The Bombay High Court recently halted Income Tax Reassessment Proceedings against a petitioner, observing that no copy of approval under Section 151 of the Income Tax Act, 1961 for reopening assessment had been served upon the Assessee.
A Writ Petition was lodged before the Bombay High Court by Imperial Consultants and Securities Ltd. who had filed their returns of income for Assessment Year (A.Y.) 2013-14 on 24.09.2013. Subsequently, the Petitioner’s returns for A.Y. 2013-14 were taken up for scrutiny on 20.07.2015 along with Notice under Section 142(1) of the Income Tax Act, 1961, calling upon the Petitioner to produce additional material.
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In furtherance, the Petitioner issued a reply letter furnishing copies of balance sheet, sheet, profit and loss account and tax audit report under Section 44AB for the financial year 2012-13 as well as computation of total income.
The petitioner argued that the interest expenditure incurred during the year, including on service tax, profession tax liabilities, and a loan for purchasing business assets, was fully allowable as a deduction and that the assets had been used to generate Business Support Services income.
Furthermore, the petitioner emphasized that no exempt income was earned during the period under consideration, making disallowance under Section 14A of the Income Tax Act inapplicable, as no expenses were incurred to earn exempt income.
On 23.03.2016, the Deputy Commissioner of Income Tax, Circle 6 (1)(2) passed an Assessment Order making a disallowance under Section 14A of the Income Tax Act, holding that the Petitioner had utilized interest-bearing funds for making further investments capable of yielding exempt income.
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Consequently, the Assessing Officer (AO) made a disallowance of interest of Rs. 2.71 Crores paid on the borrowings was made, which was assailed before the Commissioner of Income Tax (Appeals) and has been pending since.
5 years following the assessment order, on 31 March 2021, the Petitioner was served with Notice under Section 143(3) of the Act, reopening the A.Y. 2013-14 Assessment. On 30 June 2021, the Deputy Commissioner furnished the reasons for reopening the assessment but failed to serve the Petitioner a copy of the approval obtained under Section 151 of the Income Tax Act, 1961. The present case has been instituted impugning the Notice issued by the AO.
Nishant Thakkar and Jasmin Amalsadvala instructed by Lumiere Law Partners, for the Petitioner submitted that the AO failed to furnish any reasons pointing towards the Petitioner’s non-disclosure of material facts regarding the deduction of interest claimed under Section 36(1)(iii) of the Income Tax Act, 1961.
Meanwhile, Suresh Kumar, for the Revenue justified the reassessment claiming that loans had been diverted to interest-free advances to related parties, outside the scope of the Petitioner’s business purpose; the Revenue further contended that due approval under Section 151 had been obtained.
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The Division Bench of Justice G. S. Kulkarni and Justice Advait M. Sethna observed that the reassessment had been invoked after four years, requiring the AO to obtain approval from a higher authority before issuing Notice under Section 148 of the Act. In the present case, the petitioner argued that the approval under Section 151, though claimed to be obtained, was not furnished to them.
Granting relief to the Petitioner, the Bench reiterated that the duty of the Revenue to demonstrate that escapement of income occurred due to failure of the Assessee to disclose relevant details to warrant reassessment; here, a mere change of opinion cannot call for reassessment as per the procedural safeguards of Section 147 of the Income Tax Act, 1961.
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