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2016 (7) TMI 436 - GUJARAT HIGH COURT

2016 (7) TMI 436 - GUJARAT HIGH COURT - TMI - Reopening of assessment - objections of the audit party relied upon - Held that:- Primafacie atleast at one stage, the Assessing Officer was convinced that the audit objection was not valid. However, for want of full clarity on this issue, we are not inclined to conclude the matter only on this aspect. It is by now well settled that if the Assessing Officer has recorded his own reasons uninfluenced by audit objection, such action would not be bad in .....

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d, he could still have questioned the assessee about nonpayment of interest to a partner who had 99% profit sharing stake in the partnership business. He could have questioned the assessee within the purview of section 80IA(10) read with section 10AA(9) of the Act. This would be relevant since the notice for reopening is issued beyond a period of four years from the end of relevant assessment year. In any case therefore, there was no failure on the part of the assessee to disclose truly and full .....

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the basis of such material, the assessee had contended that the transactions were at the arm's length price. Thus, according to the assessee, the supply of gold by AEL to the assessee firm was at the prevailing market price. This explanation had to have relation only to the question of proper pricing of gold purchased by the assessee from AEL. This issue thus, was examined by the Assessing Officer during the original assessment. It would thereafter, not be open for the Assessing Officer to reope .....

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n similar background. The assessee who is common in both the petitions has challenged separate notices issued by the respondent Assessing Officer seeking to reopen the petitioner's assessments for the assessment years 2008-09 and 2009-10. Facts being parallel, may be recorded from SCA No.3595 of 2016. 2. Petitioner is a partnership firm and is engaged in the business of manufacturing and exporting gold jewelery through a unit which is situated in Special Economic Zone ('SEZ' for shor .....

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ion of income as per the return was accepted. 4. In order to reopen such assessment, the Assessing Officer issued impugned notice on 27.03.2015. This notice was thus, issued beyond a period of 4 years from the end of relevant assessment year. The Assessing Officer had recorded his reasons for reopening of assessment, which read as under: The assessee firm was engaged in the business of manufacturing of precious metal. The assessee filed its return of income 28.9.2008 declaring income of ₹ .....

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ng its registered office at Ahmedabad. As per the convents of the partnership deed simple interest at the rate of 9 percent per annum or such other rates prescribed under section 40(b)(iv) of the Income Tax Act i.e. @ 12 percent per annum shall be payable by the partnership on the balance amount to the credit of the capital and/or current account. 2.1 As per the convents of the partnership deed the partners were eligible for interest on the balance of their capital account at the maximum rates p .....

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.s. 10AA(9) of the Act. 2.3 The details of amount of deduction claimed u/s 10AA, balance of capital account and interest not claimed during the period 200809 is detailed below: Assessment year Total Balance in Capital account (Rs.) Interest not claimed as per section 40(b)(iv) @ 12% on the closing balance of capital account (Rs.) Deduction claimed u/s 10AA (Rs. Total amount to be disallowed u/s 10AA(9) r.w.s. 80IA (10) but restricted to claim u/s 10AA of the Act (Rs.) 2008-09 255,55,70,286 30,66 .....

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the Act. This being resulted into underassessment of income of ₹ 30,66,68,434/- . 3.1 We observed from the records that during the year assessee firm had purchased 2,17,00,000 gram of gold (purity 0.995 per gram) on various occasions amounting to ₹ 2164,58,45,237/- ($ 53,86,95,383/- ) from AEL, a sister concern and partner (partner sharing 99% profit). Scrutiny of the purchase records of gold by the assessee from AEL revealed that on most of the occasions the purchase of gold was mad .....

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company. However, the resultant profit so earned by the assessee firm was diverted back to the partners AEL (99%) and AAPL (1%) in the form of exempted income u/s 10(2A). Thus, owing to the close connection between the assessee firm and partner, the assessee earned more profit to the extent of ₹ 28,48,40,727/- ( as detailed in Statement 7 enclosed) than the ordinary profits which might be expected to arise in normal course of business attracting the provisions section 80IA(10) r.w.s. 10AA( .....

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9,161/- has escaped assessment for the A.Y.2008-09 due to the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. Hus, the case needs to be reopened by issuing notice u/s. 148 of the I.T.Act, 1961. 5. The petitioner upon being supplied such reasons, raised detailed objections under a communication dated 14.08.2015. Such objections however were rejected by the Assessing Officer by an order dated 01.02.2016. 6. Taking us through .....

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had raised detailed queries with respect to the price of the gold purchased from Adani Exports Limited ( AEL for short), one of the partners of the petitioner firm and any reopening on the basis of the same ground would therefore, not be permissible. IV. It was the duty of the assessee to disclose primary facts. If on the basis of such disclosures, there was any occasion to apply disallowance in terms of section 80IA(10) of the Act, it was not the duty of the assessee to bring the same to the no .....

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reasons. 7. On the other hand learned counsel for the department opposed the petition contending that the Assessing Officer has applied his mind independently on the issues brought to his notice by the audit party. Only upon being satisfied that the income chargeable to tax had escaped assessment, he had recorded his reasons and issued notice for reopening. The assessee failed to disclose true and full facts in the return filed as well as during the assessment proceedings. Mere production of bo .....

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diamond jewelery, was a partnership firm comprising of two partners viz. AEL and AAPL which had profit/loss sharing ratio of 99:1% respectively. The reasons cite two different grounds for the Assessing Officer to form a belief that income chargeable to tax has escaped assessment. First was that, as per the partnership deed dated 01.06.2006, the partners would receive simple interest at the rate of 9% per annum or such other rates as may be prescribed under section 40(b)(iv) of the Act on the ba .....

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ses were at a rate lower than the prevailing market rate, thus, once again inflating the assessee's profit from the eligible business. This would attract section 80IA(10) read with section 10AA(9) of the Act. 9. With this background, we have perused the original files pertaining to the queries raised by the audit party. We notice that the Assessing Officer in his letter dated 23.03.2015, written to the Commissioner of Incometax, after taking note of the detailed objections of the audit party .....

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s, AEL had made less profit in its individual capacity, reducing its tax liability. However, the profit of the assessee firm which was exempt from tax was routed back to the AEL since AEL shares 99% profit of the assessee partnership firm. The Assessing Officer was requested to verify these aspects and offer his comments. Though the immediate response of the Assessing Officer to this letter is not known, we have a letter dated 31.12.2013 written by him to the audit party, in which he referred to .....

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n No.19 is difference between 'Total market rate per gram as per MCX rate for 1.00 fineness (column No.16)' and 'Total market rate per gram with 0.995 fineness (column No.18)', which is nothing but notional difference over the fineness rate and it is not difference in the books of the assessee firm or AEL. On consideration of the above explanation, your honour will find a fact that the figure of ₹ 11.01 crore is nothing but notional difference and the audit objection requir .....

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settled that when the Assessing Officer does not accept the audit objections, but has issued the notice for reopening based solely on the audit objections, such action would not be valid. 11. Coming to the remaining issues, we may recall that the notices for reopening were issued in both cases beyond the period of four years from relevant assessment year. Here also, both the assessments proceeded more or less along similar lines. We may therefore, record the events as they unfolded during assess .....

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ails to the Assessing Officer as under: 2. The report u/s 10AA of Income Tax Act in form no.56F dated 27/09/2008 along with Annexure A together with notes forming part of the said report in respect of claim of deduction u/s 10AA of eligible profit from newly established manufacturing unit at no.447, 448 and 449 in Surat S.E.Z., Sachin, Surat notified by the Government of India (Ministry of commerce Industry), vide the letter of approval no. SSEZ/11/05/200607/ 2116, dated 20th November, 2006 unde .....

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has purchased gold bar from overseas buyers. From the above details your honour will appreciate that the AEL has more or less charged very nominal amount towards their services. In other word the transaction are at arm length price. (Annexure C) 13. With respect to non payment of interest to the partners on the borrowed capital, counsel for the petitioner submitted that though the original partnership deed dated 01.06.2006 provided for such interest, this deed was amended on 06.01.2007 which del .....

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enant in the partnership firm, no such interest was paid was very much before him during the original assessment. On the other hand, if the amended partnership deed was produced, he could still have questioned the assessee about nonpayment of interest to a partner who had 99% profit sharing stake in the partnership business. He could have questioned the assessee within the purview of section 80IA(10) read with section 10AA(9) of the Act. This would be relevant since the notice for reopening is i .....

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