2023 (9) TMI 848 - HC - Income Tax

Reopening of assessment u/s 147 - reasonable belief that the income had escaped assessment - non considering of objections - HELD THAT - In the present case having regard to the law laid down by the Hon ble Apex Court in S.A. Builders Ltd. 2006 (12) TMI 82 - SUPREME COURT 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 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 u/s 148 - We fail to understand why these decisions could not have been taken at this stage itself so that the AO having regard to the law laid down by the courts and on the submissions made by petitioner could have discharged the notice u/s 148 of the Act. There is no reason to postpone it to the assessment proceedings stage.

Issues Involved:
1. Legality of the reassessment notice under Section 148 of the Income Tax Act.
2. Validity of the interest disallowance under Section 36(1)(iii) for loans to sister concerns.

Summary:

Legality of the Reassessment Notice under Section 148:
1. The petitioner received a notice dated 18th March 2013 under Section 148 of the Income Tax Act, alleging that income chargeable to tax for Assessment Year 2009-10 had escaped assessment. The reasons cited were that loans and advances were made to sister concerns without charging interest, while borrowed funds were used, thereby disallowing interest expenditure under Section 36(1)(iii).

2. Petitioner filed objections stating that the advances were made from its own funds, not borrowed capital, and cited past assessments where similar claims by the Revenue were dismissed. The objections were rejected without considering the submissions, leading to the impugned order dated 27th November 2013.

3. The court held that the Assessing Officer (A.O.) must have relevant material to form a belief that income has escaped assessment. The belief must be based on commercial expediency, as established in S.A. Builders Ltd. vs. Commissioner of Income Tax (Appeals) and Another [2007] 288 ITR 1 (SC).

4. The court found that the reasons recorded by the A.O. were insufficient to form a reasonable belief that income had escaped assessment. The consistent acceptance of similar transactions in previous years further weakened the A.O.'s position.

5. The court emphasized that the act of issuing a notice under Section 148 must not be arbitrary and must be based on a reasonable foundation. The reasons recorded must have a live link with the formation of the belief.

6. Consequently, the court set aside the notice under Section 148 and the impugned order dated 27th November 2013, allowing the petition.

Validity of the Interest Disallowance under Section 36(1)(iii):
1. The Revenue argued that loans to sister concerns without interest should disallow the interest claimed on borrowed funds under Section 36(1)(iii).

2. The court reiterated the principle from S.A. Builders Ltd. that interest on borrowed funds should be allowed if the loans to sister concerns were made as a measure of commercial expediency.

3. The court noted that the petitioner had consistently made such loans from its own funds, and similar claims by the Revenue in previous years were dismissed by appellate authorities, including the ITAT.

4. The court concluded that there was no basis for the Revenue to disallow the interest expenditure, as the loans were made for business purposes and from the petitioner's own funds.

Conclusion:
The court allowed the petitions, setting aside the reassessment notices under Section 148 and the related orders, emphasizing the need for a reasonable foundation for forming a belief that income had escaped assessment. The court also upheld the validity of the interest expenditure under Section 36(1)(iii), recognizing the commercial expediency of loans to sister concerns.

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