Reassessment Orders Quashed Due to Jurisdiction Issue, Commission Payments Upheld, Penal Interest Invalidated

The reassessment orders for the assessment years 2005-06, 2006-07, 2007-08, and 2008-09 were quashed due to defective jurisdiction based on a change of opinion in issuing notices under section 148. The disallowance of commission payments to directors under section 36(1)(ii) was not upheld as the payments were for services rendered. The levy of penal interest under sections 234A, 234B, 234C, and 234D became moot with the invalidation of reassessment orders. The directions to verify and allow remuneration to directors were given by the CIT(A). The appeals of the assessee were allowed, dismissing the appeals of the AO.

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Issues Involved:
1. Defective jurisdiction - Issue of Notice u/s. 148 on a change of opinion - Re-assessment Order may be quashed.
2. Disallowance u/s. 36(1)(ii) on account of alleged non-allowable commission payment to the Directors.
3. Levy of Penal Interest u/s. 234A, 234B, 234C, and 234D.
4. Directions by CIT(A) to verify and allow remuneration to directors.

Detailed Analysis:

1. Defective jurisdiction - Issue of Notice u/s. 148 on a change of opinion - Re-assessment Order may be quashed:

The primary contention was that the notice issued under section 148 was based on a change of opinion. The assessee argued that during the original scrutiny assessment, all materials were furnished, and the Assessing Officer (AO) had duly applied his mind, considering the same claim while making disallowance u/s. 14A. Therefore, the jurisdiction acquired through the issue of notice u/s. 148 becomes defective and untenable for being tainted with a change of opinion. The appellate authority (FAA) did not adequately address these objections, leading to the conclusion that the order passed by the AO and upheld by the FAA was not valid, as the twin conditions of reopening the matter after a period of four years were missing. The reassessment was thus quashed for the assessment years 2005-06 and 2006-07.

For the assessment year 2007-08, although the reopening was within four years, it was still found to be based on a change of opinion, which is not permissible. The AO had already considered the commission payment while making disallowance u/s. 14A during the original assessment. Hence, the reassessment order was invalidated.

2. Disallowance u/s. 36(1)(ii) on account of alleged non-allowable commission payment to the Directors:

The AO disallowed the commission payments to the directors under section 36(1)(ii), arguing that the payments were in lieu of dividends and thus not allowable as deductions. The FAA supported this view, stating that the payments were not linked to any extra services rendered by the directors and were a device to avoid tax. However, the tribunal found that the payments had been consistently allowed in previous years and were made for services rendered by the directors. The tribunal referred to judgments like Ohm Stock Brokers Pvt. Ltd. and Voltas Ltd., which held that reassessment based on a mere change of opinion is not valid. Thus, the disallowance was not upheld.

3. Levy of Penal Interest u/s. 234A, 234B, 234C, and 234D:

The appellant denied liability to penal interest on merits. However, as the reassessment orders were invalidated, this issue became moot and was not adjudicated separately.

4. Directions by CIT(A) to verify and allow remuneration to directors:

The FAA had directed the AO to verify whether the remuneration paid to the directors was within the limits prescribed by the Companies Act and allowable as per the company's resolution. The tribunal, having invalidated the reassessment proceedings, decided the grounds of appeal against the AO for the assessment years 2005-06 and 2006-07.

Conclusion:

The appeals of the assessee were allowed, and the reassessment orders for the assessment years 2005-06, 2006-07, 2007-08, and 2008-09 were quashed due to the invalidity of the reopening based on a change of opinion. Consequently, the appeals of the AO were dismissed.

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