TaxTMI 
TaxTMI 
2012 (10) TMI 742
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....icer while framing assessment under section 143(3) of the Act, vide assessment order dated December 23, 1998. 3. The facts in relation to Special Civil Application No. 4551 of 2002 are that the petitioner filed his return of income for the assessment year 1995-96 on March 29, 1996, declaring total loss of Rs. 7,45,759 wherein, he had, inter alia, claimed interest expenses of Rs. 39,01,689 from income from other sources under section 57(iii) of the Act. The assessment came to be framed at a loss of Rs. 3,53,622 under section 143(3) of the Act by an assessment order dated March 31, 1998. 4. Subsequently, by the impugned notices, the assessments of the petitioner for the assessment years 1996-97 and 1995-96 are sought to be reopened by the Assessing Officer. In response thereto, the petitioner addressed a letter dated March 22, 2002, to the respondent asking for the reasons for issuance of notice under section 148 of the Act. However, as the respondent neither provided the reasons nor dropped the reassessment proceedings, the petitioner has approached this court by way of the present petitions challenging the aforesaid notices. 5. In response to the petit....
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....ut for acquiring controlling stake in the company (Mastek Ltd.). To determine the clear purpose for making investments in these shares, relevant facts such as percentage holding of the assessee and his group, increase in holding, purpose of such increase, etc., are necessary. The deduction under section 57(iii) is allowable only when the expenditure was incurred wholly and exclusively for the purpose of earning the said income, i.e., dividend. (2) How income has escaped assessment : The assessee has claimed interest expenditure on fund borrowed for the purpose of making investments in shares of Mastek Ltd. The claim of such interest was Rs. 51,33,658. The provisions of section 57(iii) under which the said claim was made is quoted below : (iii) Any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income." 7. The Assessing Officer has thereafter referred to various decisions of this High Court, viz., (1) Virmati Ramkrishna (Smt.) v. CIT [1981] 131 ITR 659 (Guj) (Appendix), (2) Sarabhai Sons (P.) Ltd. v. CIT [1993] 201 ITR 464 (Guj), (3)....
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....tc., and interest paid during the year, has been furnished. The assessee has not submitted the details of loans taken nor the copies of accounts from all the parties were furnished. Thus, the assessee has not discharged the primary onus of giving details of loans taken, interest paid and linking the same with the investments made in shares. The assessee nowhere submitted the investments in the shares of Mastek Ltd., is" In relation to the assessment year 1995-96, in place of the immedia- tely preceding paragraph, the reasons recorded read thus : "Details of total borrowings and their use for making investments in shares have not been submitted by the assessee. Despite specifically being asked the details of loans taken with date and amount and investments made with copy of accounts of the persons and also to link loans taken for house construction and investments and interest paid during the year, the same were not furnished. The assessee has submitted details of loans taken of Rs. 37,50,000 + Rs. 42,90,000 + Rs. 84,00,000 = Rs. 1,64,45,000. Copy of accounts from the parties were not furnished. Even interest taken on these loans at the normal rate of 2....
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....orrowings for the purpose of making investments in the shares of Mastek Ltd., which is not allowable under section 57(iii) of the Income-tax Act, 1961, considering the factual and legal position discussed above. As per Explanation 2(c)(i) and (iii) of section 147, such excessive allowance is deemed to be the case where income has escaped assessment. In view of this, there is sufficient reason to believe that substantial income chargeable to tax has escaped assessment. (ii) In this case, as discussed earlier, the assessee has not submitted the balance sheet, capital account, his holding in Mastek Ltd., linking of investments with the borrowings, copy of accounts of lenders, etc. These information's are very relevant to decide whether the expenses was solely incurred for the purpose of earning dividend or not. If the assessee would have disclosed the facts relating to the nature of investments in the shares of Mastek Ltd., the deduction under section 57(iii) would not have been allowed to the assessee. It is, therefore, clear that the substantial income has escaped assessment by reasons of the failure on the part of the assessee to disclose fully and truly all material fact....
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....urse of the assessment proceedings before the Assessing Officer. The respondent has not filed any reply to the rejoinder rebutting the averments made therein. Thus, it is an accepted position that the documents annexed with the rejoinder affidavit have been submitted by the petitioner during the course of the assessment proceedings for the respective assessment years. 11. Mr. S. N. Soparkar, senior advocate, learned counsel for the petitioner submitted that, in the present case, the original assessment order was framed under section 143(3) of the Act. The impugned notices have been issued on March 11, 2002, in relation to the assessment years 1996-97 and 1995-96, which is clearly beyond a period of four years from the end of the relevant assessment years and as such, in the absence of any failure on the part of the petitioner to disclose fully and truly all material facts necessary for his assessment for the assessment years under consideration, the assumption of jurisdiction by the Assessing Officer under section 147 of the Act is without authority of law. Inviting attention to the reasons recorded, it was submitted that the Assessing Officer seeks to reopen the assessme....
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....i) of the Act, Mr.Soparkar for the petitioner submitted that the question in the present case is whether the interest can be allowed against the dividend income. Referring to the decision of the Supreme Court in the case of CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 (SC), it was submitted that the interest can be allowed against dividend income ; hence, the petitioner had rightly made such a claim. According to the learned counsel, controlling interest is not statutorily defined and is a matter of perception. In relation to his claim of deduction under section 57(iii) of the Act, the petitioner had filed dividend warrants, and all other information called for by the Assessing Officer during the course of assessment proceedings, like confirmations from depositors, etc., and that the Assessing Officer after being satisfied as regards the admissibility of the petitioner's claim had allowed the deduction. It was contended that the Assessing Officer cannot commence the reassessment proceedings merely because he entertains a view different from his predecessor. It was further submitted that the petitioner had dis- closed fully and truly all primary facts necessary for the purpose of....
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....eing in existence, there was no obligation cast upon the petitioner to produce such documents. According to the learned counsel, in case the Assessing Officer, during the course of assessment, found it difficult to make the assessment in the absence of such documents, he could have called upon the petitioner to prepare the balance-sheet and to produce the same. It was submitted that in relation to the assessment year 1995-96, it appears that the Assessing Officer had called for the balance- sheet ; hence, the petitioner had prepared the same and produced them during the course of assessment proceedings. In respect of the assessment year 1996-97, no such information was called for by the Assessing Officer, who proceeded to assess the petitioner on the material before him. In the circumstances, it is clear that the Assessing Officer did not find the material necessary for assessment. In the circumstances no failure to disclose fully and truly all material facts can be attributed to the petitioner. Reliance was also placed upon a decision of the Supreme Court in the case of CIT v. Bhanji Lavji [1971] 79 ITR 582 (SC), wherein the court had held that when all primary facts have been dis....
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....at the dominant purpose for which the expenditure was incurred was not for earning income and at the highest, it was a mixed purpose. It was submitted that the said decision was rendered in a totally different set of facts and would not be applicable to the facts of the present case. 16. The learned counsel further submitted that the main reason for reopen- ing, according to the Assessing Officer, is that the purchase of shares of Mastek Ltd. by the petitioner was made with the motive of gaining controlling stake in the said company and not for the purpose of earning dividend. It was submitted that assuming without admitting that the petitioner has purchased the shares with a motive to gain controlling interest, the petitioner would still be entitled to deduction under section 57(iii) of the Act, if he has purchased the shares for the purpose of earning dividend income. Reliance was placed upon the binding pre-bifurcation decision of the Bombay High Court in the case of Ormerods (India) Pvt. Ltd. v. CIT [1959] 36 ITR 329 (Bom), wherein the court held that the word "purpose" in the expression "expenditure incurred solely for the purpose of making or earning such income, pr....
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....k Ltd.'s total share holding as well as the percentage of shares held by him as that would be necessary to determine as to whether the petitioner was entitled to deduction under section 57(iii) of the Act. It was submitted that a fact which was necessary for arriving at a decision as regards admissibility of a claim is a material fact and as such, the petitioner has failed to disclose fully and truly all material facts. 19. Mr. Bhatt further submitted that the petitioner has failed to disclose fully and truly all material facts necessary for his assessment and as such, the Assessing Officer is justified in reopening the assessment beyond a period of four years from the end of the relevant assessment years. Inviting attention to the reasons recorded, it was submitted that in the facts of the present case, since the petitioner has purchased the shares with a view to gain controlling stake in the company, viz., Mastek Ltd., of which the peti- tioner was the promoter/director, the petitioner was not entitled to deduction under section 57(iii) of the Act and as such, he had made a false claim which amounts to non-disclosure of correct facts. According to the learned ....
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....'s Pathology Laboratory v. P. N. Prasad, Joint CIT (No. 1) [2001] 252 ITR 673 (Bom), for the proposition that mere production of balance-sheet, profit and loss account or account books will not necessarily amount to disclosure within the meaning of the proviso to section 147 of the Act. It was submitted that the case of the Department is that though interest expenditure was not allowable under section 57(iii) of the Act, in the light of the fact that the petitioner had purchased the same to gain a controlling interest in Mastek Ltd., the petitioner had failed to disclose fully and truly all material facts by not disclosing his shares in Mastek Ltd. Reliance was also placed on the decision of the Madras High Court in the case of Tamil Nadu Petroproducts Ltd. v. CIT [2011] 330 ITR 342 (Mad) for the proposition that even a wrong claim would amount to incorrect disclosure. 23. Strong reliance was placed on the decision of this High Court in the case of Sarabhai Sons (P.) Ltd. v. CIT [1993] 201 ITR 464 (Guj), for the purpose of contending that where the shares have been purchased for the dominant purpose of gaining controlling interest and not for the purpose of earning income....
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.... 25. In conclusion it was submitted by the learned counsel that the Assessing Officer was fully justified in reopening the assessment under section 147 of the Act by issuing the impugned notices and that the petitioner having failed to disclose fully and truly all material facts necessary for his assessment for the assessment years under consideration, the assumption of jurisdiction by the Assessing Officer under section 147 of the Act is valid. 26. In the present case, the original assessments for both the assessment years in question came to be framed under section 143(3) of the Act. Evidently, both the impugned notices, which have been issued on March 11, 2002, in relation to the assessment years 1996-97 and 1995-96, respectively, have been issued after the expiry of a period of four years from the end of the relevant assessment years, the proviso to section 147 of the Act would, therefore, be clearly attracted. 27. It is by now well settled that in case where by the proviso to section 147 of the Act is attracted, two conditions have to be satisfied before the Assessing Officer acquires the jurisdiction to issue notice under section 148 in respect of....
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....close fully and truly all material facts necessary for his assessment. What facts are material and necessary for assessment will differ from case to case. But once those primary facts are disclosed, and all the facts which would help the Assessing Officer in coming to the correct conclusion are brought to his notice, the assessee's duty ends. From these primary facts and the further facts inferred from them, the taxing authority has to draw the proper legal inferences and ascertain on a correct interpretation of the taxing enactment the proper tax leviable (See Parashuram Pottery Works Co. Ltd. v. ITO [1977] 106 ITR 1 (SC). 29. Bearing in mind this settled legal position, the question that arises for consideration is as to whether in this case there was any material on the basis of which the respondent could have entertained a reasonable belief that there was escapement of income from assessment on account of failure on the part of the petitioner to disclose fully and truly all material facts necessary for his assessment for the year under consideration. 30. For this purpose it would be necessary to refer to the reasons recorded for reopening the assessments. In....
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....ssessing Officer, prima facie, the assessee had invested in shares to acquire the controlling stake in the company and his investment was not apparently for the purpose of earning dividend income. Therefore, the assessee had been allowed excess claim of interest to the extent noted hereinabove. 32. As to what was the nature of non-disclosure on the part of the petitioner, the Assessing Officer has recorded that the petitioner had not submitted the balance-sheet and the capital account along with the return or during the assessment proceedings ; that in the absence of balance-sheet, the details of investment, source of investment, application of fund for the purpose of making investments in shares, etc., have not been disclosed by the petition. The main non-disclosure alleged is that the petitioner had not submitted at to what percentage of shares he and his group were holding in Mastek Ltd. which, according to the Assessing Officer, was very relevant in the light of the Gujarat High Court's judgment in the case of Sarabhai Sons (P.) Ltd. v. CIT [1993] 201 ITR 464 (Guj). 33. In the facts of the present case, what is now required to be examined is as to whether th....
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.... investments in shares do not appear to be factually correct. 35. From the reasons recorded, it appears that failure to disclose fully and truly all material facts on the part of the petitioner has been attributed on the ground of non-furnishing of balance-sheet, capital account, details of loans with date and amount of investments made with a copy of the accounts as well as the extent of the petitioner's holding in the company, Mastek Ltd. In so far as the failure to furnish the balance-sheet and capital account, etc., is concerned, the learned counsel for the petitioner has submitted that the petitioner being an individual, is not required to maintain balance-sheet and as such, it cannot be said that there is any failure on the part of the petitioner to disclose fully and truly all material facts by not submitting the balance-sheet and capital accounts, etc. Moreover, in so far as the assessment year 1995-96 is concerned the said documents had in fact been submitted by the petitioner during the course of the assessment proceedings. 36. In this regard, it may be pertinent to refer to the decision of this court in the case of CIT v. Akbarali Jummabhai [1992] 198....
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.... from the amounts obtained by way of loans as well as interest expenditure claimed in respect thereof. It was after examining all the said documents, that the Assessing Officer had assessed the petitioner under section 143(3) of the Act. At no point of time, does it appear that the Assessing Officer had called upon the petitioner to furnish the percentage of his holding in Mastek Ltd. 37. In relation to the assessment year 1996-97, the record of the case indicates that the petitioner had furnished along with his return of income and during the course of assessment proceedings, statement of his income as well as the confirmation letters of the depositors and dividend warrants to indicate earnings by way of dividend income. In relation to the assessment year 1995-96, the petitioner had submitted the statement of income along with the balance-sheet as well as other documents evidencing proof of obtainment of the loans as well as investment of the same by purchasing shares and the income derived by way of dividend. Since, in the assessment year 1996-97, no fresh loans had been availed of, it appears that the Assessing Officer did not call for the aforesaid details and placed ....
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....uage of the section itself and without attributing to the Legislature a precise appreciation of the technical appropriateness of its own. But whatever way we read the word 'purpose' it cannot certainly mean a motive for a transaction. Much less can it mean the ulterior motive or the ultimate object of purchasing the shares by the company. The only possible way to read what Mr. Joshi has described as the express and explicit finding of the Tribunal is, in our opinion, no more than a finding by the Tribunal as to the ulterior motive or ultimate object in purchasing the shares. But the purpose of the purchase is a different matter. All that the Tribunal has recorded is that the shares were not purchased with a view to trading in them. Incidentally, we may mention that the Income-tax Officer had observed that the investments were not for a proper business consideration nor for any 'sound investment consideration'. But we are concerned with the finding of the Tribunal and not what the Income-tax Officer may have said. There is, therefore, in our view, no finding by the Tribunal that these shares were not purchased solely for the purpose of making or earning income, profits or gains. Now....
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....e course of its original assessment proceedings. On the basis of those facts, the Income-tax Officer who completed those proceedings arrived at certain decisions. The respondent appears to have initiated reassess- ment proceedings principally because he thinks that certain items of expenditure were 'wrongly allowed'. This, therefore, is a case in which reassessment has been undertaken merely on a change of opinion. Besides, the affidavit-in-reply filed by the respondent discloses complete non-application of mind in relation to an item upon which he has relied. The respondent, therefore, does not appear to have carefully looked into the record of the original assessment proceedings before he satisfied himself that there was escapement of income on account of failure on the part of the petitioner to fully and truly disclose material facts during the course of the original assessment proceedings. Under these circumstances, in our opinion, no conclusion is possible other than that the reassessment proceedings have been initiated without the very conditions precedent for the exercise of power having been in existence. In the result, the writ petition succeeds and is allowed. The impugne....
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....facts which resulted in escapement of income. All that seems to have happened is that the respondent while making assessment in the case of Mastek Ltd. has upon perusal of the shareholding pattern found that the petitioner had in all, over the years purchased 9,16,150 shares out of the total authorized capital of 50,00,000 shares and total issued and subscribed paid-up capital of 30,56,200 shares, which, according to him, was a pointer to the fact that the petitioner had purchased the shares to gain the con- trolling stake and not to earn dividend income and as such was in the nature of capital investment and not for the purpose of earning income. 41. As noticed earlier, from the statement of income filed by the petitioner it is apparent that a major portion of his income is from dividend income. Under the statute, there is no obligation on a person acquiring shares to state the percentage of shares he has acquired in a company. In the circumstances, as has been rightly contended by the learned counsel for the petitioner, the issue involved is a question of difference of perception of the assessee and the Assessing Officer, but that merely because, according to the Assess....
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....purchased the shares for the purpose of earning dividend income. 43. Clause (iii) of section 57 of the Act speaks of any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income. The words "wholly and exclusively used for the purpose of making or earning such income" mean that the expenditure should be wholly incurred for the purpose of earning such income, that is to say, the expenditure should not have been made for any other purpose. In the present case, it is not the case of the Department that the petitioner has expended any part of the loan amount on the interest of which deduction is claimed under section 57(iii) of the Act for any purpose other than purchasing shares which have yielded dividend income. The manifest and immediate purpose for obtaining the loan is to purchase shares for earning dividend income. It is obvious that if the petitioner would not have paid interest on the loan raised by him he would not have been able to get the dividend income. In these circumstances, therefore, there was a direct nexus between the expenditure of Rs. 51,33,658 and Rs. 3....
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.... to implement the expansion projects. This decision was taken in September, 1967. The assessee agreed to purchase the shares at the rate of Rs. 197.5 per share. Payment of the price was spread over a period of two years. Ten per cent. of the price was to be paid on the date of purchase and the balance amount was to be paid in instalments ranging from twelve to twenty four months with interest at nine per cent. to be paid on the outstanding amount. The assessee met with some difficulties in acquiring 2,522 shares as there was resistance from the owners of those shares. Meanwhile, a proposal was put forward by KPPL to purchase all the shares of SOML. Pursuant to that proposal, the assessee sold 46,454 shares equity shares of SOML to KPPL on April 25, 1968, at the same purchase price, viz., Rs. 197.5 per share. The purchase price was to be paid by KPPL partly in cash at the time of delivery of shares and the balance amount was to be paid in two instalments. Interest at the rate of nine per cent. was to be paid by KPPL on the balance amount. During the financial year which ended on March 31, 1969, the assessee paid by way of interest Rs. 6,05,291 to the shareholders from whom it had pu....
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....on of this High Court in the case of Dishman Pharmaceuticals and Chemicals Ltd. v. Deputy CIT (OSD) (No. 1) [2012] 346 ITR 228 (Guj) is concerned, section 2(22)(e) of the Act lays down that "dividend" includes any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without right to participate in profits) holding not less than ten per cent. of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereinafter in this clause referred to as the said concern) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits. Thus, by enacting section 2(22)(e) of the Act the Legislature had created a deeming fiction and has made the payments referred to therein as "divide....
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....decision of the Andhra Pradesh High Court in the case of KCP Ltd.v. ITO [1984] 146 ITR 285 (AP) also would not be applicable to the facts of the present case inasmuch as, in the facts of the present case, there was no obligation on the petitioner to disclose his shareholdings in Mastek Ltd. as the same was not a material fact necessary for his assessment for the purpose of deciding his claim for deduction under section 57(iii) of the Act. 47. The decision of the Madras High Court in the case of Tamil Nadu Petro- products Ltd. v. CIT [2011] 330 ITR 342 (Mad), also does not carry the case of the respondent any further as in the facts of the present case it cannot be said that the petitioner has made a false claim. In the light of the decision of the Supreme Court in the case of CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 (SC), the petitioner was fully justified in making the claim under section 57(iii) of the Act. 48. Reliance placed on behalf of the respondent on the decision of the Bombay High Court in the case of Dr. Amin's Pathology Laboratory v. P.N. Prasad, Joint CIT (No. 1) [2001] 252 ITR 673 (Bom) is misconceived, inasmuch as there was no obligation on....
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....the assessment year 1996-97 filed by the petitioner was processed under section 143(1)(a) of the said Act on May 14, 1997, and in response to the notice under section 143(2) of the Act, the chartered accountant of the petitioner had attended the case. There- after, the Deputy Commissioner of Income-tax, Circle-4, Ahmedabad, had determined the total income of the petitioner at Rs. nil, as per the assessment order dated December 23, 1998, passed under section 143(3) of the said Act. The petitioner, thereafter, received the impugned notice dated March 11, 2002, from the respondent issued under section 148 of the said Act, proposing to reopen the assessment for the assessment year 1996-97, and calling upon the petitioner to file a return within the prescribed time limit for the said assessment year. In response to the said notice, the petitioner addressed a letter dated March 22, 2002, to the respondent requesting that the return filed on November 29, 1996, for the assessment year 1996-97 be treated as return in response to the notice, and that the reasons recorded for the reopening of the assessment be communicated to him. The said letter dated March 22, 2002, appears to have been rec....
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...., Mr. M. R. Bhatt, for the respondent have made their respective submissions at length, relying upon various decisions of the hon'ble Supreme Court, of this court as well as the other courts in support of their respective contentions. However, before adverting to the said submissions, it would be necessary to advert to the contentions raised by the respondent in his reply about the alternative remedy being available to the petitioner and about the petition having been filed at a very premature stage. The court is alive to the legal position to the effect that once the petition is admitted, it should not be dismissed at the time of final hearing only on the ground of the same being premature or on the ground of the existence of alternative remedy being available to the petitioner. The court is also alive to the legal position settled by the hon'ble Supreme Court in many cases to the effect that the existence of alternative remedy itself would not be an absolute bar to the maintainability of the petition, if it is found that the authority has acted wholly without jurisdiction or that the impugned notice per se appears to be illegal or bad in law or suffers from mala fides, etc.  ....
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.... is concerned, it is pertinent to note that Chapter XX of the Income-tax Act provides for the appeals and revisions to be filed before the appropriate forums. The order of assessment or reassessment passed by the Assessing Officer under section 147 of the Act is also appealable before the appellate officer and the order of the appellate officer is further appealable before the Appellate Tribunal. The aggrieved assessee or the Commissioner, as the case may be, could also require the Appellate Tribunal to refer to the High Court any question of law arising from such orders. Hence, when the judicial and quasi-judicial statutory authorities have been established under the Special Act, the normal course of action to be followed by the assessee would be to approach such authorities and ventilate his grievances. Further, whenever the matters are referred to the High Court under the Income-tax Act, the High Court exercises advisory jurisdiction and decides the questions of law raised therein. However, whenever the original writ jurisdiction of the High Court, which is extraordinary in nature, is invoked under article 226 of the Constitution, by the assessee challenging the legality and val....
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....es avail- able under the said Act, the same deserve to be dismissed on that ground alone. However, since the petitions have been admitted in 2002 and heard finally in 2011 on all the issues raised by the learned advocates for the parties, they are being decided on the merits also. 63. As stated earlier, the present petitions have been filed challenging the validity of the impugned notices issued by the respondent under section 148 of the Act, proposing to reopen the assessment after the expiry of four years from the end of the relevant assessment years. The impugned notice dated March 11, 2002, for the assessment year 1996-97 is challenged in Special Civil Application No. 4549 of 2002 and similar notice for the assessment year 1995-96 is challenged in Special Civil application No. 4551 of 2002. The reasons recorded by the respondent-Assessing Officer before issuing the said notices as contemplated under section 148(2) of the Act are produced on record along with the affidavits-in-reply filed by the respondent to these petitions. 64. It is needless to say that the court has to consider the relevant provisions of the Act as prevailing at the time of the relevant assessme....
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....her repaying the earlier loan or for making investments in shares of Mastek Ltd. The assessee claimed that since investments were made in shares, which are generating dividend income and, therefore, interest expenditure is allowable under section 57(iii) of the Income-tax Act. The assessee did not submit the details relating to his controlling interest or his total holding in Mastek Ltd. The assessee is a director in Mastek Ltd. and increase in the shareholding in Mastek Ltd. is not for the purpose of earning dividend but for acquiring controlling stake in the company (Mastek Ltd.). To determine the clear purpose for making investments in these shares, relevant facts such as percentage holding of the assessee and his group, increase in holding, purpose of such increase, etc., are necessary. The deduction under section 57(iii) is allowable only when the expenditure was incurred wholly and exclu- sively for the purpose of earning the said income, i.e., dividend. (2) How income has escaped assessment : The assessee has claimed interest expenditure on fund borrowed for the purpose of making investments in shares of Mastek Ltd. The claim of such interest was Rs. 51,3....
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....reholding pattern for the assessment year from the details of the return are as follows : Assessment year 1995-96 1996-97 Total number of shares held in the MASTEK 8,83,350 9,16,150 Authorized capital 50,00,000 50,00,000 Issued subscribed and paid up capital 30,00,000 30,56,200 The above data has been culled from and the comparison has been derived from the details of the income-tax returns of the company Mastek Ltd. in which the abovenamed assessee is a director and it can be safely deduced that the shares were purchased with clear purpose of object of getting controlling interest over the company and the only purpose or even the dominant purpose was not the earning dividend income. In the absence of balance-sheet and other relevant information, the real nature of investments could not be decided and as such, income has escaped assessment by way of excessive deduction. In view of the non-allowable interest of Rs. 51.33 lakhs claimed by the assessee from dividend income taxable income to that extent has escaped assessment within the meaning of Explanation 2(c)(i) and (iv) of section 147 of the Income-tax Act, 1961. (....
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....iod will end on March 31, 2003, therefore, this assessment can be legally reopened by March 31, 2003. (iv) The income likely to have escaped assessment should be Rs. 1 lakh or more in this case more than Rs. 51.33 lakhs have escaped assessment from the above, it is clear that all the conditions required for reopening the assessment are satisfied in the assessee's case." 67. The respondent, after considering the relevant judicial decisions, recorded the following conclusions : "5. Conclusion It can be seen from the return of the income that the assessee has claimed interest payments of Rs. 51,33,658 on the borrowed (capital) fund for acquiring the shares of the company Mastek Ltd., in which the assessee is a managing director. The assessee has no intention to earn income by investing the borrowed capital for the purchase of shares of the company in which the assessee is a promoter director. Thus, the assessee has borrowed the money for the investment purpose and, hence, the interest paid is not allowable as expense under section 57(iii) of the Income-tax Act, 1961. In view of the above, I am of the firm belief that substantial income....
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....at regard is essential. At that stage, the final outcome of the proceeding is not relevant. In other words, at the initiation stage, what is required is 'reason to believe', but not the established fact of escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief. Whether the materials would conclusively prove the escapement is not the concern at that stage. This is so because the formation of belief by the Assessing Officer is within the realm of subjective satisfaction (see ITO v. Selected Dalurband Coal Co. P. Ltd. [1996] 217 ITR 597 (SC) ; Raymond Woollen Mills Ltd. v. ITO [1999] 236 ITR 34 (SC))." 70. From the above observations made by the hon'ble Supreme Court, it is clear that the formation of belief by the Assessing Officer is within the realm of his subjective satisfaction, and that the Assessing Officer before initiating the action under section 147 of the Act, should have reason or justification to believe that the income chargeable to tax had escaped assessment. The expression "reason to believe" cannot be read to mean that the Assessing Off....
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.... believe", examined the scope of reopening of the assessment and held as under (page 564) : "Therefore, post-1st April, 1989, power to reopen is much wider. However, one needs to give a schematic interpretation to the words 'reason to believe' failing which, we are afraid, section 147 would give arbitrary powers to the Assessing Officer to reopen assessments on the basis of 'mere change of opinion', which cannot be per se reason to reopen. We must also keep in mind the conceptual difference between power to review and power to reassess. The Assessing Officer has no power to review ; he has the power to reassess. But reassessment has to be based on fulfilment of certain precondition and if the concept of 'change of opinion' is removed, as contended on behalf of the Department, then, in the garb of reopening the assessment, review would take place. One must treat the concept of 'change of opinion' as an in-built test to check abuse of power by the Assessing Officer. Hence, after April 1, 1989, the Assessing Officer has power to reopen, provided there is 'tangible material' to come to the conclusion that there is escapement of income from assessment. Reasons must have a live....
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....ny and the details of shareholdings of the petitioner in the said company were not there with the concerned Assessing Officer and not considered by him at the time of framing original assessment. Therefore, when the present respondent on having received fresh material, has sought to reopen the assessment, on his forming a belief that the income of the petitioner charge- able to tax had escaped assessment, it could not be said that the respondent was reviewing the earlier assessment or was seeking to reopen the assessment on the basis of "mere change of opinion". As rightly submitted by Mr.Bhatt, once the reasonable nexus between fresh material and the formation of the belief is established in the reasons recorded by the Assessing Officer, the court should not go into the sufficiency or adequacy of the material and substitute its own opinion for that of the Assessing Officer. 75. It was next contended by the learned senior advocate, Mr. Soparkar, that the pre-requisite condition that the escapement of income was on account of failure on the part of the assessee to disclose fully and truly all materials necessary for his assessment for reopening of the assessment, was not s....
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.... marked as annexure E to the affidavit-in-rejoinder filed in Special Civil Application No. 4551 of 2002 are seen, there are copies of balance-sheets as on March 31, 1995, of the petitioner and his wife, along with other details of the expenses/income and the investments in shares. If the said documents, balance sheets and capital accounts were subsequently prepared and furnished during the course of original assessment, as sought to be submitted by Mr. Soparkar, on the instructions of the petitioner, the petitioner would not have stated on oath in the rejoinder that the said information or details were never called for by the then Assessing Officer. Further, if the said documents were not in existence and were not maintained by the petitioner, the same would not have been produced by the petitioner along with his return of income, as stated by him in his affidavit-in-rejoinder. Such inconsistent statements in the affidavit-in-rejoinder made by the petitioner, does not inspire confidence to hold that the petitioner had furnished the material documents along with his return of income or during the course of original assessment. Be that as it may, from the said record of the pet....
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.... allow or reject, as powers are now there under section 143(3) of the Act. In the circumstances, the submission of Mr. Soparkar that the then Assessing Officer could have called for the material or evidence from the petitioner for adjudicating upon the claim of the petitioner as regards deduction under section 57(iii) of the Act, does not merit acceptance. 78. Heavy reliance was placed upon the judgment of the hon'ble Supreme Court in the case of Parashuram Pottery Works Co. Ltd. v. ITO [1977] 106 ITR 1 (SC) by Mr. Soparkar, and also in the case of Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191 (SC), in the case of CIT v. Bhanji Lavji [1971] 79 ITR 582 (SC), to submit that the only duty which is cast upon the assessee under the Act, is to make true and full disclosure of all primary facts at the time of original assessment, and thereafter, it is for the Assessing Officer to draw correct inferences from the primary facts. According to Mr. Soparkar, it is not the duty of the assessee to advise the Assessing Officer as to what inference he should draw from the primary facts furnished by the assessee, and if the Assessing Officer draws an inference which appears subseque....
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....the expenditure claimed as deduction under section 57(iii) of the Act by way of payment of interest on loans taken for the purchase of shares, and by way of interest on loans taken for repayment of loans taken for the purchase of shares of Mastek company, was not incurred wholly and exclusively for the purpose of earning the dividend income from the said shares, but the said expenditure was incurred for the purpose of getting the controlling interest in Mastek Company, as has been found by the present respondent now. Mr. Bhatt submitted that the said material fact being very primary, non- furnishing of the same by the petitioner at the time of process of original assessment had resulted into failure on the part of the petitioner to disclose truly and fully all material facts necessary for his assessment and therefore, the respondent had rightly initiated the action for reopening of the assessment. 80. In order to appreciate the rival contentions raised by the learned advocates for the parties, it would be beneficial to reproduce the relevant part of the observations made by the hon'ble Supreme Court in the case of Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191 (SC), ....
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....will not be open to the assessee to say, for example-'I have produced the account books and the documents : You, the Assessing Officer, examine them, and find out the facts necessary for your purpose : My duty is done with disclosing these account books and the documents'. His omission to bring to the assessing authority's attention these particular items in the account books, or the particular portions of the documents, which are relevant, will amount to 'omission to disclose fully and truly all material facts necessary for his assessment'. Nor will he be able to contend successfully that by disclosing certain evidence, he should be deemed to have disclosed other evidence, which might have been discovered by the assessing authority if he had pursued investigation on the basis of what has been disclosed. The Explanation to the section, gives a quietus to all such contentions ; and the position remains that so far as primary facts are concerned, it is the assessee's duty to disclose all of them-including particular entries in account books, particular portions of documents, and documents and other evidence which could have been discovered by the assessing authority, from the documen....
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.... for the court's investigation. In other words, all that is necessary to give this special jurisdiction is that the Income- tax Officer had when he assumed jurisdiction some prima facie grounds for thinking that there had been some non-disclosure of material facts." 81. It would be further relevant to reproduce the observations made by the hon'ble Supreme Court in the case of Indo-Aden Salt Mfg. and Trading Co. Pvt. Ltd. v. CIT [1986] 159 ITR 624 (SC), as under (page 628) : ". . . mere production of evidence before the Income-tax Officer was not enough, that there may be omission or failure to make a true and full disclosure, if some material for the assessment lay embedded in the evidence which the Revenue could not have uncovered but did not, then, it is the duty of the assessee to bring it to the notice of the assessing authority. The assessee knows all the material and relevant facts-the assessing authority might not. In respect of the failure to disclose, the omission to disclose may be deliberate or inadvertent. That was immaterial. But if there is omission to disclose material facts, then, subject to the other conditions, jurisdiction to reopen is attract....
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....link the borrowings with the investments, which had resulted in the excess allowance of interest. The respondent had, after recording the factual and legal matrix, arrived at a belief that substantial income had escaped assessment due to the failure on the part of the petitioner to disclose fully and truly all material facts and, therefore, the assessment needed to be reopened. Conside- ring the said reasons recorded by the Assessing Officer, supported by the legal position, it could not be said that the belief of the respondent that there was failure on the part of the petitioner to disclose fully and truly material facts, was not well founded or was erroneous. As held by the hon'ble Supreme Court in the case of Asst. CIT v. Rajesh Jhaveri Stock Brokers P. Ltd. [2007] 291 ITR 500 (SC), the expression "reason to believe" in section 147 cannot be read to mean that the Assessing Officer should have finally ascertained the fact by legal evidence or conclusion, what is required is the reason to believe but not the established fact of escapement of income. 84. It was then sought to be submitted by Mr. Soparkar, placing heavy reliance on the decision in the case of Ormerods (In....
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....s such, there cannot be any disagreement with the ratios of judgments cited by Mr. Soparkar and Mr. Bhatt, as in all these cases, the crux of the decisions is, inter alia, that the expenditure must have been incurred wholly and exclusively for the purpose of earning income, and it is immaterial whether the income was in fact earned or not. However, it is pertinent to note that in section 57(iii), the emphasis is on the expression "wholly and exclusively" which precedes the words "for the purpose of making or earning such income". Therefore, for claiming deduction under section 57(iii) of the Act, the expenditure must not be expended for the purpose other than the purpose of earning income or for the mixed purpose of earning income and other extraneous purpose. In the instant cases, the respondent had deduced a belief from the fresh tangible material that the expenditure incurred by the petitioner was not expended wholly and exclusively for the purpose of earning income from shares, but such expenditure was incurred also for the purpose of gaining controlling interest over the company, the said purpose could not be said to be the exclusive or sole purpose, and hence, the deduction u....
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....or the substratum is laid by the respondent in the reasons, considering all factual and legal position demonstrating his belief that the income chargeable to tax of the petitioner had escaped assessment, and that such escapement was by reason of failure on the part of the petitioner to disclose fully and truly all material facts necessary for his assessment for the relevant assessment years, it could not be said that the assumption of jurisdiction exercised by the respondent under section 147 of the Act after expiry of four years from the end of the relevant assessment years was bad, illegal or invalid. There being no infirmity or illegality in the impugned notices issued by the respondent under section 148 of the Act proposing to reopen the assessment for the assessment years 1995-96 and 1996-97, it does not warrant any interference of this court exercising extraordinary writ jurisdiction under article 226 of the Constitution of India and, therefore, both the petitions deserve to be dismissed. 89. However, it is clarified that it will be open for the petitioner to file his objections against the reasons recorded by the respondent, and the respondent shall decide the said object....
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....r sources : Dividend 16,75,157 Bank interest 15,691 Interest on IT refund 1,010 16,91,858 Less : Interest paid to loans 39,01,689 -22,09,831 " 97. At item No. V to the schedule, the assessee described interests paid on various loans to different creditors. The total interest paid comes to Rs. 39,01,689. At the bottom of such item No. V, the assessee had stated, "this claim against dividend income from Mastek Ltd." Such claim was not disturbed by the Assessing Officer in his scrutiny assessment, of course without any elaborate discussion in the assessment order and the assessment was taken in scrutiny. The Assessing Officer framed assessment on March 31, 1998, assessing a total loss of Rs. 3,53,622. During the assessment, the Assessing Officer had raised certain queries. The petitioner replied to such queries under communication dated February 15, 1998. In the said letter, he had stated that he had founded a company, viz., Mastek Ltd. and is currently the director of the said company. In the letter, the assessee provided the details of new investments during the year. He stated that the assessee had invested in shares of....
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.... interest of the company and not of the sole or even the dominant purpose of earning dividend income. The Assessing Officer was of the opinion that the said income had escaped assessment and that such escapement was due to the reason of the asses- see failing to disclose truly and fully all material facts necessary for such assessment. 101. In Special Civil Application No. 4549 of 2002, the petitioner has challenged a notice dated March 11, 2002, issued by the Assessing Officer seeking to reopen assessment previously framed after scrutiny for the assessment year 1996-97. For the said assessment year, the assessee had filed his return of income on November 29, 1996, declaring total income nil. The case of the petitioner was taken in scrutiny. During the assessment, the Assessing Officer raised certain queries. The assessee replied to such questions of the Assessing Officer under his communication dated December 14, 1998, in which he stated that, "the assessee has been assessed under section 143(3) for the assessment years 1992-93, 1993-94, 1994-95 and 1995-96. Initially, loan was taken for acquiring shares of Mastek Ltd. and, thereafter, loans were taken to repay earlier l....
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.... of purchase of the shares which yield income taxable under the head "Income from other sources". She, therefore, held as under : "In the aforesaid premises, even if any motive were to be attributed to the petitioner, the same would not be relevant for the purpose of section 57(iii) of the Act, inasmuch as, the entire amount had been used for the purpose of buying shares which had yielded dividend income. In the circumstances, the very basis for reopening the assessment is misconceived." 107. In short, she held in favour of the petitioner on both counts, viz., that there was no failure on the part of the assessee to disclose truly and fully all material facts and, therefore, assessment previously framed after scrutiny could not be reopened beyond the period of four years from the end of the relevant assessment year. She also held that the claim of deduction under section 57(iii) of the Act was valid and that, therefore, the very basis for reopening the assessment that income chargeable to tax had escaped assessment was absent. 108. The hon'ble Ms. Justice Bela Trivedi, however, was unable to adopt the view of her colleague. She, under a separate dissen....
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.... case, the apex court did not permit reopening beyond a period of four years, on the ground that there was an obligation on the part of the Income-tax Officer to compute the income individually, including the income of the minor son and thereby no obligation was imposed on the taxpayer to disclose the income liable to be included under such head. (2) Reliance was also placed on a decision of the apex court in the case of ITO v. Radheshyam Ladia [1987] 166 ITR 134 (SC), wherein the decision in the case of V. D. M. Rm. M. Rm. Muthia Chettiar [1970] 74 ITR 183 (SC), came up for consideration before the apex court. The apex court did not find it necessary to refer the issue to the larger Bench. (3) The learned counsel also relied on a decision in the case of Ormerods (India) Pvt. Ltd. v. CIT [1959] 36 ITR 329 (Bom), wherein the claim of the assessee for deduction of interest paid on the borrowed funds for investment for the purpose of earning income came to be disallowed by the Tribunal. The Bombay High Court was of the opinion that 'The motive for the purchase of shares and the purpose for purchase of the shares should not be allowed to be mixed-up'. The ....
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....ain any separate column for showing the income of the spouse and minor child liable to be included in the total income of the assessee, but it did contain a note stating that if the income of any other person is includible in the total income of the assessee under the provisions, inter alia, of section 64, such income should also be shown in the return under the appropriate head. This note clearly required the assessee to show in the return under the appropriate head of income, namely, "Profits and gains of business or profession" the amounts representing the shares of the husband and minor daughter of the assessee in the profits of the two partnership firms. The assessee, however, failed to disclose these amounts in the return submitted by her and there was, plainly and manifestly a breach of the obligation imposed by section 139, sub-section (1), requiring the assessee to furnish a return of her income in the prescribed form. To accept the contention that despite the note the assessee was still not liable to show in the return the amounts representing the shares of her husband and minor daughter in the two partnership firms would render the note meaningless and futile and turn it....
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....that such petitions cannot be dismissed merely on the ground of availability of alternative remedy. Firstly, the petitioner relied on facts and material already on record, which were undisputed or indisputable. His contention that there was true and full disclosure of material facts on his part, needs to be examined in these petitions. Whether the assessee satisfied such requirements, and, therefore, can validly contend that the reopening of assessments beyond a period of four years was invalid, is to be judged on the basis of material on record. If the assessee had discharged his primary duty, obviously, the Assessing Officer would, thereafter, have no jurisdiction to reopen the assessment beyond a period of four years. 116. Such question would go to the root of the matter and strike at the very jurisdiction of the Assessing Officer to reopen the assessment. Only upon jurisdictional facts being established that the Assessing Officer can proceed to reopen the assessment. It is well-settled through a series of decisions of this court as well as of the apex court that where there is lack of inherent jurisdiction in the Authority, an alternative remedy, even if available, wo....
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.... Constitution Bench of the apex court in Calcutta Discount's case [1961] 41 ITR 191 but to require the assessee first to lodge preliminary objections before the Assessing Officer who is bound to decide the preliminary objections to issuance of the reassessment notice by passing a speaking order and, therefore, if such order on the preliminary objections is still against the assessee, the assessee will get an opportunity to challenge the same by filing a writ petition so that he does not have to wait till completion of the reassessment proceedings which would have entailed the liability to pay tax and interest on reassessment and also to go through the gamut of appeal, second appeal before the Income-tax Appellate Tribunal and then reference/ tax appeal to the High Court. Viewed in this light, it appears to me that the rigour of availing of the alternative remedy before the Assessing Officer for objecting to the reassessment notice under section 148 has been considerably softened by the apex court in the GKN case in the year 2003. In my view, therefore, the GKN case does not run counter to the Calcutta Discount's case [1961] 41 ITR 191 but it merely provides for challenge ....
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....reported in [2012] 346 ITR 228 (Guj) ; [2011] 2 GLH 699 , which reads as under (page 240 of 346 ITR) : "From the above judicial pronouncements, the following principles can be culled out : (i) To confer jurisdiction to the Assessing Officer to reopen the assessment under section 147 of the Income-tax Act beyond four years from the end of the assessment year, the following two conditions must be satisfied (a) that the Assessing Officer must have reason to believe that the income chargeable to tax has escaped assessment ; and (b) that the same was occasioned, on account of either failure on the part of the assessee to make a return of his income for that assessment year, or to disclose fully and truly all material facts necessary for assessment of that year ; (ii) both the above conditions are conditions precedent and must be satisfied simultaneously before the Income-tax Officer can assume jurisdiction to reopen the assessment 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 ....
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....nbsp; 122. In the present case, the assessee filed his return for the assessment year 1995-96. In the return, he had disclosed that he had paid interest on various loans totalling to Rs. 39,01,689. This was adjusted against dividend income from Mastek Ltd. He, further, disclosed that he had received dividend of Rs. 16,75,157, against which he claimed deduction towards interest paid on various loans. Thus, the fact that the assessee had paid interest on the loans and such interest he claimed as deduction under the dividend income from Mastek Ltd. was very much within the knowledge of the Assessing Officer in the original return, itself. Moreover, in response to the queries raised by the Assessing Officer, the assessee filed further documents. Vide letter dated February 15, 1998, the assessee made further disclosures in which in the first paragraph itself he stated that he had worked for two years with NOCIL after which he cofunded Mastek Ltd. He was currently the director of Mastek Ltd. He gave details of various investments made by him in shares. He supplied the details at schedule A to the letter. After taking into account such material, the Assessing Officer, passed his order ....
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....enditure) laid out or expended wholly and exclusively for the purpose of making or earning such income." 126. The issue which is being raised by the Assessing Officer through reopening of the assessment is that the assessee was not entitled to any deductions for the interest paid for borrowings, which he utilized for purchase of shares in Mastek Ltd. The case of the Assessing Officer in brief is that such investments were not made for the purpose of earning dividend, but, for the purpose of acquiring controlling shares in Mastek Ltd. and recorded the reasons for the same. He, therefore, opined that the assessee was not entitled to deduction under section 57(iii) of the Act since such expenditure cannot be held to have been incurred exclusively for the purpose of earning such income. 127. Whether the Assessing Officer is justified in holding such, prima facie, belief is not an issue, on which I need to make any conclusive statement. The question is whether did the assessee fail in his duty to disclose fully and truly all primary facts. This question is important since the Assessing Officer sought reopening of the assessment beyond a period of four years from the ....
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....o ask for such material during the assessment. However, the primary onus to provide such details even if not disclosed cannot be shifted on the assessee. 131. Under the circumstances, if the assessment was sought to be reopened within a period of four years from the end of the relevant assessment year, the situation may have been different. It was perhaps open for the Revenue to contend that, since there was no opinion formed by the Assessing Officer on the original assessment, on such an issue, reopening of assessment cannot be stated to be based on mere change of opinion. However, the present case is related to reopening of assessment beyond a period of four years. Reopening notice must, therefore, be quashed. 132. I am, however, unable to concur with the view of the hon'ble Justice Devani when she holds that even on the merits, no additions could have been made. She examined the nature of interest paid by the assessee, the nature of investment made in purchase of shares of Mastek Ltd. and came to the conclusion that the interest paid on borrowed funds, which were utilized for the purpose of shares for earning dividend would fall within the parameters of secti....