The Bombay High Court HC set aside an assessment order under section 148 of Income ncome Tax Act,1961 in the absence of evidence proving income escapement in assessment.
Vaman Prestressing Co. Pvt. Ltd., the petitioner is engaged in the business of manufacture and sale of prestress concrete sleepers used in laying of railway tracks. In the year 2007, Rail Vikas Nigam Limited (RVNL) awarded the petitioner a contract for the manufacture and supply of PSC monoblock sleepers for broad gauge for ADB funded project of Aligarh to Ghaziabad, 3rd Line which is in the Northern zone.
It was also mandated that the petitioner should set up a new manufacturing facility at an agreed location, therefore incorporated a new company ICON Sleeper Track Pvt. Ltd. (ICON) on 28th August 2007 as a subsidiary of the petitioner. ICON has set up a manufacturing facility for the manufacture of PSC sleepers at Sholaka on the Northern Railway. For this purpose, the petitioner had granted loans and advances and also invested in the share capital of ICON which, as on 31st March 2008, stood at Rs.7,67,91,417/- and Rs.20,00,000/-, respectively and Rs.8,05,30,529/- and Rs.1,00,00,000/- as on 31st March 2009, respectively. It is this deployment of funds to associate concerns which, according to the Revenue, was for a non-business purpose.
Respondent No.1 alleged that the amount deployed by the petitioner towards investing in extending loans and advances to associate concerns was out of borrowed funds and made a disallowance of interest expenditure incurred on its borrowings on the ground that borrowed funds to the extent deployed in such activity were not used for its business. On appeal, the Commissioner of Income Tax (Appeals) (CIT[A]) held that such deployment of funds was for business purposes and that such funds were deployed out of interest-free funds available with the petitioner.
The Assessing Officer (A.O.) concluded that where no regular assessment was done and only a summary order under Section 143(1) of the Act was done, the case can be re-opened under Section 147 of the Income Tax Act.
The petition came to be admitted by an order dated 25th June 2014 and Ad-interim relief was granted. Respondent no.1 was directed not to take further steps under the notice issued under Section 148 and Section 142(1) of the Act. During the pendency of the petition proceedings under Section 153(A) of the Act against the petitioner were commenced and an assessment order dated 27 March 2015 under Section 153(A) read with Section 143(3) of the Act has been passed.
Mr. Pardiwalla submitted, that the A.O. must have formed the belief that the assessee’s income chargeable to tax has escaped assessment, such belief formed by the A.O. must be based on relevant material and unless the jurisdictional requirements are fulfilled the assumption of jurisdiction to reassess petitioner’s income is illegal.
It was argued that since the borrowed capital of the petitioner was advanced to the sister and associate concern without charging any interest, the interest paid on borrowed capital was not allowable as a deduction under Section 36(1)(iii) of the Act which showed that petitioner’s income chargeable to tax as escaped assessment.
Mr. Suresh Kumar submitted that since there is no assessment done in the aforesaid case the department had no occasion to verify the veracity of the claim made in the income tax returns. As held by the Hon’ble Apex Court in Rajesh Jhaveri Stock Brokers Pvt. Ltd. (supra) where no
The division bench comprising Justice K.R Shriram & Justice Dr. N.k. Gokhale accepted the view taken in CIT vs. Dalmia Cement (Bharat) Ltd that “once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize its profit.”
The Apex Court in the S.A. Builders Ltd. case held that “ it was impossible for any prudent person to form a reasonable belief that the income had escaped assessment. The reasons which have been recorded could never have led a prudent person to form an opinion that income had escaped assessment within the meaning of Section 147 of the Act.
Even when those points were raised in the objections to the reopening notice filed by the petitioner, Respondent No.1 instead of dealing with the objections and submissions simply dismissed the same by saying that since there was no assessment done in the aforesaid case the department had no occasion to verify the veracity of the claim made in the income tax returns and all those points only have a bearing at the time of assessment to be undertaken in the proceedings and not on the issuance of notice under Section 148 of the Act. We fail to understand why these decisions could not have been taken at this stage itself so that the A.O., having regard to the law laid down by the courts and on the submissions made by the petitioner, could have discharged the notice dated 18th March 2013 issued under Section 148 of the Act. There is no reason to postpone it to the assessment proceedings stage.”
In light of the observation, the Court disposed of the Petition.
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