TMI Blog2016 (10) TMI 96X X X X Extracts X X X X X X X X Extracts X X X X ..... ation 1 to Section 147, he would have discovered a material fact viz. of the company not paying interest on sizeable borrowings. In fact, the fact that the said two lenders were the Directors of the Company is not appearing in the annexures `D' and `E to the audit report where the figures of loans are mentioned. Thus, the assessing officer would have to correlate different documents only upon which, if at all, he would learn that the two directors had advanced huge loans to the company. Thus, this case clearly fell within the scope of explanation to Section 147 of the Act. This would not therefore prevent the assessing officer from reopening the assessment beyond a period of four years from the reign of assessment year. - Decided against assessee - SPECIAL CIVIL APPLICATION NO. 18771 of 2014 - - - Dated:- 21-9-2016 - MR. AKIL KURESHI AND MR. A.J. SHASTRI, JJ. FOR THE PETITIONER : MR SN SOPARKAR, SENIOR ADVOCATE WITH MR B S SOPARKAR, ADVOCATE FOR THE RESPONDENT : MR NITIN K MEHTA, ADVOCATE ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE AKIL KURESHI) 1. The petitioner has challenged notice dated 31.3.2014 issued by the respondent- Assessing Officer to reopen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 was ₹ 46,65,937/- by calling for year-wise details of such interest. By not paying interest on borrowed funds, the profits of the eligible unit u/s10B was artificially inflated to almost this extent. The profits of the eligible unit need to be adjusted to the extent of such interest expenses which were not incurred by the assessee and in doing so artificially inflated its tax-exempt profits. Furthermore, it was noticed that the assessee had claimed income of ₹ 1,24,000/- in relation to FDR interest as exempt u/s10B. Such income was not eligible for exemption u/s10B and was wrongly claimed by the assessee. It is seen that during the course of original assessment proceedings u/s143(3) for AY 2007-08, there was failure on the part of the assessee to furnish unit-wise accounts and all the details mentioned above to complete the assessment accordingly. In view of the above, I have reason to believe that income of the assessee has escaped assessment and the case of the assessee needs to be re-assessed. 2.3 Upon being supplied the reasons recorded by the Assessing Officer, the petitioner raised objections to the notice for reopening under communication dated 14.10.201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terial available to the Assessing Officer to reopen the assessment. (5) Counsel lastly submitted that there is no compulsion in law for the company to pay interest on the funds borrowed from the directors. It is not the case of the revenue that such interest was paid but not reflected. Merely because the Directors did not charge interest on advances to the company would not establish that income chargeable to tax had escaped the assessment. 4. On the other hand, learned counsel Shri Nitin Mehta for the revenue opposed the petition contending that the requirements of true and full disclosure would include also bringing to the notice of the Assessing Officer that the company had not paid interest to the Directors. That no interest was charged did not form part of the record. The assessee therefore cannot contend that there was true and full disclosure. Counsel drew our attention to Sub-section (7) of Section 10B read with Sub-section (10) of Section 80IA of the Act to contend that when the assessee-company claiming deduction under Section 10B of the Act did not pay interest on sizeable borrowings from the directors, it would be open for the Assessing Officer to assess the profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of articles would be 100% exempt from tax. Sub-section (7) of Section 10B provides that the provisions of Sub-section (8) and sub-section (10) of Section 80IA shall so far as may be applied in relation to the undertaking referred to in the present section as they apply for the purpose of undertaking referred to in Section 80IA. Thus, by reference, the provisions of sub-section (8) and sub-section (10) of Section 80IA are made applicable to Section 10B of the Act also. 8. Section 80IA pertains to deductions in respect of profits and gains for industrial undertakings or enterprises engaged in infrastructure development etc. Sub-section (10) of Section 80IA reads as under: (10) Where it appears to the Assessing Officer that, owing to the close connection between the assessee carrying on the eligible business to which this section applies and any other person, or for any other reason, the course of business between them is so arranged that the business transacted between them produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business, the Assessing Officer shall, in computing the profits and gains of such eligible business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Name Loan accepted Squared Up Max.Balance Accepted by cash 1 Mr.Amit N Shah 30,60,000 No 39,36,357 No 2 Mrs.C.N.Shah 50,65,760 No 1,51,44,081 No 3 Nital N Shah 30,60,000 No 65,39,411 No 4 Zeenita A Shah 30,60,049 No 48,59,171 No 5 Mr.N.M.Shah 2,71,11,542 No 5,12,91,622 No Another document was Annexure `E' which gave particulars of each repayment of loan or deposit of an amount exceeding limit prescribed under Section 269T of the Act and read as under: Name ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on Bench of the Supreme Court in the said case held that to confer jurisdiction on the Assessing Officer to issue notice for assessment beyond four years two conditions had to be satisfied. First was that Income Tax Officer must have reason to believe that income, profits or gains chargeable to tax had been under assessed. Second was that he must also have a reason to believe that such underassessment had occurred by reason of either (1) omission or failure on the part of an assessee to make a return of his income or (2) omission or failure on the part of an assessee to disclose fully and truly all material facts necessary for his assessment for that year. Both these conditions are conditions precedent to be satisfied before the Income Tax Officer can have jurisdiction to issue notice for assessment or reassessment beyond four years. It was further observed that what facts were material and necessary for assessment differ from case to case. The duty of the assessee is to disclose primary facts. The said duty however did not extend beyond the full and true disclosure of all primary facts. Once such primary facts were before the Assessing Authority, it was for him to decide what infe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent beyond four years of the end of the assessment year; (iii) such reasons must be recorded and if the reasons recorded by the Assessing Officer do not disclose satisfaction of these two conditions, reopening notice must fail; (iv) there is no set format in which such reasons must be recorded. It is not the language but the contents of such recorded reasons which assumes importance. In other words, a mere statement that the Assessing Officer had reason to believe that certain income has escaped assessment and such escapement of income was on account of non-filing of the return by the assessee or failure on his part to disclose fully and truly all material facts necessary for assessment would not be conclusive. Nor absence of any such statement would be fatal, if on the basis of reasons recorded, it can be culled out that there were sufficient grounds for the Assessing Officer to hold such beliefs;.... 17. In Zohar Siraj Lokhandwala V/s M.G.Kamat and others, reported in 210 ITR 956, the Division Bench of Bombay High Court observed as under: There is no doubt, as observed by the Supreme Court in Calcutta Discount Co.Ltd. v.ITO [1961] 41 ITR 191, that the duty of disclosi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disclosure of the material facts. Explanation 2 makes the position abundantly clear. (Indo-Aden Salt Mfg. And Trading Co.P.Ltd. v.CIT [1986] 159 ITR 624 (SC)). 18. The contention of true and full disclosures would have to be appreciated bearing in mind the above judicial pronouncements. Such requirement flowing from the provisions of Section 147 would have to be appreciated bearing in mind explanation 1 which as noted provides that production before the Assessing Officer the account books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of the proviso. There is thus, a thin line between the disclosure which disguises a material fact and therefore would be in terms of the proviso read with explanation 1 would amount to failure of disclosure and one where it would be the duty of the Assessing Officer on the basis of primary facts disclosed by the assessee to draw further inferences on facts and or in law. Significantly, explanation 1 refers to discovery by the Assessing Officer while exercising due diligence. 19. In the present case, what formed pa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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