AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2015 (7) TMI 801
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....n the absence of' any allegation that there was no true and full disclosure of material facts by the Appellant, the jurisdiction acquired through the issue of notice u/s. 148 becomes defective and untenable for being tainted with a change of opinion and the Order may, consequently, be quashed. ii) The ld. CIT(A) failed to appreciate the implication of mandatory proviso to Sec. 147 where it is stipulated that no action shall be taken for reassessment beyond four years from the end of the relevant assessment year in the absence of any failure on the' 'part of Appellant; therefore, the notice issued u/s. 148 does not have the mandate of law and may, therefore, be treated as voidabinitio. iii) Without prejudice to above, the notice u/s. 148 cannot be issued to make roving and fishing enquiries or to complete an unfinished task as possibly been left out during original scrutiny assessment proceedings. 2. Disallownce u/s.36(1)(ii)Rs. 26,47,146/on account of alleged nonallowable commission payment (Rs.16,87,146/) to the Directors: i) The ld. Commissioner of Income tax(Appeals) erred in confirming the disallowance without appreciating that the appellant had, after compl....
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....re, the notice issued u/s. 148 does not have the mandate of law and may, therefore, be treated as voidabinitio. iii) Without prejudice to above, the notice u/s. 148 cannot be issued to make roving and fishing enquiries or to complete an unfinished task as possibly been left out during original scrutiny assessment proceedings. 2. Disallowance u/s. 36(1)(ii) Rs. 29,44.544/on account. of alleged nonallowable Commission payment (Rs. 18,64,544/) to the Directors i) The ld. CIT(A) erred in confirming the disallowance without appreciating that the Appellant had, after complying to the enabling conditions, paid commission to two of its directors in particular against their full time rendering of services; thus the disallowance is uncalled for as the said payment is no an appropriation of profits or a payment in lieu of dividend but purely a charge of against profits. ii) Without prejudice to above, any payment made even to a director with substantial holding purely in terms of appointment against the services rendered is outside the scope of Sec. 36(1) (ii); thus the same cannot be attributed as distribution of dividend or profits in the guise of commission. As the payments have ....
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....s thus the disallowance is uncalled for as the said payment is not an appropriation of profits or a payment in lieu of dividend but purely a charge of against profits. ii) Without prejudice to above, any payment made even to a director with substantial holding purely in terms of appointment against the services rendered is outside the scope of Sec. 36(1 )(ii); thus the same cannot be attributed as distribution of dividend or profits in the guise of commission. As the payments have direct nexus to the services rendered, Sec.36(1 )(ii) has no role to play under the circumstances and the disallowance may be deleted. iii) The Id. CIT(A) erred in confirming even the payment of remuneration of Rs. 13,20,000/paid to Directors as includible while making disallowance u/s.36(1 )(ii). 3. Levy of Penal Interest u/s. 234A, 2348, 234C and 234D The Appellant, on merits, denies its liability to penal interest. 4. The Appellant craves leave to add, amend or alter all or any of the above Grounds of Appeal." ITA/6366/MUM/2013-AY.08-09: 1. Defective jurisdiction Issue of Notice u/s. 148 on a change of opinion Reassessment Order may be quashed i) The ld. CIT(A) erred in treating the issue....
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....wance u/s.36(1 )(ii). 3. Levy of Penal Interest u/s. 234A, 2348, 234C and 234D The Appellant, on merits, denies its liability to penal interest. 4. The Appellant craves leave to add, amend or alter all or any of the above Grounds of Appeal." ITA/17/MUM/2014-AY.2005-06: "1. On the facts and in the circumstances of the case and in law,the Ld.CIT(A) was not justified in directing the A.O. to verify and allow the remuneration to the directors which was not segregated from commission in the Tax Audit report and Director's report. 2.On the facts and in the circumstances of the case and in law,the impugned order of the Ld.CIT(A)is contrary to law and consequently merits to be set aside and that of the Assessing Officer be restored. 3. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary." ITA/18/MUM/2014-AY.2006-07: "1. On the facts and in the circumstances of the case and in law,the Ld.CIT(A) was not justified in directing the A.O. to verify and allow the remuneration to the directors which was not segregated from commission in the Tax Audit report and Director's report. 2.On the facts and in the circumstances of the....
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....e Act,on 30.03.2012 , recording following reasons: "The assessee filed return income of Rs. 94,68,428/. The return was processed u/s.143(1) of the Income tax act, 1961.Order u/s. 143(3) was passed determining the total income of Rs. 1, 01,065,220/. On perusal of P&L account, it is observed that the assessee has paid Directors Remuneration of Rs. 26,57,146/to Directors. In the AY 200910, the assessing officer found that this payment made to Directors includes commission payment. Therefore, this commission was added u/s. 36(1)(iii). As per section(1)(ii), only such commission payments are allowed as expenditure as "any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend, if it had not been paid as bonus or commission.".The Directors of this company are also shareholders in the company.Clearly, the payments being made to the shareholders are not covered under this section to be eligible for deduction as the same could have been made to the director who is a share holder as disbursement of profit or dividend. Since, the assessee has violated the provisions of section of 36(1)(ii) in making suc....
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.... decision of Kalyanji Mavji & Co. (102ITR287).He referred to the cases of Praful Chunilal Patel(148CTR62),Citibank N A (179 CTR124),Indo Adan Salt Mfg. & Trading Co.(P.)Ltd.(159ITR624),Export Guarantee Corporation of India Ltd.(350ITR651),Indian Hume Pipe Co.Ltd.(348ITR439) and dismissed the appeal filed by the assessee. He further held that the assessee was a closely held company where no dividend was declared,that the commission was paid to the director who was also one of the promoter and the family member of the other directors.He referred to the decision of Dalal Broacha Stock Broking (P) Ltd.(supra) and held that the commission paid to the two directors was not linked to any extra services rendered by them in due course of their duties,that the payment was apparently in lieu of the dividend and is a device to avoid payment of full tax,that the commission paid to the directors is not allowable u/s. 36(1)(ii) or 37 of the Act.As regards to the merit of the addition of commission u/s. 36(1)(ii),he observed that the AO had treated the entire payment made to the directors as commission,that the payment has been made in respect of both the salary as well as commission. Giving bifu....
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.... of the AO and the FAA and stated that the assessee had not disclosed the true facts about the commission paid to the directors, that there was no change of opinion, that the reopening was valid. 5.a.We have heard the rival submissions and perused the material before us.Before proceeding further,we would like to mention certain principles that govern the re-opening of assessment u/s. 147 of the Act and same can be summarised as under: i.The twin conditions required for reopening an assessment beyond the period of four years are that there must be reason to believe that income chargeable to tax had escaped assessment and that such escapement of income is on account of omission or failure on the part of the assessee to disclose fully and truly all material facts for assessment of the income of the assessee for the year under consideration.In other words,in the absence of any satisfaction having been recorded by the AO,as required under the proviso to section 147 of the Act, that the income has escaped assessment by reason of failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment for the assessment year under consideration, th....
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....sion that he has now reason to believe that income had escaped assessment and reopen the assessment proceedings. ix.Further, on the basis of an audit report, notice under section 148 cannot be issued as such audit report cannot be regarded as "information" within the meaning of 147(b) . x.Merely because in the reasons recorded, the AO did not use particular words and phrases that would not be fatal to the notice of reopening.What was of importance was the substance and not form. 5.b.1.We would also like to refer to three judgments dealing with the issue.First of them is matter of Ohm Stock Brokers Pvt.Ltd.(351 ITR 443) of the Hon'ble Mumbai High Court.Facts of the case were that the assessee,for the AY.s.2005-06 and 2006-07,had by letters dated 12.03.2007, and 31.08.2007 placed on the record before the AO the nature of payments, the agreements with the two directors in pursuance of which they were paid a fixed monthly remuneration and a commission/performance bonus representing 35% of the net profit before taxation as well as the a justification for the payment.The AO was apprised by the assessee of all the material facts necessary for the assessment and did not make any additio....
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....es of reopening would accordingly have to be quashed and set aside..... ......the mere fact that the order of assessment did not specifically deal with the issue as to whether the payment fell within the purview of section36(1)(ii)was not dispositive. The test is as to whether the assessee had furnished to the Assessing Officer all the primary facts on the basis of which a deduction was claimed in respect of the commission that was paid to the two directors for services rendered. The assessee had specifically placed before the Assessing Officer by its letter dated September 4, 2009, copies of the agreements dated June 16, 2005, between the assessee and its directors in pursuance of which remuneration was paid to them for the assessment year 200708 which included the payment of commission. The attention of the Assessing Officer was clearly and specifically drawn to the quantum of the fixed monthly remuneration and in addition to the payment of commission which was computed at a stipulated proportion of the net profits. The assessee explained the basis on which a decision was taken to make the payment of commission at a fixed monthly remuneration and the rest at a proportion of the....
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.... facts." Facts of the case were that the basis for reopening the assessment was confined to two issues. The first issue was that the assessee set off unabsorbed depreciation for the AY.1994-95 amounting to Rs. 25.81 crores in the AY.2004-05.Subsequently the Special Bench of the Tribunal held that unabsorbed depreciation for the period up to 1996-97 could be carried forward and set off against the income from any head for a maximum period of eight AY.s.Hence,according to the AO, the set off of unabsorbed depreciation for the AY. 1994-95 against the income of the AY.2004-05 was not in accordance with law and, consequently, income had escaped assessment. The second issue in relation to which the assessment was reopened was that while giving effect to the order of the Tribunal,income was computed under section 115JB without any addition on account of provision for diminution in the value of investment and provision for doubtful debts/ advances.In this regard reliance had been placed on a subsequent amendment made by the Finance (No. 2) Act, 2009 with retrospective effect from 01. 04. 2001.According to the AO,since the amendment to section 115JB had been brought about with retrospecti....
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....ust be material facts based on some reasonable belief which would have a material bearing on the question of underassessment. If there is no material for the formation of any belief or where the purported belief was nothing but a mere change of opinion, in that case, he would have no jurisdiction to initiate proceedings under section 147 and section 148 of the Incometax Act, 1961. He has the power to reopen the assessment where he has reason to believe that income chargeable to tax has escaped assessment but such reassessment cannot be initiated on a mere change of opinion to merely re-examine an issue on the basis of information or material which was already available to the Assessing Officer at the time of the completion of the original assessment. "Reason to believe" could never be an outcome of a change of opinion.Consequently,before taking any action, he is required to substantiate his satisfaction in the reasons recorded by him. If such reasons recorded disclose a mere change of opinion the assessment proceedings cannot be initiated. .........Once the Assessing Officer has made an assessment on the primary facts and documents placed before it, the Assessing Officer cannot at ....
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....he case,that the AO had not mentioned that the failure of the assessee to disclose the relevant and material facts led to under assessment or escapement of income for the assessment year under consideration.From the reasons recorded the belief of assessee in failure of the assessee is not emerging.The FAA has also not dealt with the issue at all.The operative part of this order reads as under: "In view of the foregoing,I find that the issuance of notices u/s.148 by the AO is in order and no interference is therefore called for.This ground of appeal is accordingly, dismissed." Nowhere he had discussed as to how the facts of the cases relied upon by him were applicable to the facts of the case under appeal.In these circumstances,in our opinion,the order of the FAA is not a speaking order.He had not dealt with the objections raised by the assessee.As the basis for endorsing the reopening after four years is missing,so,we are reversing his order.We hold that the order passed by the AO and upheld by the FAA was not a valid order,as the twin conditions of reopening of the matter,after a period of four years,were missing.Effective ground of appeal filed by the assessee is decided in it....
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....e FAA that material was not available at the time of the original assessment.The AO has reviewed his original order and in our opinion in the reassessment proceedings it is not permissible.We find that the AO and the FAA have heavily relied on the order of the Dalal Broacha Stock Brokers Pvt.Ltd.In our opinion,the issue of reopening of completed assessment in light of a subsequent judgment of higher judicial forum has been dealt in great length by us in the earlier part of the order.Following the same,we hold that action taken by the AO u/s.147of the Act with regard to the commission payment made to the Director is invalid.Even on merits the issue is covered by the judgment of Ohm Stock Brokers Pvt.Ltd.(supra).We find that facts of the judgment are almost similar to the facts of the present appeal.Therefore,in our opinion,the order of the FAA has to be reversed.Effective ground of appeal is decided in favour of the assessee as we are of the opinion that the reassessment order is not valid. As we have held the proceedings of section 147 invalid,so,we are not deciding the second ground of appeal. ITA./6366/Mum/2013-AY.2008-09: 10.Grounds of appeal for the year under consideration ....