MEHTA EXPORTS,MUMBAI vs. ACIT - 20(2), MUMBAI

Per Rajesh Kumar, Accountant Member:

by the assessee are as under:

1. The Id. Commissioner of Income Tax (Appeals) erred in confirming the Order passed uls.143(3) r.w.s. 147 without appreciating that the necessary satisfaction of Joint Commissioner of Income Tax as required u/s.151 of the Income Tax Act was not obtained prior to issuance of Notice u/s.148 and therefore the assessment itself was bad in law.

2. The Id. Commissioner of Income Tax (Appeals) erred in confirming the Reopening of assessment uls.148 of the Income Tax Act without 2 M/s. Mehta Exports appreciating that the Assessee Firm had disclosed thoroughly and fully all the material facts during the original assessment proceedings uls.143(3) and therefore the reason to believe formed by Id. Assessing Officer was bad in law and not in conformity with requirement u/s.147.

3. The Id. Commissioner of Income Tax (Appeals) erred in confirming the addition of Rs.23,35,760/- without appreciating that the Interest to the Partners was paid in accordance with terms of Partnership Deed and therefore there could have been no disallowance uls.40(b)(iv).

4. The Id. Commissioner of Income Tax (Appeals) erred in confirming the addition of Rs.2,21,051/- on notional basis calculating the interest on Closing Balance of one Partner for the whole year without appreciating that the said calculation was erroneous.”

3 M/s. Mehta Exports 27.03.2014 which was complied with by the assessee by submitting vide letter dated 10.04.2014 that return of income filed originally may kindly be treated as return in response to notice u/s 148 of the Act and statutory notices under section 143(2) and 142(1) were duly issued and served upon the assessee. Thus the reassessment proceedings were started within four years from the end of the relevant assessment year. The reasons recorded for issuing the notice under section 148 of the Act are as under: “The assessee is partnership firm three partners and capital account of one of the partners namely Shri K.D. Mehta having share ratio 33.33% revealed that credit balance under this capital account during the year consideration was Rs.60908445/- and debit balance at Rs.62750537/- thus, there was a debit balance at the end of the financial year i.e. as on 31.03.2009 of Rs.1842092/-. This indicate that the partner has withdrawn more amount than amount available is capital account. In view of ibid provision and interest is required to change for this debit balance. Instead of sharing the interest at the rate of 12% assessee firm has claimed and interest of Rs.2335760 to Shri K.D. Mehta. This is incorrect there is negative balance in capital account at the end of the year therefore allowance of interest on capital does not arise in view of above cited provisions the same should have disallowed and add to total income. Thus there is under assessment of income of Rs.2335760/-.

In view of the above, I have reason to believe that the income of Rs.2335760/- chargeable to tax has escaped assessment for the year and consideration within the meaning of Explanation 2(e) to the provision of section 147 the Income Tax Act, 1961 and therefore, I seek permission for issuing notice u/s 148 of the Income Tax Act, 1961.”

The assessment was finally framed by the AO vide order dated 01.10.2014 passed under section 143(3) read with section 147 of the Act assessing the total income at Rs.3,29,56,580/-by making two additions i.e. (i) Rs.2,21,051/- towards interest charged on the negative capital of the partner and (ii) withdrawal of interest of Rs.23,35,760/- already allowed to partner.

4 M/s. Mehta Exports 6. In the appellate proceedings, the assessee challenged the reopening of the assessment on frivolous and flimsy reasons which are nothing but change of opinion. The Ld. CIT(A) dismissed the appeal of the assessee after considering the submissions as have been incorporated in the appellate order in para 5.2 by observing that the reassessment proceedings were validly initiated. The Ld. CIT(A) also noted that the assessee has not objected the initiation of reassessment proceedings under section 147 of the Act whereas the AO has given sound reasons in para 2 of the assessment order for such re-opening. According to the Ld. CIT(A) the non compliance of the provisions of the Act are defined definite reasons to believe that income has escaped assessment and once the AO has recorded the reasons to believe on the basis of records available before him showing the case of under assessment of income, he is well within his power to issue notice under section 148 of the Act. The Ld. CIT(A) relied on a series of decisions as mentioned in para 5.8, 5.9 & 5.9.2 of the appellate order. The Ld. A.R. vehemently submitted before us that the order of Ld. CIT(A) upholding the reassessment proceedings under section 147 read with section 148 is totally against the facts on record and the settled position of law. The Ld. A.R. while taking us through the reasons recorded to form a belief as to the escapement of income submitted that the only reasons recorded were that Mr. K.D. Mehta a partner in the assessee firm was having 33.33% share in the business in the firm and debit and credit balances during the year were Rs.6,27,50,537/- and 5 M/s. Mehta Exports Rs.6,09,08,445/- respectively meaning thereby that the debit was more than the credit balance to the tune of Rs.18,42,092/-. According to the AO the partner has overdrawn his capital account and therefore the assessee is required to charge interest on the debit balance rather than allowing interest to the assessee to the tune of Rs.23,35,760/- and thus the sole reasons for reopening were under assessment of income to the tune of Rs.23,35,760/-. The Ld. A.R. contended that all the evidences including the copy of ledger accounts were furnished in the original assessment proceedings before the AO. The Ld. A.R. drew our attention to letter dated 30.08.2011 addressed to the DCIT (the AO) wherein in para No.4 the assessee has furnished the details of credits during the year in the partner’s account and the ledger accounts. The Ld. A.R. also took us to the copy of capital account of Shri K.D. Mehta in which the credit balance appearing as on 01.04.2008 was Rs.1,94,64,671/- and thereafter during the year various credit and debit entries were made and ultimately there was excess of debit over credit to the tune of Rs.18,42,092/-. The Ld. A.R. submitted that all these details and information were provided before the AO at the time of framing of original assessment under section 143(3) and therefore reopening the proceedings under section 143(3) read with section 147 when no fresh tangible material was before the AO and it was just a case of mere change of opinion which is not permissible under the Act. The Ld. A.R. in defense of his arguments relied on a series of decisions namely Madhukar Khosla vs. ACIT (2015) 55 taxmann.com

6 M/s. Mehta Exports 391 (Delhi), Motilal R. Todi vs. ACIT (2017) 85 taxmann.com 234 and TANMAC India vs. DCIT (2017) 78 taxmann.com 155 (Madras). In view of the said decisions, the Ld. A.R. argued that the case of the AO forming reason to believe is not based upon the fresh tangible material and is a mere change of opinion which is not permissible under the Act, therefore, the reassessment should be quashed.

7 M/s. Mehta Exports as the assessee has overdrawn the capital account to the tune of Rs.18,42,092/- and therefore, the same needs to be withdrawn. The first appellate authority upheld the reopening on the ground that the assessee has not objected and challenged the reopening before the AO and the belief formed by the AO on the basis of records before him was correct and as per law. We find on the perusal of the records before us that the submissions of the A.R. before the AO during the course of original assessment proceedings under section 143(3) of the Act especially the letter dated 30.08.2011 addressed to DCIT wherein the assessee has filed the details of partners capital accounts along with ledger accounts. We also notice from page Nos.15 to 18 of the paper book in which datewise capital account is placed wherein all the credit and debit entries which showed that at the beginning of the year the credit balance was Rs.1,94,64,671/- whereas at the year end the capital account was overdrawn to the tune of Rs.18,42,092/-. A perusal of all these evidences on record reveals that the AO has examined all the materials at the time of original assessment proceedings under section 143(3) of the Act and therefore there is no fresh tangible material before the AO to form a reason to believe that income of the assessee has escaped to the tune of Rs.23,35,760/-. In our opinion, the present case which is a mere formation of belief on the basis of re-examination of the same records which were available at the time of original assessment proceedings and therefore nothing less than a change of opinion which is not permissible under the IT Act. The case of the assessee is 8 M/s. Mehta Exports supported by the decisions of various High Courts in the case of Madhukar Khosla vs. ACIT(supra), Motilal R. Todi vs. ACIT (supra) & TANMAC India vs. DCIT (supra). In the case of Madhukar Khosla vs. ACIT (supra) the Hon’ble Delhi High Court has considered the decision of the apex court in the case of CIT vs. Kelvinator of India Ltd. and various other decisions and held that there was nothing to show what triggered issuance of notice of reassessment as there was no information or new facts which could led the AO to believe that full disclosure had not been made and said notice can not be sustained. In the case of Motilal R. Todi vs. ACIT (supra) wherein it has been held by the co-ordinate bench of the Tribunal that there has to be fresh tangible material in the possession of AO at the time of recording of impugned reasons before he could proceed to record the reason for the reopening of the case while relying on the decision the of Hon’ble Supreme Court in the case of CIT vs. Kelvinator of India Ltd. (2010) 320 ITR 561. The Tribunal has also considered the decision of Madhukar Khosla vs. ACIT (supra) whereas the decisions relied upon by the Revenue in the case of Export Credit Guarantee Corporation of India Ltd. vs. Addl. CIT (supra) and Yuvraj vs. Union of India (supra) are distinguishable on facts and are not applicable. In the case of Export Credit Guarantee Corporation of India Ltd. vs. Addl. CIT (supra) it has been held that where there is a complete failure on the part of the AO to apply his mind during the course of original assessment proceedings, to points on which assessment is sought to be reopened, it can be said that there

9 M/s. Mehta Exports is tangible material and therefore the reason to believe that income has escaped assessment. Whereas the AO applied his mind by seeking the information from the assessee and only after that the AO has framed the assessment. In the case of Yuvraj vs. Union of India (supra) the issue of capital gain or casual income resulting from sale of rights to purchase the plot was not addressed at all in the original assessment and therefore the reopening done can not be said to be based upon the change of opinion. Both these cases are not applicable to the facts of the present case and accordingly we are inclined to quash the reassessment proceedings as being based upon the change of opinion and resultantly the assessment framed is also invalid and quashed accordingly.

Order pronounced in the open court on 28.05.2018.