1) ================================================================Appearance:MR TUSHAR HEMANI, LD.SR.ADV WITH MS VAIBHAVI K PARIKH(3238) for the Petitioner(s) No. 1MR M.R.BHATT, LD.SR.ADV WITH MR KARAN SANGHANI FOR M R BHATT & CO.(5953) for the Respondent(s) No. 1=============================================================== CORAM:HONOURABLE MR. JUSTICE N.V.ANJARIAand HONOURABLE MR. JUSTICE BHARGAV D. KARIA Date : 19/07/2022 ORAL JUDGMENT (PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA) Hemani with learned advocate Ms.Vaibhavi K.Parikh for the petitioner and learned SeniorAdvocate Mr.M.R.Bhatt with learned advocateMr.Karan Sanghani for M.R.Bhatt & Co. for therespondent. 2.Rule, returnable forthwith. Learned advocateMr.Karan Sanghani for M.R.Bhatt & Co. waivesservice of notice of rule on behalf of therespondent. 2.1 Having regard to the controversy involved inthis petition, which is in a very narrow compass,with the consent of the learned advocates for therespective parties, the same is taken up forhearing today. 3.1.The petitioner has challenged the notice dated 21.03.2021 issued under Section 148 of theIncome Tax Act, 1961 (for short ‘the Act’) forreopening of the Assessment Year 2013-14. 3.2.The reasons for reopening of theassessment were provided to the petitioner on 19[th]May, 2021. As per the reasons recorded, thepetitionerhasclaimeddeductionof Rs.1,40,33,638/- towards interest paid on capitalborrowed from the partners of the petitioner-firmand in view of the provisions of section 24(b) ofthe Act, interest is allowable in case of capitalborrowed but contribution of capital by partnerscannot be termed as amount borrowed by the firmfor purchase of property and hence such interestis not allowable. It is further stated in thereasons recorded that as per the balance-sheet,profit and loss account and ledger, thepetitioner made payment of security charges ofRs.7,89,840/- which was also required to be disallowed under provisions of Section 40(a)(ia)of the Act. 3.3.The petitioner filed objections on 19.07.2021 before the Assessing Officercontending that on perusal of the reasonsrecorded, it appears that the Assessing Officerwithout forming an independent belief and opinionincorrectly invoked the provisions of Section 147of the Act. The petitioner further explained indetail with regard to both the proposed issuesfor reopening. 3.4.The Assessing Officer by order dated03.11.2021 disposed off objections filed againstnotice under Section 148 of the Act by rejectingthe same. 4.1.Learned Senior Advocate Mr. TusharHemani submitted that the regular assessment forthe Assessment Year 2013-14 was concluded byassessment order dated 31.08.2015 passed underSection 143(3) of the Act after proper scrutiny,therefore, the impugned notice which is issuedbeyond the period of four years, is liable to be 3.4.The Assessing Officer by order dated03.11.2021 disposed off objections filed againstnotice under Section 148 of the Act by rejectingthe same. 4.1.Learned Senior Advocate Mr. TusharHemani submitted that the regular assessment forthe Assessment Year 2013-14 was concluded byassessment order dated 31.08.2015 passed underSection 143(3) of the Act after proper scrutiny,therefore, the impugned notice which is issuedbeyond the period of four years, is liable to be set aside as there is nothing to indicate thatthere was any suppression on the part of thepetitioner with regard to the issues which havebeen raised in relation to the interest expenseclaimed under Section 24(b) of the Act as thepetitioner has paid interest to the partners onthe capital borrowed by it. 4.2.It was further submitted that theassessment order dated 31.08.2015 was passed after issuance of notice under Sections 143(2)and 142(1) of the Act and the petitioner has filed detailed reply on 11[th]August, 2015 submitting all the details including thepartners’ capital account etc., as required bythe Assessing Officer and therefore there is nofailure on the part of the petitioner to disclosefully and truly all material facts. 5.1.On the other hand, learned Senior Advocate Mr.M.R.Bhatt assisted by learned advocate Mr.Karan Sanghani for M.R.Bhatt & Co.for the respondent submitted that the petition isfiled at a premature stage as the notice underSection 148 read with Section 147 of the Act forAssessment Year 2013-14 has been issued afterrecording satisfaction by the assessing officerthat he has reason to believe that income hasescaped assessment for the both the issues ofpayment of interest on partners’ capital andpayment of security charges by the assessee and if the petitioner is aggrieved by the reassessment order, alternative efficaciousremedy is available by way of Appeal to the CIT(Appeals) and thereafter to the Appellate Tribunal as per the provisions of the Act. 5.2.It was submitted that the reasons recorded by the Assessing Officer are based upon due application of mind and forming an independent opinion. 5.3.It was further submitted that the Assessing Officer has reason to believe thatincome chargeable to tax has escaped assessmentas the petitioner has not fully and trulydisclosed the material facts necessary forassessment for the year under consideration. Itwas submitted that the requisite full and truediscloser of all material facts necessary for theassessment have not been made as noted in thereasons recorded for the reopening and theevidences as mentioned and the reasons recordedfor reopening were embedded in such a manner thatmaterial evidence could not be discovered by theAssessing Officer at the time of the originalassessment and could have been discovered withdue diligence and accordingly, the provisions ofSub-section (1) of Section 147 of the Act isattracted. 6.Considering the rival submissions made by theboth the sides and the detailed reply filed in response to the notice under section 142(1) ofthe Act during the course of scrutiny assessmentunder Section 143(3) of the Act along withpartners’ capital account and other details andon perusal of the reasons recorded by theAssessing Officer for reopening, it appears thatthe facts enumerated therein have been found onthe examination of the case records only. Thereis nothing on record to show any live link withany tangible material available with the Assessing Officer to form an independent opinionto form a reasonable belief that incomechargeable to tax has escaped assessment inrespect of both the issues for the year underconsideration. 6.Considering the rival submissions made by theboth the sides and the detailed reply filed in response to the notice under section 142(1) ofthe Act during the course of scrutiny assessmentunder Section 143(3) of the Act along withpartners’ capital account and other details andon perusal of the reasons recorded by theAssessing Officer for reopening, it appears thatthe facts enumerated therein have been found onthe examination of the case records only. Thereis nothing on record to show any live link withany tangible material available with the Assessing Officer to form an independent opinionto form a reasonable belief that incomechargeable to tax has escaped assessment inrespect of both the issues for the year underconsideration. 7. The assessee has submitted all the materialfacts including the statement showing comparisonof expenses of last three financial years, copyof balance-sheet, profit and loss account,partners’ capital account, fix assets block, copy of ledger account of electricity expenses etc. asrequested by the Assessing Officer in the noticeunder Sections 143(2) and 142(1) of the Act. 8. In view of the facts of the case, therefore,it cannot be said that the petitioner has notdisclosed fully and truly all material facts andtherefore as per proviso to the Section 147 ofthe Act, no reopening can be made beyond fouryears in case, when there is no failure on thepart of the assessee to fully and truly discloseall material facts and it is a mere change ofopinion by the assessing officer which is notpermissible to reopen the assessment as persettled legal position as held by the Hon’blesupreme Court in case of Commissioner Of Income Tax, Delhi vs M/S. Kelvinator Of India Ltdreported in 320 ITR 560 (SC) as under: “On going through the changes, quotedabove, made to Section 147 of the Act,we find that, prior to Direct Tax Laws (Amendment) Act, 1987, re-opening couldbe done under above two conditions andfulfillment of the said conditions aloneconferred jurisdiction on the AssessingOfficer to make a back assessment, butin section 147 of the Act [with effectfrom 1st April, 1989], they are given ago-by and only one condition hasremained, viz., that where the AssessingOfficer has reason to believe thatincome has escaped assessment, confersjurisdiction to re-open the assessment.Therefore, post-1st April, 1989, powerto re-open is much wider. However, oneneeds to give a schematic interpretationto the words "reason to believe" failingwhich, we are afraid, Section 147 wouldgive arbitrary powers to the AssessingOfficer to re-open assessments on thebasis of "mere change of opinion", whichcannot be per se reason to re-open. Wemust also keep in mind the conceptualdifference between power to review andpower to reassess. The Assessing Officerhas no power to review; he has the powerto re-assess. But reassessment has to bebased on fulfillment of certain pre-condition and if the concept of "changeof opinion" is removed, as contended onbehalf of the Department, then, in thegarb of re-opening the assessment,review would take place. One must treatthe concept of "change of opinion" as anin-built test to check abuse of power bythe Assessing Officer. Hence, after 1stApril, 1989, Assessing Officer has power to re-open, provided there is "tangiblematerial" to come to the conclusion thatthere is escapement of income fromassessment. Reasons must have a livelink with the formation of the belief.Our view gets support from the changesmade to Section 147 of the Act, asquoted hereinabove. Under the Direct TaxLaws (Amendment) Act, 1987, Parliamentnot only deleted the words "reason tobelieve" but also inserted the word"opinion" in Section 147 of the Act.However, on receipt of representationsfrom the Companies against omission ofthewords"reasontobelieve",Parliament re-introduced the saidexpression and deleted the word"opinion" on the ground that it wouldvest arbitrary powers in the AssessingOfficer. We quote here in below therelevant portion of Circular No.549dated 31st October, 1989, which reads asfollows: "7.2 Amendment made by the AmendingAct, 1989, to reintroduce theexpression `reason to believe' inSection 147. --A number ofrepresentationswerereceivedagainst the omission of the words`reason to believe' from Section 147and their substitution by the`opinion' of the Assessing Officer.It was pointed out that the meaningof the expression, `reason tobelieve' had been explained in a number of court rulings in the pastand was well settled and itsomission from section 147 would givearbitrary powers to the AssessingOfficer to reopen past assessmentson mere change of opinion. To allaythese fears, the Amending Act, 1989,has again amended section 147 toreintroduce the expression `hasreason to believe' in place of thewords `for reasons to be recorded byhim in writing, is of the opinion'.Other provisions of the new section147, however, remain the same." For the afore-stated reasons, we see nomerit in these civil appeals filed bythe Department, hence, dismissed with noorder as to costs.” 9.Therefore, when a regular assessment order under section 143(3) of the Act is passed, apresumption can be raised that assessing officerpassed such an order on application of mind afterconsidering the material on record. Therefore,Assessing officer cannot invoke jurisdiction toreassess under section 147 of the Act upon a merechange of opinion. C/SCA/17545/2021 JUDGMENT DATED: 19/07/2022 10. In view of the foregoing reasons, thepetition succeeds and is accordingly allowed. Theimpugned notice dated 21.03.2021 issued underSection 148 of the Act is hereby quashed and setaside. Rule is made absolute to the aforesaidextent. No orders as to cost. (N.V.ANJARIA, J) (BHARGAV D. KARIA, J) PALAK