Reassessment On Suspicion To Enquire Further Is Unsustainable: Gujarat High Court

The division bench of Justices Biren Vaishnav and Bhargav D Karia observed, “The reassessment was also therefore based on suspicion. As pointed out by learned Senior Counsel Mr.Hemani, that factors that indicate that income has escaped assessment consists of facts which if established will have a cause and effect relationship, whereas factors which indicate a suspicion about income escaping assessment which would warrant a further inquiry. This is not what is contemplated under section 148 of the Act. The jurisdiction cannot be used to carry out a roving inquiry.”

The aforementioned ruling emanated from two Special Civil Applications, both sharing identical basic facts.

In the context of the case's factual backdrop, the petitioner held a partnership position in the housing project development firm, "M/s. My Home Developers." The partnership's commencement was on June 15, 2007, with a partnership deed executed on June 27, 2007, featuring a discretionary clause pertaining to the "payment of interest on capital."

On April 1, 2009, an amendment to the partnership deed stipulated that no interest on capital would be payable to the partners from that date onward. For the Assessment Year 2010-11, the Assessing Officer's assessment categorized the petitioner's disclosed income as "Income from other sources" rather than "Business Income."

This had repercussions on the partnership firm's entitlement to a deduction under section 80IB(10) of the Income Tax Act. The Commissioner of Income Tax (Appeals) dismissed the partnership firm's appeal against the Assessment Order.

In a subsequent scrutiny assessment for the Assessment Year 2012-13, where the assessed income was determined as NIL after allowing a deduction of Rs. 15,78,260/- under section 80IB(10) of the Act, the Income Tax Appellate Tribunal (ITAT) ruled in favor of the partnership firm. The ITAT held that the income disclosed during the survey indeed constituted income from housing projects, making the firm eligible for the deduction under section 80IB(10) of the Act.

Subsequently, the partnership firm's cases for the Assessment Years 2011-12, 2012-13, and 2013-14 were reopened, prompting the issuance of a notice under section 148 of the Act for the year under consideration. The petitioner raised objections against the reopening, but they were rejected by the revenue department.

The petitioner contended that there was no taxable income since they did not receive any "interest on capital" or "remuneration" from the partnership firm. Additionally, the petitioner asserted that, on the merits, there were no grounds for adding to their income.

Furthermore, the petitioner argued that the reopening of the case was founded on invalid reasons, pointing out that the respondent disregarded the amended partnership deed effective April 1, 2009. The amended deed explicitly stated that no "interest on capital" or "remuneration" was payable.

The court placed reliance on a previous case, PCIT vs. Alidhara Taxspin Engineers, in Tax Appeal NO. 265 of 2017, emphasized that the mere incorporation of interest on partners’ capital and remuneration clauses in partnership deeds does not imply their mandatory nature.

The court found that the petitioner had not received any interest on capital or remuneration from the partnership firm.

Concerning the additional counts pertaining to the sale of immovable property and investments, the court determined that the reassessment lacked a substantive foundation and was rooted in suspicion rather than concrete evidence. The Assessing Officer's actions were deemed to constitute a speculative inquiry.

Consequently, the court invalidated and annulled the notices issued by the Assessing Officer under Section 148 of the Income Tax Act.

Appearance: Mr. Tushar Hemani, Senior Counsel With Ms Vaibhavi K Parikh(3238) For The Petitioner(S) No. 1 Mr. Karan Sanghani, Standing Counsel For Mrs Kalpana K Raval(1046) For The Respondent(S) No. 1

LL Citation: 2023 LiveLaw (Guj) 189

Case Title: Artiben Amishkumar Patel Versus The Income Tax Officer, Ward 3(2)(1)

Case No.: R/Special Civil Application No. 18957 Of 2019

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