Reopening u/s 148 was rightly done as income of the company was shifted to partnership firm to avoid tax by setting off bad debts – SLP dismissed by Supreme Court
In a recent order/judgment, Hon’ble Supreme Court has dismissed the SLP filed by the assessee company against the order of the Gujarat High Court upholding the reopening of the case where income of the company was shifted to partnership firm to avoid tax by claiming old balances as bad debts.
ABCAUS Case Law Citation:
4359 (2024) (12) abcaus.in SC
Important Case Laws relied upon by Parties:
S. Khader Khan Son 352 ITR 480 (SC)
ITO v. Atchaiah 218 ITR 239
CIT v. Shardaben K. Modi 365 ITR 169
The petitioner company was engaged in the business manufacturing and sales of fire safety equipment’s. The case for the relevant assessment year was selected for scrutiny under CASS and assessment order u/s 143(3) of the Income Tax Act 1961 (the Act) was passed.
A survey operation u/s 133A of the Act was carried out in the case of a partnership firm whose partner was also director in the Petitioner company. It was observed that the firm has shown an income as brokerage shown in the Profit & Loss account. The partner of the firm in statement recorded u/s 133A(3) (iii) of the Act stated that the brokerage income was received on account of liaisoning work in supply of fire fighting equipment abroad though the firm did not have expertise in this field. It was admitted that the sister concern of the firm (the Petitioner) had enough experience to carry out this work that is why firm performed this work. Further it was also admitted that all conversation with the purchaser was done by the Petitioner company in which the partner was also a director.
When the Partner was asked as to when prima facie correspondence was done by the Petitioner company and the work was also done by it. why firm had offered brokerage income in its Profit and Loss account, the partner categorically stated that firm and the Petitioner company were under same tax rate. The work was performed by the company and brokerage income also belonged to company but income was offered to tax by firm as there is no difference in tax rate and there was no loss to the department also.
However, the Assessing Officer (AO) observed that the firm has claimed huge amount of bad debts which have been set off against the brokerage income. Therefore, the showing brokerage income by the firm as its income was not tax neutral as contended. In view of the above, the case of the Petitioner company was reopened by issue of notice u/s 148 for escapement of income.
Aggrieved, the Petitioner challenged the validity of reopening before the Hon’ble Gujarat High Court. The case of the Petitioner was that merely relying upon the statement of the Partner of the firm, in absence of any material on record, the Assessing Officer was not justified in re-opening of the assessment for the year under consideration.
It was submitted that the statement recorded under Section 133(A)(3)(iii) of the Act is not a statement on oath and has no evidentiary value, Placing reliance on the judgment of the Hon’ble Supreme Court, it was contended that that no addition could be made on the basis of the statement made by the assessee unless there was corroborative material found during the course of survey, which unequivocally support the statement made by the assessee.
The Petitioner also place reliance on the judgment of the Gujarat High Court wherein it was held that in absence of any independent material, statement of the son of the assessee recorded during the survey would not form a valid basis for re-opening the assessment
The Petitioner also relied upon the CBDT Instructions F. No.286/2/2003-IT (Inv. II) dated 10th March, 2003 and also CBDT letter F. No. 286/98/2013-IT (INV. II) dated 18th December, 2014 on the subject of Section 132-Search and Seizure, wherein it is stated that the assessee is not required to be coerced for admission of undisclosed income and emphasised upon the need to focus on gathering evidences during search/ survey and strictly avoid obtaining admission of undisclosed income under coercion/undue influence.
The Revenue contended that answers to question given by Partner were self-explanatory and clearly showed that income of the company was shifted to partnership firm as there were common partners and directors. It was also pointed out that the firm had claimed bad debts under Section 36(2) and to set off such bad debts, income of the company of brokerage was shown as income of the partnership firm and therefore, there was escapement of the income at the hands of the company and as held by the Apex Court only the right person is required to be taxed.
The Hon’ble High Court observed that it was not in dispute that the brokerage income shown in the P&L account of the firm whereas the actual income belonged to the petitioner company as confirmed by Partner that the whole work was performed by the petitioner company. It was also not in dispute that the firm has claimed bad debts and set off it against the brokerage income so that no additional tax liability arises to the firm.
The Hon’ble High Court opined that Assessing Officer had, rightly relied on the decision of the Apex Court as the right person i.e. company was required to be taxed for the purpose of charging of income tax for doing work as the entire brokerage income belonged to the petitioner.
The Hon’ble High Court opined that the judgments on which reliance was placed by the petitioner for assuming jurisdiction by the Assessing Officer to re-open the assessment would not be applicable in the facts of the case, more particularly, when it appeared to be a fact not disputed on the basis of reply to the statement made by the partner of the firm that the entire brokerage income was belonging to the petitioner company as the work was done by the petitioner company.
The Hon’ble High Court further opined that whether statement of the Partner can be relied upon or what is the evidentiary value of the same can be considered during the course of assessment proceedings which will be proceeded by the Assessing Officer after giving opportunity of hearing to the petitioner to lead the evidence including the cross-examination.
In view of the above observations, the High Court had dismissed the Petition.
Not satisfied by the dismissal of the Petition, the assessee filed a Special Leave Petition (SLP) before the Hon’ble Supreme Court challenging the order of dismissal.
The Hon’ble Supreme Court in view of the findings recorded in the impugned judgment, held that no case was made out to exercise jurisdiction under Article 136 of the Constitution of India and accordingly, dismissed the Special Leave Petition.
Download Full Judgment Click Here >>
- Indian Bank Empanelment of Concurrent/Stock Auditors for FY 2025-26 Last date 24/07/2025
- CBDT notifies IREDA Five Years Bonds for exemption u/s 54EC
- No liability to collect TCS u/s 206C (1C) from person involved in illegal mining – HC
- ICAI issues FAQs on Guidance Note on Financial Statements of Non-Corporate EntitiesÂ
- Organizing Garba event not business/trade u/s 2(15) to deny benefit of exemption u/s 11
