Court Quashes Reopening of Tax Assessment for Vijya Laxmi Exports Partner

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Case Name: 

Devenbhai Mafatlal Patel vs. Assistant Commissioner of Income Tax (High Court of Gujarat)

R/Special Civil Application No. 20607 of 2018

Date: 7th January 2021

Key Takeaways:

• The court emphasized the necessity of tangible material evidence for reopening tax assessments.
• The decision reinforces the principle that mere incorporation of interest and remuneration clauses in a partnership deed does not mandate their payment or taxation.
• The ruling highlights the importance of full and true disclosure by taxpayers and the limitations on reopening assessments beyond four years.

Issue: 

Was the Revenue Department justified in reopening the tax assessment for the partner of Vijya Laxmi Exports beyond the four-year period, based on alleged undisclosed income?

Facts:

• The petitioner, a partner in Vijya Laxmi Exports, filed a return for the Assessment Year 2011-12, which was initially assessed without issues.
• The Revenue Department later issued a notice to reopen the assessment, claiming that income from interest and remuneration had not been disclosed.
• The petitioner argued that no such income was received and that the reopening was unjustified and beyond the statutory period.

Arguments:

• Petitioner: Argued that the reopening was based on conjecture without tangible evidence of undisclosed income. The petitioner had fully disclosed all material facts, and the reopening was beyond the permissible period.
• Revenue Department: Claimed that the petitioner failed to disclose income from interest and remuneration, justifying the reopening of the assessment.

Key Legal Precedents:

• The court referenced the case of “PCIT vs. Alidhara Taxspin Engineers,” which established that mere clauses in a partnership deed do not mandate payment or taxation of interest and remuneration unless actual income is received.

Judgement: 

The court quashed the notice for reopening the assessment, ruling in favor of the petitioner. It held that the Revenue Department lacked tangible evidence of undisclosed income and that the reopening was unjustified beyond the four-year limit.

FAQs:

Q1. Why was the assessment reopened?

• The Revenue Department believed that income from interest and remuneration had not been disclosed by the petitioner.

Q2. What was the court’s main reason for quashing the notice?

• The court found no tangible evidence of undisclosed income and noted that the reopening was beyond the statutory period without any failure in disclosure by the petitioner.

Q3. What does this mean for similar cases?

• This case reinforces the need for concrete evidence before reopening assessments and clarifies that clauses in partnership deeds do not automatically imply taxable income.

Q4. Can the Revenue Department appeal this decision?

• While the decision can be appealed, the court’s ruling is based on established legal principles, making a successful appeal challenging without new evidence.

1. By this writ-application under Article 226 of the Constitution of India, the writ-applicant has prayed for the following reliefs :

“(a) quash and set aside the impugned notice at 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;

(c) any other and further relief deemed just and proper be 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 impugned notice issued under Section 148 (of Income Tax Act, 1961) (for short, 'the Act 1961') for re-opening of the assessment for the Assessment Year 2011-12 on the ground that the income chargeable to tax had escaped assessment within the meaning of Section 147 (of Income Tax Act, 1961). The notice dated 31st March 2018

issued under Section 148 (of Income Tax Act, 1961) is at page-16 (Annexure-A) to this writ-application. The reasons recorded and conveyed to the writ-applicant are at page-66 (Annexure-G) to this writ-application.

3. It appears that the writ-applicant filed his return of income on 30th September 2011 for the Assessment Year 2011-12 declaring the total income at Rs.84,20,950=00 and agriculture income for the rate purpose of Rs.7,38,235=00 Thereafter, a revised return of income was filed on 24th September 2012 showing the income of Rs.2,18,400=00 from a house property,

Rs.5,36,22,727=00 from the business and profession for which deduction under chapter VIA of Section 80IB (of Income Tax Act, 1961) of Rs.5,36,62,553=00 was claimed, long term capital gain of Rs.84,23,837=00 was claimed exempt under Section 54B (of Income Tax Act, 1961) of the

Act 1961. The writ-applicant also showed income from the other sources of Rs.1,38,120=00 and agriculture income of Rs.7,38,230=00 for the rate purpose. The case of the writ-applicant was selected for scrutiny under the CASS. The assessment proceedings came to be completed on 25th February

2014 by passing order under Section 143(3) (of Income Tax Act, 1961). An addition of Rs.6,55,538=00 on account of STCG was made.

4. The record reveals that the writ-applicant is a partner in a

partnership firm running in the name of M/s.Vijya Laxmi

Exports. It appears that the Revenue Audit Party raised an audit

objection in the case of M/s.Vijya Laxmi Exports. As per the

audit objection, the partnership deed of M/s.Vijya Laxmi Exports

contains a clause to provide interest and remuneration to its

partners as per the provision of Section 40(b) (of Income Tax Act, 1961).

5. It is the case of the department that the firm did not make

any provision for the said interest and remuneration to be

provided to the partners in accordance with the provisions of the

partnership deed during the Assessment Year 2011-12.

6. It has come to the notice of the department that M/s.Vijya

Laxmi Exports paid Rs.12,74,351=00 as interest on the partners

capital and Rs.44,97,148=00 as remuneration to its partners,

but at the same time, claimed excess deduction of

Rs.57,71,499=00 under Section 10AA (of Income Tax Act, 1961) which was

liable to be taxed in the hands of the partners. According to the

department, the income of Rs.57,71,499=00 was required to be

taxed in the hands of the partners. According to the Revenue,

the writ-applicant, being one of the partners of the firm

M/s.Vijya Laxmi Exports, has a share capital of 30 per cent.

7. Having regard to what has been stated above, it is the case

of the Revenue that the writ-applicant had received interest on

capital of rs.3,82,305=00 and Rs.13,49,145=00 respectively as

remuneration from the partnership firm and the said amount

had not been offered or disclosed for the purpose of taxation.

8. In such circumstances referred to above, the department

has thought fit to re-open the assessment proceedings beyond

the period of four years on the ground that the amount of

Rs.17,31,450=00 had escaped assessment within the meaning of

Section 147 (of Income Tax Act, 1961) for failure on the part of the

writ-applicant to disclose all the material facts fully and truly.

9. Upon receipt of the reasons for the re-opening of the

assessment proceedings, objections were filed dated 20th July

2018 and the same came to be disposed of by the Revenue vide

order dated 20th September 2018.

10. Being dissatisfied with the decision to re-open the

assessment, the writ-applicant is here before this Court with the

present writ-application.

11. This Court, while issuing the notice, passed the following

order dated 26th December 2018 :

“1. Mr.Tushar Hemani, learned advocate for the petitioner

has invited invited the attention of the Court to the order

dated 20.12.2018 passed by this Court in the case of Vijya

Laxmi Exports in Special Civil Application No.20132 of 2018

to submit that in the case of the partnership firm also, the

Assessing Officer sought to reopen the assessment on the

ground that the firm had claimed excess deduction of

Rs.57,71,499/- under Section 10AA (of Income Tax Act, 1961),

1961 which was liable to be taxed in the hands of the

partners. It was pointed out that in that case the court has

issued notice and has restrained the respondents from

passing the final order.

2. Referring to the reasons recorded, it was submitted

that in the case of the partners, the Assessing Officer seeks

to reopen the assessment on the ground that M/s.Vijya

Laxmi Exports has paid Rs.12,74,351/- as interest on

partners capital and Rs.44,97,148/- as remuneration to its

partners but has claimed excess deduction of

Rs.57,71,499/- under section 10AA (of Income Tax Act, 1961). Reference

was made to the computation of total income of Vijya Laxmi

Exports to point out that interest and remuneration therein is

shown as nil, which is also reflected in clause (g) in column

No.17 in the statement of particular required to be furnished

under Section 44AB (of Income Tax Act, 1961). It was submitted that

therefore, the Assessing Officer seeks to reopen the

assessment on the basis of conjectures and surmises and

that on the reasons recorded, the Assessing Officer could

not have formed the belief that income chargeable to tax has

escaped assessment. It was further pointed out that in this

case the impugned notice has been issued on 31st March,

2018 in relation to Assessment Year 2011-12 which is

clearly beyond a period of four years from the end of the

relevant assessment year without there being any failure on

the part of the petitioner to disclose fully and truly all

material facts necessary for his assessment, therefore, the

assumption of jurisdiction on the part of the Assessing

Officer under section 147 (of Income Tax Act, 1961), is invalid.

3. Having regard to the submission advanced by the

learned counsel for the petitioner, issue Notice returnable on

5th February, 2019. By way of ad-interim relief, the

respondent is permitted to proceed further pursuant to the

impugned notice; he, however, shall not pass the final order

without the prior permission of this Court. Direct service is

permitted today.”

12. Mr.Tushar Hemani, the learned senior counsel assisted by

Ms.Vaibhavi Parikh and Mr.Parimal Parmar, the learned counsel

appearing for the writ-applicant, submitted that the Revenue is

not justified in re-open the assessment proceedings on the

grounds as assigned in the reasons. He would submit that from

the computation of total income, tax audit report and annual

accounts of the partnership firm, no interest or remuneration

had been paid by the firm to its partners. The case of the

writ-applicant for the year under consideration was taken up for

scrutiny assessment under Section 143(3) (of Income Tax Act, 1961). The

Assessing Officer, at the relevant point of time, framed the

assessment under Section 143(3) (of Income Tax Act, 1961) vide order

dated 25th February 2014 without making any addition in

respect of the interest on capital and remuneration to the

partners.

13. It is further pointed out by Mr.Hemani that the partnership

firm, namely Vijya Laxmi Exports, was also selected for scrutiny

assessment for the Assessment Year 2011-12 and the Assessing

Officer had disallowed the entire claim of deduction of

Rs.86,19,599=00 under Section 10AA (of Income Tax Act, 1961) while framing the

assessment under Section 143(3) (of Income Tax Act, 1961) vide order

dated 26th February 2014. The assessment order was carried in

appeal before the CIT(A) who, vide order dated 2nd May 2014,

deleted the disallowance of Rs.86,19,599=00 made by the

Assessing Officer under Section 10AA (of Income Tax Act, 1961).

14. He would submit that the re-opening is beyond the period

of four years from the end of the relevant assessment years.

There is no failure on the part of his client in fully and truly

disclosing all the material facts. The action of re-opening beyond

the period of four years is not justified in any manner.

15. In such circumstances referred to above, Mr.Hemani, the

learned senior counsel prays that there being merit in his

writ-application, the same may be allowed and the impugned

notice be quashed and set-aside.

16. On the other hand, this writ-application has been

vehemently opposed by Ms.Raval, the learned senior standing

counsel appearing for the Revenue. Ms.Raval would submit that

having regard to the reasons assigned for re-opening of the

assessment, this Court may not interfere. According to Ms.Raval,

tangible material has come to the notice of the department, and

on the basis of which, the department could be said to be

justified in issuing the notice for the purpose of re-opening of

the assessment.

17. In such circumstances referred to above, Ms.Raval prays

that there being no merit in this writ-application, the same may

be rejected.

18. Having heard the learned counsel appearing for the parties

and having gone through the materials on record, the only

question that falls for our consideration is, whether the Revenue

is justified in re-opening the assessment beyond the period of

four years under Section 147 (of Income Tax Act, 1961).

19. We take notice of the fact that the decision to re-open the

assessment is substantially on the ground that the

writ-applicant failed to offer 'interest on capital' and

'remuneration' as income alleged to have been received from the

partnership firm, namely M/s.Vijya Laxmi Exports.

20. It is the settled position of law that the condition precedent

for the purpose of resorting to re-opening of the assessment is

that the Assessing Officer should be satisfied based on some

cogent or tangible material, that the case is one of escapement of

income chargeable to tax. In the absence of escapement of any

income 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 mere

incorporation of interest on partners capital and remuneration

does not necessarily mean or should be construed as mandatory.

There has to be some material on record to indicate that the

writ-applicant had actually received any 'interest on capital' or

'remuneration' from the partnership firm. Where no such income

has been earned by the writ-applicant, the question of taxing the

same does not arise at all.

22. At this stage, we may look into the decision of this High

Court in the case of PCIT vs. Alidhara Taxspin Engineers (Tax

Appeal No.265 of 2017, decided on 2nd May 2017), wherein this

Court considered two questions of law as proposed by the

Revenue in the said appeal. The two questions of law which

came to be considered by this Court are as under :

“Whether on the facts and circumstances of the case and in

law, the Hon’ble ITAT was justified in not appreciating the

fact that by not providing interest and remuneration to the

partners, the firm has claimed higher profits leading to

higher claim of deduction u/s 80IB (of Income Tax Act, 1961) and thus,

devoiding the revenue from due amount of tax?

(B) “Whether on the facts and circumstances of the case

and in law, the Hon’ble ITAT was justified in not

appreciating that the Section 80IB(10) (of Income Tax Act, 1961) enables AO to

re-compute the profit of undertaking claiming deduction u/s

80IB 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 answering

the aforesaid two questions in favour of the assessee, this Court

held as under :

“On interpretation of the partnership agreement and

considering the wish of the partners reflected in the

partnership deed, not to pay/charge interest on the partners

capital and the remuneration, the learned tribunal has

rightly deleted the dis-allowance made by the Assessing

Officer with respect to the deduction claimed under Section

80IB of the Income Tax Act. As rightly observed by the

learned tribunal, mere incorporation of interest on the

partners’ capital and remuneration does not signify that the

same are mandatory in nature. We concur with the view

taken by the learned tribunal. We see no reason to interfere

with the impugned judgment and order passed by the

learned tribunal. No substantial questions of law arise in the

present Tax Appeal. The present Tax Appeal deserves to be

dismissed and is accordingly dismissed.”

24. Applying the very same dictum of law as laid in the case of

Alidhara Taxspin Engineers (supra), we have no hesitation in

arriving at the conclusion that the re-opening of the assessment

is not justified.

25. In the result, this writ-application succeeds and is hereby

allowed. The impugned notice is hereby quashed and set-aside.

All the consequential proceedings pursuant thereto stand

terminated.

(J. B. PARDIWALA, J.)

(ILESH J. VORA, J.)