2018 (2) TMI 764 - HC - Income Tax

Reopening of assessment - proof of payment of recognized expenditure - eligibility of reasons to believe - assessment beyond period of four years from the end of relevant assessment year - Held that - The information on which the Assessing Officer proceeded to form a belief that the said payment was not a recognized deduction, the said payment could not have been allowed to be deduced from the income, was already on the record. This would be relevant in the context of the fact that the impugned notice came to be issued beyond the period of four years from the end of relevant assessment year and the element of true and full disclosure on the part of the assessee would be important. There was nothing outside of the record which could have thrown any light on the nature of payment and its deductibility in terms of provisions of the Income-tax Act. We are not called upon to judge the Assessing Officer s assertion that though such payments were recognized in partnership deed, as per the Income-tax law, the payments were not allowable deductions, being the nature of payments made to the outgoing partner and therefore were in the nature of capital expenditure. We are presently concerned with the limited issue of reopening of the assessment beyond period of four years from the end of relevant assessment year. In this respect, the Revenue has completely failed in satisfying us that there was any failure on the part of the assessee in disclosing truly and fully, all material facts. From the reasons recorded by the Assessing Officer as well as material produced before us, it is completely visible that all necessary facts were already on record, duly disclosing and that there was no failure on the part of the assessee in this regard - Decided in favour of assessee.

Issues Involved:
1. Legality of reopening the assessment beyond four years.
2. Validity of deduction of pension payments to retired partners under the Income Tax Act.

Issue-wise Detailed Analysis:

1. Legality of Reopening the Assessment Beyond Four Years:
The petitioner challenged the notices dated 20th February 2017 and 24th March 2017 issued by the respondent-Assessing Officer to reopen the petitioner’s assessment for the Assessment Years 2010-2011 and 2011-2012. The petitioner argued that there was no failure on their part to disclose fully and truly all material facts necessary for the assessment. The facts necessary for assessment were already on record, and the notice for reopening issued beyond the four-year period was therefore invalid. The court observed that the Assessing Officer did not refer to any material outside the assessment proceedings to indicate that income chargeable to tax had escaped assessment. The information on which the Assessing Officer formed his belief was already on record. Given that the notice was issued beyond four years from the end of the relevant assessment year, full and true disclosure by the assessee was crucial. The court concluded that all necessary facts were already on record, and there was no failure on the part of the assessee in this regard. Consequently, the reopening of the assessment beyond the period of four years was not justified.

2. Validity of Deduction of Pension Payments to Retired Partners:
The Assessing Officer objected to the deduction of ?48.10 lakhs from the assessee's gross professional receipts, which was paid to a retired partner. According to the Assessing Officer, this payment was not an allowable deduction since a partner is not an employee of the firm and is therefore not entitled to a pension after retirement. The payment to the retiring partner was deemed capital in nature. The petitioner countered this by pointing out that the partnership deed had a clause for paying pension to retiring partners, and such practice was followed in similar firms. The court noted that the partnership deed contained elaborate provisions for payments to retiring partners based on amounts billed but not received, work completed but not billed, and work partly completed and not billed at the time of death or retirement. The details of these payments were already on record during the original assessment proceedings. The court emphasized that there was nothing outside of the record that could have influenced the nature of the payment and its deductibility. The court did not need to judge the assertion that the payments were not allowable deductions under the Income-tax law. The primary concern was the reopening of the assessment beyond four years, and the Revenue failed to show any failure on the part of the assessee to disclose all material facts fully and truly. Therefore, the court set aside the impugned notices.

Conclusion:
The court allowed the petitions and disposed of them, setting aside the impugned notices for reopening the assessment.

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